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

Show all filings for SUPPORT.COM, INC.

Form 10-Q for SUPPORT.COM, INC.


8-May-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes included elsewhere in this Form 10-Q (the "Report") and the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2013. The following discussion includes forward-looking statements. Please see "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 first quarter of 2014 decreased 8% year-over-year. Revenue from services increased 2% year-over-year. Revenue from software and other decreased 50% year-over-year due to a decision to discontinue our largest advertising placements in the second half of 2013 because they no longer yielded positive results, with revenue from end-user software products declining and revenue from licensing of our Nexus Platform growing.


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Cost of services for the first quarter of 2014 increased 39% year-over-year primarily as a result of the hiring of additional technology specialists for our home networking support bundle program with Comcast. Cost of software and other for the first quarter of 2014 decreased 22% year-over-year due to lower sales of end-user software products driven by our decision to discontinue our largest advertising placements in the second half of 2013. Total gross margin declined from 52% to 29% year-over-year due to a higher percentage of revenues generated by the lower margin home networking support bundle program with Comcast which replaced the higher margin Xfinity signature support program with Comcast at the end of 2013.

Operating expenses for the three months ended March 31, 2014 decreased 32% from the same period in 2013, primarily driven by lower sales and marketing expense related to end-user software products as a result of our decision to discontinue our largest advertising placements in the second half of 2013.

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 interim condensed consolidated financial statements, we make estimates, assumptions and judgments that can have a significant impact on our net revenue, operating income or loss and net income or loss, as well as on the value of certain assets and liabilities on our condensed consolidated balance sheet. We believe that the estimates, assumptions and judgments involved in the accounting policies described in Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 have the greatest potential impact on our interim condensed consolidated financial statements, so we consider them to be our critical accounting policies and estimates. There have been no significant changes in these critical accounting policies and estimates during the three months ended March 31, 2014.

 RESULTS OF OPERATIONS

The following table sets forth the results of operations for the three months
ended March 31, 2014 and 2013 expressed as a percentage of total revenue:

                                                                     Three Months Ended
                                                                          March 31,
                                                                   2014               2013
Revenue:
Services                                                                90 %               81 %
Software and other                                                      10                 19

Total revenue                                                          100                100

Costs of revenue:
Cost of services                                                        70                 46
Cost of software and other                                               1                  2
Total cost of revenue                                                   71                 48
Gross profit                                                            29                 52
Operating expenses:
Research and development                                                 7                  8
Sales and marketing                                                      8                 19
General and administrative                                              14                 14
Amortization of intangible assets and other                              1                  2

Total operating expenses                                                30                 43

Income (loss) from operations                                           (2 )               10
Interest income and other, net                                           -                  -

Income (loss) from continuing operations, before income taxes           (2 )               10
Income tax provision                                                     1                  1
Income (loss) from continuing operations, after income taxes            (3 )                9
Income from discontinued operations, after income taxes                  -                  -

Net income (loss)                                                       (3 )%               9 %


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Three Months Ended March 31, 2014 and 2013

REVENUE

                                       Three Months
                                           Ended
                                         March 31,              $            %
In thousands, except percentages     2014         2013        Change       Change

Services                           $ 16,726     $ 16,446     $    280            2 %
Software and other                    1,887        3,756       (1,869 )        (50 )%
Total revenue                      $ 18,613     $ 20,202     $ (1,589 )         (8 )%

Services. 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 three months ended March 31, 2014 increased by $280,000 from the same period in 2013. For the three months ended March 31, 2014, services revenue generated from our partnerships was $15.6 million compared to $15.6 million for the same period in 2013. Direct services revenue was $1.1 million for the three months ended March 31, 2014 compared to $850,000 for the same period in 2013.

Software and other. Software and other revenue is comprised primarily of fees for end-user software products provided through direct customer downloads, and, to a lesser extent, through the sale of this software via partners and licensing of our Nexus platform. Software and other revenue declined by 50% for the first quarter of 2014 compared to same quarter in 2013 due to a decision to discontinue our largest advertising placements in the second half of 2013. For the three months ended March 31, 2014, revenue from software and other generated from our direct sales was $1.1 million compared to $2.2 million for the same period in 2013. Software revenue and other generated from our partnerships was $733,000 for the three months ended March 31, 2014 compared to $1.5 million for the same period in 2013.

COSTS OF REVENUE

                                       Three Months
                                          Ended
                                        March 31,              $           %
In thousands, except percentages     2014        2013       Change       Change

Cost of services                   $ 12,962     $ 9,310     $ 3,652           39 %
Cost of software and other              239         307         (68 )        (22 )%
Total cost of revenue              $ 13,201     $ 9,617     $ 3,584           37 %

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 $3.7 million in cost of services for the three months ended March 31, 2014 compared to the same period in 2013 was mainly driven by the hiring of additional technology specialists for our home networking support bundle program with Comcast.


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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 end-user software 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 for the three months ended March 2014 compared to the same period in 2013 was primarily due to lower sales of end-user software products driven by our decision to discontinue our largest advertising placements in the second half of 2013.

OPERATING EXPENSES

                                      Three Months
                                          Ended
                                        March 31,             $            %
In thousands, except percentages    2014        2013        Change       Change

Research and development           $ 1,354     $ 1,588     $   (234 )        (15 )%
Sales and marketing                $ 1,551     $ 3,936     $ (2,385          (61 )%
General and administrative         $ 2,663     $ 2,763     $   (100           (4 )%

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 $234,000 for the three months ended March 31, 2014 as compared to the same period in 2013 resulted from a decrease in compensation costs.

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 $2.4 million in sales and marketing expense for the three months ended March 31, 2014 compared to for the same period in 2013 resulted from our decision to discontinue our largest advertising placements in the second half of 2013.

General and administrative. General and administrative expense consists primarily of compensation costs and related overhead costs for administrative personnel and professional fees for legal, accounting and other professional services. The decrease of $100,000 in general and administrative expense for three months ended March 31, 2014 compared to the same period in 2013 was primarily related to lower stock-based compensation expense due to the resignation of the Company's President and Chief Executive Officer during the three months ended March 31, 2014.

Amortization of Intangible Assets and Other

                                                Three Months
                                                    Ended
                                                  March 31,            $            %
In thousands, except percentages               2014       2013       Change       Change

Amortization of intangible assets and other   $   273     $ 335     $    (62 )        (19 )%

Amortization of intangible assets and other. The decrease of $62,000 in amortization of intangibles assets and other for the three months ended March 31, 2014 compared to the same period in 2013 was due to certain intangible assets becoming fully amortized as of the end of 2013.

INTEREST INCOME AND OTHER, NET

Three Months
Ended
March 31, $ %
In thousands, except percentages 2014 2013 Change Change

Interest and other, net $ 78 $ 73 $ 5 7 %


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INCOME TAX PROVISION

Three Months
Ended
March 31, $ %
In thousands, except percentages 2014 2013 Change Change

Income tax provision $ 125 $ 149 $ (24 ) (16 )%

The provision for income taxes is comprised of estimates of current taxes due in domestic and foreign jurisdictions. For the three months ended March 31, 2014 and 2013, income tax provision primarily consisted of state income tax, foreign taxes, and tax expense related to the recording of a deferred tax liability that results from the amortization for income tax purposes of acquisition-related goodwill. The decrease in the income tax provision from 2013 to 2014 was primarily due to lower domestic and foreign income.

LIQUIDITY AND CAPITAL RESOURCES

Total cash, cash equivalents and investments at March 31, 2014 and December 31, 2013 were $75.5 million and $72.4 million, respectively. The increase in cash, cash equivalents and investments was primarily due to cash generated from operating activities.

Operating Activities

Net cash provided by operating activities was $3.4 million and $4.4 million for the three months ended March 31, 2014 and 2013, respectively. Net cash provided by operating activities primarily reflected the net income (loss) for the period, adjusted for non-cash items such as depreciation, amortization of premiums and discounts on investments, stock-based compensation expense and amortization of intangible assets and changes in operating assets and liabilities. The sum of these non-cash items totaled $1.2 million and $1.4 million in the three months ended March 31, 2014 and 2013, respectively. Net cash provided by operating activities during the three months ended March 31, 2014 was the result of a net loss of $482,000, non-cash items of $1.2 million and a decrease in accounts receivable of $2.0 million and an increase in accrued compensation of $1.1 million. Net cash provided by operating activities during the three months ended March 31, 2013 was the result of net income of $1.9 million, non-cash items of $1.4 million and increases in accrued compensation of $744,000 and other accrued liabilities of $815,000.

Investing Activities

Net cash used in investing activities was $238,000 and $4.4 million for the three months ended March 31, 2014 and 2013, respectively. For the three months ended March 31, 2014, net cash used in investing activities was primarily due to the purchase of marketable securities for $15.3 million offset by maturities of $15.1 million and $34,000 for purchases of property and equipment. Net cash used in investing activities for the three months ended March 31, 2013 was primarily due to the purchase of marketable securities for $10.9 million offset by maturities of $6.5 million and $38,000 for purchases of property and equipment.

Financing Activities

Net cash provided by (used in) financing activities was $59,000 and $($1.0) million for the three months ended March 31, 2014 and 2013, respectively. Net cash provided by financing activities for the three months ended March 31, 2014 was due to the proceeds from exercise of employee stock options of $59,000. Net cash used in financing activities for the three months ended March 31, 2013 was from the proceeds of exercises of employee stock options of $3.1 million offset by the repurchase of shares of $4.1 million (net repurchase of $1.8 million after considering proceeds from the exercise of stock options that resulted in shares that were repurchased).


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Working Capital and Capital Expenditure Requirements

At March 31, 2014, we had stockholders' equity of $95.7 million and working capital of $78.6 million. We believe that our existing cash balances will be sufficient to meet our working capital requirements, as well as our planned capital expenditures for at least the next 12 months.

If we require additional capital resources to grow our business internally or to acquire complementary technologies and businesses at any time in the future, we may seek to sell additional equity or debt securities. The sale of additional equity could result in dilution to our existing stockholders.

We plan to continue to make investments in our business during 2014. We believe these investments are essential to creating sustainable growth in our business in the future. Additionally, we may choose to acquire other businesses or complimentary technologies to enhance our product capabilities and such acquisitions would likely require the use of cash.

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