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COMVERSE, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge)
The following discussion and analysis of our financial condition and results of
operations should be read together with the audited combined financial
statements and related notes for the fiscal year ended January 31, 2012 included
in the Preliminary Information Statement filed as Exhibit 99.1 to our
Registration Statement on Form 10 filed with the SEC on October 10, 2012, and
the unaudited condensed consolidated and combined financial statements and notes
thereto and financial information appearing elsewhere in this Quarterly Report.
This discussion and analysis contains forward-looking statements based on
current expectations relating to future events and our future financial
performance that involve risks and uncertainties. Our actual results may differ
materially from those anticipated in these forward-looking statements as a
result of many factors, including those set forth under "Forward-Looking
Statements" on page i of this Quarterly Report. Percentages and amounts within
this section may not calculate due to rounding differences.
The Share Distribution
On October 31, 2012, CTI completed its spin-off the Company as an independent,
publicly-traded company, accomplished by means of a pro rata distribution of
100% of our outstanding common shares to CTI's shareholders (the "Share
Distribution"). Following the Share Distribution, CTI no longer holds any of our
outstanding capital stock, and we are an independent, publicly-traded company.
Immediately prior to the Share Distribution, CTI contributed to us Exalink Ltd.
("Exalink"), its wholly-owned subsidiary. Other than holding certain
intellectual property rights, Exalink has no operations. Following the Share
Distribution, we and CTI operate independently, and neither have any ownership
interest in the other. In order to govern certain ongoing relationships between
CTI and us after the Share Distribution and to provide mechanisms for an orderly
transition, we and CTI entered into agreements pursuant to which certain
services and rights are provided for following the Share Distribution, and we
and CTI have indemnified each other against certain liabilities arising from
their respective businesses and the services that will be provided under such
agreements. For more information, see note 3 to our condensed consolidated and
combined financial statements included in this Quarterly Report.
Subsequent to the Share Distribution, we expect to incur increased costs as a
result of becoming an independent, publicly-traded company, including
compensation costs attributable to the enhancement of our senior management,
compensation of non-employee directors and compensation expense and professional
fees related to financial reporting and compliance with our periodic reporting
obligations under federal securities laws. We believe our cash flow from
operations will be sufficient to fund these additional costs.
Sale of Starhome
As a result of the Starhome Disposition, the results of operations of Starhome,
including the gain on the sale of Starhome, net of tax, are included in
discontinued operations, less applicable income taxes, as a separate component
of net income (loss) in our condensed consolidated and combined statements of
operations for all periods presented. The assets and liabilities of Starhome are
included in discontinued operations as separate components of our condensed
combined balance sheet as of January 31, 2012. For more information, see note 14
to our condensed consolidated and combined financial statements included in this
Quarterly Report.
Starhome is a provider of wireless service mobility solutions that enhance
international roaming. Wireless operators use Starhome's software-based
solutions to generate additional revenue and to improve profitability by
directing international roaming traffic to preferred networks and by providing a
wide range of services to subscribers traveling outside their home network.
EXECUTIVE SUMMARY
Overview
We are a leading provider of software-based products, systems and related
services that:
• provide converged, prepaid and postpaid billing and active customer
management systems (referred to as Business Support Systems or BSS) for
wireless, wireline and cable network operators delivering a value
proposition
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designed to ensure timely and efficient service monetization, consistent
customer experience, reduced complexity and cost, and enable real-time marketing
based on all relevant customer profile information;
• enable wireless and wireline (including cable) network-based
Value-Added Services (or VAS), comprised of two categories-Voice and
Messaging-that include voicemail, visual voicemail, call completion,
short messaging service (or SMS) text messaging (or texting),
multimedia picture and video messaging, and Internet Protocol (or IP)
communications; and
• provide wireless users with optimized access to Internet websites,
content and applications, manage and enforce policy and generate data
usage and revenue for wireless operators.
Our products and services are used by more than 450 wireless, wireline and cable
network communication service provider customers in more than 125 countries,
including the majority of the world's 100 largest wireless network operators.
Our products and services are designed to generate voice and data network
traffic, increase revenue and customer loyalty, monetize services and improve
operational efficiency.
Our reportable segments are:
• Comverse BSS-comprised of Comverse's BSS operating segment; and
• Comverse VAS-comprised of Comverse's VAS operating segment.
The results of operations of all of our other operations, including the Comverse
Mobile Internet (or Comverse MI) operating segment, our Netcentrex operations
(or Netcentrex), our global corporate functions that support our business units
and Exalink Ltd., are included in the column captioned "Comverse Other" as part
of our business segment presentation. Starhome's results of operations are
included in discontinued operations and therefore not presented in segment
information.
Significant Events
During the three months ended October 31, 2012 and subsequent thereto, the
following additional significant events occurred:
Separation of Chief Operating Officer. On August 5, 2012, Comverse Ltd. and Oded
Golan, our Senior Vice President and Chief Operating Officer, entered into a
separation agreement in which they mutually agreed upon the terms of transition
and separation of employment of Mr. Golan. Pursuant to the separation agreement,
Mr. Golan will continue to serve in his current capacity through January 31,
2013, at which time he will resign from his position.
Merger of Verint and CTI. On August 12, 2012, CTI entered into an agreement and
plan of merger (referred to as the Verint Merger Agreement) with Verint pursuant
to which CTI will merge with and into a subsidiary of Verint and become a
wholly-owned subsidiary of Verint (referred to as the Verint Merger). The
completion of the Verint Merger is subject to certain conditions.
Under the Distribution Agreement we and CTI entered into in connection with the
Share Distribution, we have agreed to indemnify CTI and its affiliates
(including Verint after the Verint Merger) against certain losses that may arise
as a result of the Verint Merger and the Share Distribution. Certain of our
indemnification obligations are capped at $25.0 million and certain are
uncapped. CTI has agreed to place $25.0 million in cash in escrow, upon the
closing of the Verint merger, to support indemnification claims to the extent
made against us by CTI and its affiliates (including Verint after the Verint
Merger). The escrow funds cannot be used for claims related to the Israeli
Optionholder suit. We will also assume all pre-Share Distribution tax
obligations of each of us and CTI. For more information, see note 3 to our
condensed consolidated and combined financial statements included in this
Quarterly Report.
Contribution and Sale of Starhome. On August 1, 2012, CTI, certain Starhome
shareholders and Starhome entered into a Share Purchase Agreement (the "Starhome
Share Purchase Agreement") with Fortissimo Capital Fund II (Israel), L.P.,
Fortissimo Capital Fund III (Israel), L.P. and Fortissimo Capital Fund III
(Cayman), L.P. (collectively, "Fortissimo") pursuant to which Fortissimo agreed
to purchase all of the outstanding share capital of Starhome (the "Starhome
Disposition"). On September 19, 2012, CTI, in order to ensure it could meet the
conditions of the Verint Merger, contributed to us its interest in Starhome,
including its rights and obligations under the Starhome Share Purchase
Agreement. The Starhome Disposition was completed on October 19, 2012.
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Under the terms of the Starhome Share Purchase Agreement, Starhome's
shareholders received aggregate cash proceeds of approximately $81.3 million,
subject to adjustment for fees, transaction expenses and certain taxes. Of this
amount, $10.5 million is held in escrow to cover potential post-closing
indemnification claims, with $5.5 million being released after 18 months and the
remainder released after 24 months, in each case, less any claims made on or
prior to such dates. We received aggregate net cash consideration (including
$4.9 million deposited in escrow at closing) of approximately $37.2 million,
after payments that CTI agreed to make to certain other Starhome shareholders of
approximately $4.5 million.
As a result of the Starhome Disposition, the results of operations of Starhome,
including the gain on sale of Starhome, net of tax, are included in discontinued
operations, less applicable income taxes, as separate components of net income
(loss) in our condensed combined statements of operations for all periods
presented. The assets and liabilities of Starhome are included in discontinued
operations as a separate component of our condensed consolidated and combined
balance sheets as of January 31, 2012. See note 14 to the condensed consolidated
and combined financial statements included in this Quarterly Report.
Liquidity Forecast
During the nine months ended October 31, 2012, we experienced significant
negative cash flows from operations. We continue our efforts to aggressively
market our solutions and services, improve profitability and cash collections
and implement cost reduction measures. We currently forecast that available cash
and cash equivalents will be sufficient to meet our liquidity needs, including
capital expenditures, for at least the next 12 months. For a more comprehensive
discussion of our liquidity forecast, see "-Liquidity and Capital
Resources-Financial Condition-Liquidity Forecast."
Consolidated and Combined Financial Highlights
The following table presents certain financial highlights for the three and nine
months ended October 31, 2012 and 2011 including Comverse performance, a
non-GAAP measure, and Comverse performance margin (reflecting Comverse
performance as a percentage of revenue) for our company on a consolidated and
combined basis:
Three Months Ended October 31, Nine Months Ended October 31,
2012 2011 2012 2011
(Dollars in thousands)
Total revenue $ 185,200 $ 243,797 $ 494,176 $ 589,616
Gross margin 36.2 % 40.9 % 35.9 % 38.0 %
Income (loss) from operations 1,312 29,501 (7,781 ) 1,417
Operating margin 0.7 % 12.1 % (1.6 )% 0.2 %
Net (loss) income from continuing
operations (10,575 ) 16,040 (31,071 ) (26,220 )
Income from discontinued operations,
net of tax 21,831 2,509 26,542 5,713
Net income (loss) 11,256 18,549 (4,529 ) (20,507 )
Less: Net income attributable to
noncontrolling interest (157 ) (619 ) (1,167 ) (2,026 )
Net income (loss) attributable to
Comverse Inc. 11,099 17,930 (5,696 ) (22,533 )
Net cash provided by (used in)
operating activities - continuing
operations 21,089 3,163 (29,407 ) (34,871 )
Non-GAAP Financial Measures
Comverse performance 13,645 43,405 18,513 54,022
Comverse performance margin 7.4 % 17.8 % 3.7 % 9.2 %
Reconciliation of Income (Loss) from Operations to Comverse Performance
Comverse performance, a non-GAAP financial measure, represents our operating
results without the impact of significant expenditures incurred by us in
connection with CTI's efforts to become or remain current in periodic reporting
obligations under the federal securities laws and the remediation of material
weaknesses in internal control over financial reporting, certain non-cash
charges, and certain other gains and charges.
We provide Comverse performance, a non-GAAP financial measure, as additional
information for our operating results. This measure is not in accordance with,
or an alternative for, GAAP financial measures and may be different from, or not
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comparable to similarly titled or other non-GAAP financial measures used by
other companies. We believe that the presentation of this non-GAAP financial
measure provides useful information to investors regarding certain additional
financial and business trends relating to our results of operations as viewed by
management in monitoring our businesses, reviewing our financial results and for
planning purposes.
As previously disclosed by CTI, during the fiscal year ended January 31, 2012,
CTI changed its reportable segments as a result of the implementation of the
Phase II Business Transformation and the manner in which its chief operating
decision maker reviewed our financial results and allocated resources to CTI's
operating segments. Prior to the change in its reportable segments, we were a
reportable segment of CTI and CTI used the financial measure of segment
performance to present the results of operations of its previous Comverse
reportable segment. As a result of the change in reportable segments, each of
our BSS and VAS businesses became a separate reportable segment of CTI, and the
results of operations of all of our other operations were included in the column
captioned "All Other" as part of CTI's business segment presentation. Following
the change in reportable segments at CTI, the measure segment performance as
used with respect to our company was renamed Comverse performance (as our
company was no longer a CTI reportable segment) but its calculation continued to
be made consistent with prior practice. We believe that the presentation of
Comverse performance provides useful information to investors regarding our
performance, including comparability with financial information previously
reported by CTI.
The following table provides a reconciliation of income (loss) from operations
to Comverse performance for the three and nine months ended October 31, 2012 and
2011:
Three Months Ended October 31, Nine Months Ended October 31,
2012 2011 2012 2011
(Dollars in thousands)
Income (loss) from operations $ 1,312 $ 29,501 $ (7,781 ) $ 1,417
Expense Adjustments:
Stock-based compensation expense 1,880 974 5,512 2,671
Amortization of acquisition-related
intangibles 3,976 4,245 12,048 13,241
Compliance-related professional fees 176 4,162 189 14,629
Compliance-related compensation and
other expenses 288 1,575 1,841 5,482
Impairment of goodwill 5,605 - 5,605 -
Impairment of property and equipment 15 1,118 50 1,275
Litigation settlements and related
costs 413 - 170 474
Restructuring charges (23 ) 1,838 1,084 14,888
Other 3 (8 ) (205 ) (55 )
Total expense adjustments 12,333 13,904 26,294 52,605
Comverse performance $ 13,645 $ 43,405 $ 18,513 $ 54,022
Segment Performance
We evaluate our business by assessing the performance of each of our operating
segments. Our Chief Executive Officer is our chief operating decision maker (or
CODM). The CODM uses segment performance, as defined below, as the primary basis
for assessing the financial results of the operating segments and for the
allocation of resources. Segment performance, as we define it in accordance with
the Financial Accounting Standards Board's (or the FASB) guidance relating to
segment reporting, is not necessarily comparable to other similarly titled
captions of other companies.
Segment performance is computed by management as income (loss) from operations
adjusted for the following: (i) stock-based compensation expense; (ii)
amortization of acquisition-related intangibles; (iii) compliance-related
professional fees; (iv) compliance-related compensation and other expenses; (v)
impairment of goodwill; (vi) impairment of property and equipment; (vii)
litigation settlements and related costs; (viii) restructuring charges; and (ix)
certain other gains and charges. Compliance-related professional fees and
compliance-related compensation and other expenses relate to fees and expenses
recorded in connection with CTI's efforts to (a) complete certain financial
statements and audits of such financial statements, (b) become current in
periodic reporting obligations under the federal securities laws, and (c)
remediate material weaknesses in internal
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control over financial reporting. Although following the Share Distribution we
will not continue to incur compliance-related professional fees and
compliance-related compensation and other expenses for the filing of CTI's
periodic reports, we do expect to incur significant fees and expenses related to
compliance with our periodic reporting obligations under the federal securities
laws. For additional information on how we apply segment performance to evaluate
the operating results of our segments for the three and nine months ended
October 31, 2012 and 2011, see note 20 to the condensed consolidated and
combined financial statements included in this Quarterly Report.
In evaluating each segment's performance, management uses segment revenue, which
consists of revenue generated by the segment. Certain segment performance
adjustments relate to expenses included in the calculation of income (loss) from
operations, while, from time to time, certain segment performance adjustments
may be presented as adjustments to revenue. We had no segment performance
adjustments to revenue for the three and nine months ended October 31, 2012 and
2011.
Segment Financial Highlights
The following table presents, for the three and nine months ended October 31,
2012 and 2011, segment revenue, gross margin, income (loss) from operations,
operating margin, segment performance and segment performance margin (reflecting
segment performance as a percentage of segment revenue) for each of our
reportable segments and Comverse Other:
Three Months Ended October 31, Nine Months Ended October 31,
2012 2011 2012 2011
(Dollars in thousands)
SEGMENT RESULTS
Comverse BSS
Segment revenue $ 65,947 $ 117,731 $ 192,679 $ 278,403
Gross margin 29.4 % 44.9 % 33.7 % 44.6 %
Income from operations 6,860 30,413 25,889 56,261
Operating margin 10.4 % 25.8 % 13.4 % 20.2 %
Segment performance 10,838 34,657 38,617 71,568
Segment performance margin 16.4 % 29.4 % 20.0 % 25.7 %
Comverse VAS
Segment revenue $ 111,457 $ 112,655 $ 268,668 $ 276,234
Gross margin 48.5 % 50.6 % 46.3 % 45.2 %
Income from operations 43,879 48,372 90,899 99,017
Operating margin 39.4 % 42.9 % 33.8 % 35.8 %
Segment performance 43,879 48,667 91,815 100,553
Segment performance margin 39.4 % 43.2 % 34.2 % 36.4 %
Comverse Other
Segment revenue $ 7,796 $ 13,411 $ 32,829 $ 34,979
Gross margin (82.5 )% (75.3 )% (36.5 )% (71.1 )%
Loss from operations (49,427 ) (49,284 ) (124,569 ) (153,861 )
Operating margin (634.0 )% (367.5 )% (379.4 )% (439.9 )%
Segment performance (41,072 ) (39,919 ) (111,919 ) (118,099 )
Segment performance margin (526.8 )% (297.7 )% (340.9 )% (337.6 )%
For a discussion of the results of our segments, see "-Results of Operations,"
and note 20 to the condensed consolidated and combined financial statements
included in this Quarterly Report.
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Business Trends and Uncertainties
For the three and nine months ended October 31, 2012 compared to the three and
nine months ended October 31, 2011, we experienced decreases in revenue, which
were partially offset by decreases in costs and operating expenses, resulting in
a decrease in income from operations for the three months ended October 31, 2012
compared to the three months ended October 31, 2011 and a change to loss from
operations for the nine months ended October 31, 2012 from income from
operations for the nine months ended October 31, 2011. Comverse performance for
the three and nine months ended October 31, 2012 decreased compared to the three
and nine months ended October 31, 2011. For more information, see note 20 to the
condensed consolidated financial statements included in this Quarterly Report.
The decreases in revenue were primarily attributable to decreases in revenue
from Comverse BSS customer solutions and maintenance revenue at our Comverse BSS
and Comverse VAS segments, partially offset by increases in revenue from
Comverse VAS customer solutions. For a discussion of the reasons for the changes
in revenue from customer solutions at our Comverse BSS and Comverse VAS
segments, see "Comverse BSS," "Comverse VAS," "Results of Operations-Segment
Results-Comverse BSS" and "Results of Operations-Segment Results-Comverse VAS."
The decreases in maintenance revenue was primarily attributable to decreased
collections that resulted in a delay in the recognition of revenue, timing of
entering into renewals of maintenance contracts, termination of maintenance
contracts and a decrease in maintenance revenue attributable to maintenance
services provided to customers during the initial service period corresponding
to a decline in new installed base value.
During the three months ended October 31, 2012, our cash and cash equivalents
and restricted cash were favorably impacted primarily by CTI's cash contribution
in connection with the Share Distribution, cash proceeds from the Starhome
Disposition and a decline in costs, operating expenses and disbursements,
partially offset by a decrease in cash collections, that resulted in positive
operating cash flow in the three months ended October 31, 2012. The decrease in
cash collections was primarily attributable to reduced customer order activity
in recent years, the adverse impact of the timing of acceptances in certain
projects and the timing of completion of project milestones.
Our costs, operating expenses and disbursements decreased during the three and
nine months ended October 31, 2012 primarily due to our continued focus on
closely monitoring our costs and operating expenses as part of our efforts to
improve our cash position and achieve long-term improved operating performance
and positive operating cash flows. These cost reductions were partially offset
by, among other factors, the increasing complexity of project deployment which
resulted in higher product delivery costs. In addition, following the Share
Distribution we will incur expenses in connection with financial reporting and
compliance with the federal securities laws certain of which were previously
borne by CTI, our former parent company.
In order to improve operating performance and cash flow from operations, we
intend to continue to implement initiatives that we believe will enhance
efficiency and result in significant reductions in costs and operating expenses.
The initiatives include:
• Prioritizing the industrialization of our BSS offerings to meet or exceed
our customer requirements for ease of use and faster deployment times;
• Establishing and expanding low cost centers of excellence and research and
development centers in Eastern Europe and Asia; and
• Realigning our cost structure to our current size and business environment
by primarily reducing our selling, general and administrative expenses.
We intend to implement these initiatives during the fiscal year ending January
31, 2014 and expect that some of these initiatives will continue to be
implemented during the fiscal year ending January 31, 2015. In addition, for the
fiscal year ending January 31, 2014, we plan to make significant capital
expenditures relating to upgrades of systems and tools that we believe will
increase operational efficiency and result in significant cost reductions in
future fiscal periods. As a result of these initiatives, we expect that selling,
general and administrative expenses will decline as a percentage of revenue in
future fiscal periods.
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Our principal business activities are reported through the following segments:
• Comverse BSS, which conducts our converged, prepaid and postpaid billing
and active customer management systems business and includes groups
engaged in product management, professional services, research and
development and product sales support; and
• Comverse VAS, which conducts our value-added services business and
includes groups engaged in VAS delivery, Rich Communication, Voice and Messaging product research and development and product sales support.
Comverse BSS
In the nine months ended October 31, 2012, customer orders for BSS customer
solutions decreased slightly compared to the nine months ended October 31, 2011.
We believe that BSS customer solutions order activity was impacted by
uncertainty in economic conditions that prompted existing and potential
customers to defer significant capital investments involved in deploying our BSS
solutions and upgrading existing prepaid or postpaid systems to our converged
BSS solution. In addition, customers are more closely monitoring their operating
expenses. We believe a portion of the decline was also attributable to the
maturation of certain markets that historically accounted for a significant
portion of our BSS growth.
Revenue from BSS customer solutions for the three and nine months ended October
31, 2012 decreased compared to the three and nine months ended October 31, 2011.
The decrease in revenue from Comverse BSS customer solutions was primarily
attributable to material modifications of contracts that allowed the recognition
of additional revenue during the three and nine months ended October 31, 2011,
decreases in revenue from customer acceptances and changes in scope and
settlements of certain customer contracts during the three and nine months ended
October 31, 2012. Revenue from Comverse BSS customer solutions continued to be
adversely affected by (i) the increasing complexity of project deployment
resulting in extended periods of time required to complete project milestones,
delaying receipt of customer acceptance and (ii) lower volume of BSS projects in
the current fiscal periods resulting from reduced customer order activity in
recent years. In addition, as we focus our efforts to further industrialize our
BSS offerings to offer a stronger pre-packaged solution that improves ease of
use and faster deployment times, near-term bookings may be impacted. For a more
detailed discussion relating to revenue from Comverse BSS customer solutions,
see "Results of Operations-Segment Results-Comverse BSS-Revenue."
We have a leading industry position in the BSS converged billing market and
believe that we are well positioned to leverage our leading market position and
our BSS solution offering to take advantage of the growth in the emerging
converged BSS market. As part of our strategy, Comverse BSS is continuing its
efforts to expand its presence and market share in the BSS market with BSS
solutions that we believe offer several advantages over competitors' offerings,
including faster time to market and lower total cost of ownership. Comverse BSS
continues to offer its existing prepaid and postpaid customer base upgrades to
its Comverse ONE converged billing solution, which we believe better addresses
the enhanced business needs of communication service providers. In addition,
Comverse BSS continues to aggressively pursue opportunities to market its BSS
solutions, primarily Comverse ONE, to new customers as part of its efforts to
increase its customer base. As a result, Comverse BSS is experiencing a shift in
product mix as the portion of sales of its advanced Comverse ONE converged
billing solution continues to increase and the portion of sales of its
traditional stand-alone prepaid and postpaid BSS solutions continues to
decrease. In addition, to maintain its market leadership in BSS convergence and
monetization of new business models, Comverse BSS continues to expend
significant resources on research and development to further enhance Comverse
ONE and its advanced monetization capabilities, including support for new
business models such as machine to machine and cloud services.
Communication service providers are experiencing growth in global wireless
subscriptions and traffic and a rapid growth in the use of advanced services,
such as data services and Internet browsing. In response to these market trends,
communication service providers require enhanced BSS system functionality to
accommodate their business needs. As a result, Comverse BSS is facing increasing
complexity of project deployment resulting in extended periods of time required
to complete project milestones and receive customer acceptance which are
generally required for revenue recognition and receipt of payment. To address
these challenges, Comverse BSS continues its efforts to improve its delivery and
implementation capabilities to reduce costs and expenses. In addition, Comverse
BSS continues to focus on increasing its revenue and improving its margins by
broadening its customer solution and service offerings to existing and new
customers.
As part of its service offering, Comverse BSS offers a suite of managed services
that enable it to assume responsibility for the operation and management of its
customers' billing systems. Comverse's managed services suite is designed to
provide
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customers with improved efficiencies relating to the operation and management of
their systems, thereby allowing them to focus on their own internal business
needs and strengths with reduced management distraction. Managed services
provide Comverse with recurring and predictable revenue and are used by Comverse
to create and establish long-term relationships with customers as well as
cross-sell additional solutions and system enhancements. We believe that the
longevity of Comverse's customer relationships and the recurring revenue that
such relationships generate provide it with stability and a competitive
advantage in marketing its solutions to its existing customer base.
We believe that Comverse BSS's solutions offering has the potential to become a
key driver of growth going forward. We expect that as a leader in the converged
BSS market, we will continue to build on the strength of our Comverse ONE
solution, particularly in the converged billing segment of the BSS market, which
is expected to grow rapidly over the next few years. We also expect that growth
in mobile data traffic will increase the demand for Comverse's mobile Internet
solutions, which include policy management and enforcement, deep packet
inspection, traffic management and video optimization capabilities, all of which
are integrated into our BSS solution. In implementing our growth strategy, we
plan to focus our efforts on increasing our presence primarily in APAC, the
Middle East and certain countries in Latin America, including Brazil and Mexico
and leveraging our existing customer base by offering upgrades to Comverse ONE
primarily in Europe.
Comverse VAS
Customer orders for Comverse VAS customer solutions for the nine months ended
October 31, 2012 decreased compared to the nine months ended October 31, 2011.
This decrease is attributable to a decline in customer order activity related to
Comverse VAS' traditional solutions, such as voicemail and SMS text messaging,
which was not fully offset by customer orders for Comverse VAS' advanced
offerings, and the implementation of Comverse's strategy to pursue primarily
higher margin VAS projects which contributed to lower levels of VAS customer
order activity.
Revenue from Comverse VAS customer solutions for the three and nine months ended
October 31, 2012 increased compared to the three and nine months ended October
31, 2011 primarily resulting from an increase in revenue recognized upon cash
collection due to increased collections from certain customers. The increase in
revenue for the nine months ended October 31, 2012 was also attributable to the
timing of completion of project milestones. These increases were partially
offset by a decrease in revenue resulting from customer acceptances of
large-scale deployments of next generation voicemail products during the three
and nine months ended October 31, 2011 with no comparable customer acceptances
in the three and nine months ended October 31, 2012. For a more detailed
discussion relating to revenue from Comverse VAS customer solutions, see
"Results of Operations-Segment Results-Comverse VAS-Revenue."
Comverse VAS continues to maintain its market leadership in voice-based
products, such as voicemail and call completion. However, in the VAS market,
wireless subscriber preferences have changed in recent years as consumers
transitioned to alternative messaging applications, such as SMS text messaging,
in part as a substitute for voicemail usage, and increased the use of data in
connection with the deployment of smartphones and other devices, such as
tablets. This transition resulted in intensified competition due to the change
in the business mix of Comverse VAS from the voicemail product line, in which we
continue to hold a leading market position, to other applications and products
in which Comverse VAS is continuing to face significant competitive challenges
as part of its efforts to increase market share. In addition, Comverse VAS faces
increasing competition from changing technologies that may provide alternatives
to its products and services. For example, the introduction of open access to
web-based applications from wireless devices allows end users to utilize
web-based services, such as Facebook, Google, Yahoo or Hotmail, to access, among
other things, instant messaging and electronic mail free of charge rather than
use wireless carriers' service offerings. Furthermore, Comverse VAS continues to
face competition from low-cost competitors from emerging markets. We believe
these changes have reduced demand for Comverse VAS's products and services and
increased pricing pressures, which have in turn reduced revenue and margins.
At the same time, the growth in global wireless subscriptions, and emerging
wireless segments, such as data services and Internet browsing, support demand
for several of our products. As part of our efforts to maintain our market
position and leverage these recent trends, Comverse VAS is engaged in the
promotion of advanced offerings, such as visual voicemail, call management, IP
messaging, a Service Enablement Middleware, Rich Communication Solutions (RCS),
and Software as a Service (SaaS) cloud-based solutions. We believe demand for
advanced offerings may grow due to the increasing deployment of smartphones by
wireless communication service providers. Accordingly, we continue to expend
significant resources on VAS research and development activities in order to
enhance existing products and develop new solutions.
We plan to continue to aggressively market our VAS products, leveraging our
leading market position to replace competitors and sell capacity expansions and
other solutions to existing customers. We plan to do so while maintaining
pricing
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profitability disciplines, which may subject VAS customer order activity to
fluctuations in future fiscal periods. In addition, we believe we are in a
position to benefit from recent consolidations of customers, primarily in North
America.
Uncertainties Impacting Future Performance
Mix of Revenue
As part of our strategy, we continue our efforts to expand our BSS business and
pursue primarily higher margin VAS projects which have resulted in lower VAS
revenue. Currently, we are unable to predict whether increases in BSS revenue,
if any, will exceed or fully offset declines in VAS revenue. If BSS revenue does
not increase, or if increases in BSS revenue do not exceed or fully offset
declines in VAS revenue, our revenue, profitability and cash flows would likely
be materially adversely affected.
It is unclear whether our advanced offerings will be widely adopted by existing
and potential customers. Currently, we are unable to predict whether sales of
advanced offerings will exceed or fully offset declines that we may experience
in the sale of traditional solutions. If sales of advanced offerings do not
increase or if increases in sales of advanced offerings do not exceed or fully
offset any declines in sales of traditional solutions, due to adverse market
trends, changes in consumer preferences or otherwise, our revenue, profitability
and cash flows would likely be materially adversely affected.
Customer Confidence
We believe that we may have lost business opportunities due to concerns on the
part of customers about our financial condition. We believe that the completion
of the Share Distribution and the listing of our common stock on NASDAQ will
enhance our market perception and the willingness of customers and partners to
purchase our solutions and services.
Global Economic Conditions
The business of Comverse BSS and Comverse VAS is impacted by general economic
conditions. The weakness in the global economy in recent years has materially
and adversely affected the telecommunications industry. Many customers
experienced significant declines in revenue and profitability and some customers
were required to reduce excessive debt levels. In response to these challenges,
many of our customers have implemented cost cutting measures, including more
closely managing their operating expenses and capital investment budgets. This
resulted in reduced demand for our products, services and solutions, longer
customer purchasing decisions and pricing pressures.
Recently, there have been adverse developments in global debt markets (including
European sovereign debt) and other indications of a slowdown in the global
economic recovery. These conditions have adversely impacted financial markets
and have created substantial volatility and uncertainty, which we believe has
had an adverse impact on the timing of certain customer spending decisions, and
may continue to do so. If the recovery in the global economy is curtailed and
market conditions worsen, our existing and potential customers could reduce
their spending, which, in turn, could reduce the demand for our products and
services.
Difficulty in Forecasting Operating Results
Our operating results are difficult to predict. A high percentage of our
customer orders has typically been generated late in fiscal quarters. In
addition, based on historical industry spending patterns of communication
service providers, we typically forecast our highest customer order activity to
occur in our fourth fiscal quarter. This trend makes it difficult for us to
forecast our annual customer order activity and to implement effective measures
to cover any shortfalls of prior fiscal quarters if customer orders for the
fourth fiscal quarter fail to meet our expectations. Furthermore, we continue to
emphasize large capacity systems in our product development and marketing
strategies. Contracts for BSS and VAS installations typically involve a lengthy,
complex and highly competitive bidding and selection process, and our ability to
obtain particular contracts is inherently difficult to predict. A delay,
cancellation or other factor resulting in the postponement or cancellation of
significant orders may cause us to miss our financial projections, which may not
be discernible until the end of a financial reporting period.
Share Distribution
In connection with the Share Distribution, we entered into the Distribution
Agreement with CTI pursuant to which, among other things, we agreed to indemnify
CTI and its affiliates (including Verint after the Verint Merger) against
certain losses that may arise as a result of the Verint Merger and the Share
Distribution. To the extent that we are required to make payments to satisfy
these indemnification obligations, our liquidity could be impacted. See Part II,
Item 1A, "Risk Factors" of
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this Quarterly Report-Risks Related to our Operation as an Independent,
Publicly-Traded Company "We are required to indemnify CTI and its affiliates
(including Verint following the Verint Merger) after the Verint Merger against
certain claims or losses that may arise in connection with the Verint Merger and
the Share Distribution."
RESULTS OF OPERATIONS
The following discussion provides an analysis of our consolidated and combined
results and the results of operations of each of our segments for the fiscal
periods presented. The discussion of the results of operations of each of our
segments provides a more detailed analysis of the results of each segment
presented. Accordingly, the discussion of our consolidated and combined results
should be read in conjunction with the discussions of the results of operations
of our segments.
Three and Nine Months Ended October 31, 2012 Compared to Three and Nine Months
Ended October 31, 2011
Condensed Consolidated and Combined Results
Three Months Ended October 31, Change Nine Months Ended October 31, Change
2012 2011 Amount Percent 2012 2011 Amount Percent
(Dollars in thousands, except per share data)
Total revenue $ 185,200 $ 243,797 $ (58,597 ) (24.0 )% $ 494,176 $ 589,616 $ (95,440 ) (16.2 )%
Costs and expenses
Cost of revenue 118,171 143,968 (25,797 ) (17.9 )% 316,772 365,485 (48,713 ) (13.3 )%
Research and development,
net 20,379 25,273 (4,894 ) (19.4 )% 59,243 73,990 (14,747 ) (19.9 )%
Selling, general and
administrative 39,756 43,217 (3,461 ) (8.0 )% 119,253 133,836 (14,583 ) (10.9 )%
Other operating expenses 5,582 1,838 3,744 203.7 % 6,689 14,888 (8,199 ) (55.1 )%
Total costs and expenses 183,888 214,296 (30,408 ) (14.2 )% 501,957 588,199 (86,242 ) (14.7 )%
Income (loss) from
operations 1,312 29,501 (28,189 ) (95.6 )% (7,781 ) 1,417 (9,198 ) (649.1 )%
Interest income 163 377 (214 ) (56.8 )% 606 1,260 (654 ) (51.9 )%
Interest expense (218 ) (283 ) 65 (23.0 )% (594 ) (754 ) 160 (21.2 )%
Interest expense on notes
payable to CTI (205 ) (204 ) (1 ) N/M (455 ) (386 ) (69 ) 17.9 %
Other income (expense), net 147 (2,670 ) 2,817 (105.5 )% (3,749 ) (5,226 ) 1,477 (28.3 )%
Income tax provision (11,774 ) (10,681 ) (1,093 ) 10.2 % (19,098 ) (22,531 ) 3,433 (15.2 )%
Net (loss) income from
continuing operations (10,575 ) 16,040 (26,615 ) (165.9 )% (31,071 ) (26,220 ) (4,851 ) 18.5 %
Income from discontinued
operations, net of tax 21,831 2,509 19,322 N/M 26,542 5,713 20,829 N/M
Net income (loss) 11,256 18,549 (7,293 ) (39.3 )% (4,529 ) (20,507 ) 15,978 (77.9 )%
Less: Net income
attributable to
noncontrolling interest (157 ) (619 ) 462 (74.6 )% (1,167 ) (2,026 ) 859 (42.4 )%
Net income (loss)
attributable to Comverse,
Inc. $ 11,099 $ 17,930 $ (6,831 ) (38.1 )% $ (5,696 ) $ (22,533 ) $ 16,837 (74.7 )%
Net income (loss)
attributable to Comverse,
Inc.:
Net income (loss) from
continuing operations $ (10,575 ) $ 16,040 $ (26,615 ) $ (31,071 ) $ (26,220 ) $ (4,851 )
Income from discontinued
operations, net of tax 21,674 1,890 19,784 25,375 3,687 21,688
Net income (loss)
attributable to Comverse,
Inc. $ 11,099 $ 17,930 $ (6,831 ) $ (5,696 ) $ (22,533 ) $ 16,837
Earnings (loss) per share
attributable to Comverse,
Inc.'s stockholders:
Basic and diluted earnings
(loss) per share(1)
Continuing operations $ (0.48 ) $ 0.73 $ (1.21 ) $ (1.42 ) $ (1.20 ) $ (0.22 )
Discontinued operations $ 0.99 $ 0.09 $ 0.90 $ 1.16 $ 0.17 $ 0.99
(1) On November 1, 2012, we issued 724,807 restricted stock units, 132,473
deferred stock units and 495,894 options to purchase our shares of common stock
to replace CTI Awards previously granted to our employees. As these awards were
not outstanding as of October 31, 2012, they were not required to be
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considered in our diluted earnings (loss) per share calculation; however they
will be considered in subsequent periods diluted earnings (loss) per share
calculations. See note 22 to the condensed consolidated and combined financial
statements included in this Quarterly Report.
Total Revenue
Management analyzes our revenue by: (i) revenue generated from customer
solutions, and (ii) maintenance revenue. Revenue generated from customer
solutions consists primarily of the licensing of our customer solutions,
hardware and related professional services and training. Professional services
primarily include installation, customization and consulting services. Certain
revenue arrangements that require significant customization of a product to meet
the particular requirements of a customer are recognized under the
percentage-of-completion method. The vast majority of the
percentage-of-completion method arrangements are fixed-fee contracts.
Maintenance revenue consists primarily of post-contract customer support (or
PCS), including technical software support services, unspecified software
updates or upgrades to customers on a when-and-if-available basis.
Three Months Ended October 31, 2012 compared to Three Months Ended October 31,
2011. Revenue from customer solutions was $115.1 million for the three months
ended October 31, 2012, a decrease of $45.5 million, or 28.3%, compared to the
three months ended October 31, 2011. The decrease was attributable to a decline
of $50.1 million and $3.0 million in customer solutions revenue at the Comverse
BSS segment and Comverse Other, respectively, partially offset by an increase of
$7.5 million at the Comverse VAS segment. Revenue recognized using the
percentage-of-completion method was $53.0 million and $81.6 million for the
three months ended October 31, 2012 and 2011, respectively, and comprised
approximately 29% and 33% of total revenue for such periods, respectively.
Maintenance revenue was $70.1 million for the three months ended October 31,
2012, a decrease of $13.1 million, or 15.7%, compared to the three months ended
October 31, 2011. This decrease was primarily attributable to declines of $8.7
million, $2.6 million and $1.7 million in maintenance revenue at the Comverse
VAS segment, Comverse Other and Comverse BSS segment, respectively.
Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31,
2011. Revenue from customer solutions was $287.6 million for the nine months
ended October 31, 2012, a decrease of $57.3 million, or 16.6%, compared to the
nine months ended October 31, 2011. The decrease was attributable to a decline
of $75.9 million in customer solutions revenue at the Comverse BSS segment,
partially offset by increases of $18.0 million and $0.7 million in customer
solutions revenue at the Comverse VAS segment and Comverse Other, respectively.
Revenue recognized using the percentage-of-completion method was $109.9 million
and $146.8 million for the nine months ended October 31, 2012 and 2011,
respectively, and comprised approximately 22% and 25% of total revenue for such
periods, respectively.
Maintenance revenue was $206.6 million for the nine months ended October 31,
2012, a decrease of $38.1 million, or 15.6%, compared to the nine months ended
October 31, 2011. This decrease was primarily attributable to declines of $25.5
million, $9.8 million and $2.8 million in maintenance revenue at the Comverse
VAS segment, Comverse BSS segment and Comverse Other, respectively.
Revenue by Geographic Region
Three Months Ended October 31, 2012 compared to Three Months Ended October 31,
2011. Revenue in the Americas, Europe, Middle East and Africa (or EMEA) and Asia
Pacific (or APAC) represented approximately 36%, 30%, and 34% of our revenue,
respectively, for the three months ended October 31, 2012 compared to
approximately 20%, 52%, and 28% of our revenue, respectively, for the three
months ended October 31, 2011. The presentation of revenue by geographic region
is based on the location of customers.
Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31,
2011. Revenue in the Americas, Europe, Middle East and Africa (or EMEA) and Asia
Pacific (or APAC) represented approximately 34%, 35%, and 31% of our revenue,
respectively, for the nine months ended October 31, 2012 compared to
approximately 22%, 51%, and 27% of our revenue, respectively, for the nine
months ended October 31, 2011.
Foreign Currency Impact on Revenue
Fluctuations in the U.S. dollar relative to foreign currencies in which we
conducted business for the three months ended October 31, 2012 compared to the
three months ended October 31, 2011 unfavorably impacted revenue by $2.3
million.
Our functional currency for financial reporting purposes is the U.S. dollar. The
majority of our revenue for the nine months ended October 31, 2012 was derived
from transactions denominated in U.S. dollars. All other revenue was derived
from transactions denominated in various foreign currencies, primarily the
British pound, euro and Japanese yen. Fluctuations in the
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U.S. dollar relative to foreign currencies in which we conducted business for
the nine months ended October 31, 2012 compared to the nine months ended October
31, 2011 unfavorably impacted revenue by $7.1 million.
Foreign Currency Impact on Costs
A significant portion of our expenses, principally personnel-related costs, is
incurred in new Israeli shekel (or NIS), whereas our functional currency for
financial reporting purposes is the U.S. dollar. A strengthening of the NIS
against the U.S. dollar would increase the U.S. dollar value of our expenses in
Israel. We enter into foreign currency forward contracts to mitigate risk
attributable to foreign currency exchange rate fluctuations.
Cost of revenue
Cost of revenue primarily consists of hardware and software material costs and
compensation and related expenses for personnel involved in the customization of
our products for customer delivery, contractor costs, maintenance and
professional services, such as installation costs and training, royalties and
license fees, depreciation of equipment used in operations, amortization of
capitalized software costs and certain purchased intangible assets and related
overhead costs.
Three Months Ended October 31, 2012 compared to Three Months Ended October 31,
2011. Cost of revenue was $118.2 million for the three months ended October 31,
2012, a decrease of $25.8 million, or 17.9%, compared to the three months ended
October 31, 2011. The decrease was attributable to declines in costs of $18.3
million and $9.3 million at the Comverse BSS segment and Comverse Other,
respectively, offset by an increase in costs of $1.7 million at the Comverse VAS
segment for the three months ended October 31, 2012 compared to the three months
ended October 31, 2011.
Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31,
2011. Cost of revenue was $316.8 million for the nine months ended October 31,
2012, a decrease of $48.7 million, or 13.3%, compared to the nine months ended
October 31, 2011. The decrease was attributable to declines in costs of $26.5
million, $15.0 million and $7.1 million at the Comverse BSS segment, Comverse
Other, and Comverse VAS segment, respectively, for the nine months ended October
31, 2012 compared to the nine months ended October 31, 2011.
Research and Development, Net
Research and development expenses, net primarily consist of personnel-related
costs involved in product development, net of reimbursement under government
programs. Research and development expenses also include third party development
and programming costs and the amortization of purchased software code and
services content used in research and development activities.
Three Months Ended October 31, 2012 compared to Three Months Ended October 31,
2011. Research and development expenses, net, were $20.4 million for the three
months ended October 31, 2012, a decrease of $4.9 million, or 19.4%, compared to
the three months ended October 31, 2011. The decrease was primarily attributable
to a decline of $7.0 million at the Comverse BSS segment, partially offset by an
increase of $2.2 million at the Comverse VAS segment.
Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31,
2011. Research and development expenses, net, were $59.2 million for the nine
months ended October 31, 2012, a decrease of $14.7 million, or 19.9%, compared
to the nine months ended October 31, 2011. The decrease was primarily
attributable to declines of $21.5 million and $2.2 million at the Comverse BSS
segment and Comverse Other, respectively, partially offset by an increase of
$9.0 million at the Comverse VAS segment.
Selling, General and Administrative
Selling, general and administrative expenses consist primarily of compensation
and related expenses of personnel, professional services, sales and marketing
expenses, facility costs and unallocated overhead expenses.
Three Months Ended October 31, 2012 compared to Three Months Ended October 31,
2011. Selling, general and administrative expenses were $39.8 million for the
three months ended October 31, 2012, a decrease of $3.5 million, or 8.0%,
compared to the three months ended October 31, 2011. The decrease was primarily
attributable to a declines of $3.0 million and $0.6 million at the Comverse BSS
and Comverse VAS segments, respectively, partially offset by an increase of $0.1
million at Comverse Other.
Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31,
2011. Selling, general and administrative expenses were $119.3 million for the
nine months ended October 31, 2012, a decrease of $14.6 million, or 10.9%,
compared to the nine months ended October 31, 2011. The decrease was primarily
attributable to declines of $7.3
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million, $6.1 million and $1.3 million at the Comverse BSS segment, Comverse
Other, and the Comverse VAS segment, respectively.
Other Operating Expenses
Other operating expenses consist of operating expenses not included in research
and development, net and selling, general and administrative expenses and for
the fiscal periods presented include primarily restructuring charges and
impairments of intangible assets.
Three Months Ended October 31, 2012 compared to Three Months Ended October 31,
2011. Other operating expenses were $5.6 million for the three months ended
October 31, 2012, an increase of $3.7 million, compared to the three months
ended October 31, 2011. The increase was primarily attributable to an increase
at Comverse Other.
Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31,
2011. Other operating expenses were $6.7 million for the nine months ended
October 31, 2012, a decrease of $8.2 million, or 55.1%, compared to the nine
months ended October 31, 2011. The decrease was primarily attributable to a
decline at Comverse Other.
Income (Loss) from Operations
Three Months Ended October 31, 2012 compared to Three Months Ended October 31,
2011. Income from operations was $1.3 million for the three months ended October
31, 2012, a decrease of $28.2 million, or 95.6%, compared to the three months
ended October 31, 2011. The decrease was primarily attributable to a decrease in
income from operations of $23.6 million and $4.5 million at the Comverse BSS and
Comverse VAS segments, respectively.
Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31,
2011. Loss from operations was $7.8 million for the nine months ended October
31, 2012, a change of $9.2 million compared to income from operations of $1.4
million for nine months ended October 31, 2011. The change was primarily
attributable to a decline in income from operations of $30.4 million and $8.1
million at the Comverse BSS and Comverse VAS segments partially offset by a
decrease in loss from operations of $29.3 million at Comverse Other.
Interest Income
Three Months Ended October 31, 2012 compared to Three Months Ended October 31,
2011. Interest income was $0.2 million for the three months ended October 31,
2012, a decrease of $0.2 million, or 56.8%, compared to the three months ended
October 31, 2011.
Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31,
2011. Interest income was $0.6 million for the nine months ended October 31,
2012, a decrease of $0.7 million, or 51.9%, compared to the nine months ended
October 31, 2011.
Interest Expense
Three Months Ended October 31, 2012 compared to Three Months Ended October 31,
2011. Interest expense was $0.2 million for the three months ended October 31,
2012, a decrease of $0.1 million, or 23.0%, compared to the three months ended
October 31, 2011.
Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31,
2011. Interest expense was $0.6 million for the nine months ended October 31,
2012, a decrease of $0.2 million, or 21.2%, compared to the nine months ended
October 31, 2011.
Interest Expense on Notes Payable to CTI
Interest expense on notes payable to CTI consists of interest expense payable by
us to CTI under a promissory note dated January 11, 2011 and a revolving loan
agreement dated May 9, 2012 (referred to as the loan agreement).
Three Months Ended October 31, 2012 compared to Three Months Ended October 31,
2011. Interest expense on notes payable to CTI was $0.2 million for the three
months ended October 31, 2012, and October 31, 2011. For more information about
this note and the loan agreement, see note 9 of the condensed consolidated and
combined financial statements included in this Quarterly Report.
Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31,
2011. Interest expense on notes payable to CTI was $0.5 million for the nine
months ended October 31, 2012, an increase of $0.1 million, or 17.9% , compared
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to the nine months ended October 31, 2011. For more information about this note
and the loan agreement, see note 9 of the condensed consolidated and combined
financial statements included in this Quarterly Report.
Other Income (Expense), Net
Three Months Ended October 31, 2012 compared to Three Months Ended October 31,
2011. Other income, net was $0.1 million for the three months ended October 31,
2012, a change of $2.8 million compared to other expense, net of $2.7 million
for the three months ended October 31, 2011. The change was primarily
attributable to a $2.7 million increase related to the recognition of net
foreign currency transaction gains of $0.2 million for the three months ended
October 31, 2012, compared to net foreign currency transaction losses of $2.5
million for the three months ended October 31, 2011.
Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31,
2011. Other expense, net was $3.7 million for the nine months ended October 31,
2012, a decrease of $1.5 million, or 28.3%, compared to the nine months ended
October 31, 2011. The decrease was primarily attributable to a $0.8 million
decrease related to the recognition of net foreign currency transaction losses
of $3.5 million for the nine months ended October 31, 2012, compared to $4.3
million for the nine months ended October 31, 2011.
Income Tax Provision
Three Months Ended October 31, 2012 compared to Three Months Ended October 31,
2011. We recorded an income tax provision from continuing operations of $11.8
million for the three months ended October 31, 2012, representing an effective
tax rate of 982.0%, compared with an income tax provision from continuing
operations of $10.7 million, representing an effective tax rate of 40.0% for the
three months ended October 31, 2011. During the three months ended October 31,
2012 and 2011, the effective tax rates were greater than the US statutory rate
primarily due to the fact that we did not record an income tax benefit on losses
incurred in certain of our U.S. and foreign jurisdictions in which we maintain
valuation allowances against our net deferred tax assets. The income tax
provisions from continuing operations are comprised of income tax expense
recorded in non-loss jurisdictions, withholding taxes and certain tax
contingencies. The change in our effective tax rate for the three months ended
October 31, 2012, compared to the three months ended October 31, 2011 is
primarily attributable to changes in the relative mix of income and losses
across various jurisdictions.
Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31,
2011. We recorded an income tax provision from continuing operations of $19.1
million for the nine months ended October 31, 2012, representing an effective
tax rate of (159.5)%, compared with an income tax provision from continuing
operations of $22.5 million, representing an effective tax rate of (610.8)% for
the nine months ended October 31, 2011. During the nine months ended October 31,
2012 and 2011, the effective tax rates were negative due to the fact that we
reported income tax expense on loss before income tax provision. We did not
record an income tax benefit on the losses for the periods, primarily because we
maintain valuation allowances against certain of our U.S. and foreign net
deferred tax assets. The income tax provisions from continuing operations are
comprised of income tax expense recorded in non-loss jurisdictions, withholding
taxes and certain tax contingencies. The change in our effective tax rate for
the nine months ended October 31, 2012, compared to the nine months ended
October 31, 2011 is primarily attributable to changes in the relative mix of
income and losses across various jurisdictions.
Income from Discontinued Operations, Net of Tax
Income from discontinued operations represents the results of operations of
Starhome, including the gain on sale of Starhome, net of tax.
Three Months Ended October 31, 2012 compared to Three Months Ended October 31,
2011. Income from discontinued operations, net of tax, was $21.8 million for the
three months ended October 31, 2012, compared to $2.5 million for the three
months ended October 31, 2011. The increase was primarily attributable to $22.6
million gain on sale of Starhome recorded during the three months ended October
31, 2012. See note 14 of the condensed consolidated and combined financial
statements included in this Quarterly Report.
Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31,
2011. Income from discontinued operations, net of tax, was $26.5 million for the
nine months ended October 31, 2012, compared to $5.7 million for the nine months
ended October 31, 2011. The increase was primarily attributable to $22.6 million
gain on sale of Starhome recorded during the nine months ended October 31, 2012.
See note 14 of the condensed consolidated and combined financial statements
included in this Quarterly Report.
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Net Income (Loss)
Three Months Ended October 31, 2012 compared to Three Months Ended October 31,
2011. Net income was $11.3 million for the three months ended October 31, 2012,
a decrease in income of $7.3 million, or 39.3%, compared to the three months
ended October 31, 2011 due primarily to the reasons discussed above.
Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31,
2011. Net loss was $4.5 million for the nine months ended October 31, 2012, a
decrease in loss of $16.0 million, or 77.9% compared to the nine months ended
October 31, 2011 due primarily to the reasons discussed above.
Net Income Attributable to Noncontrolling Interest
Three Months Ended October 31, 2012 compared to Three Months Ended October 31,
2011. Net income attributable to noncontrolling interest was $0.2 million for
the three months ended October 31, 2012, a decrease of $0.5 million, or 74.6%,
compared to the three months ended October 31, 2011. The decrease was
attributable to a decrease in Starhome's net income for the three months ended
October 31, 2012 compared to the three months ended October 31, 2011.
Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31,
2011. Net income attributable to noncontrolling interest was $1.2 million for
the nine months ended October 31, 2012, a decrease of $0.9 million, or 42.4%,
compared to the nine months ended October 31, 2011. The decrease was
attributable to a decrease in Starhome's net income for the nine months ended
October 31, 2012 compared to the nine months ended October 31, 2011.
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Segment Results
Comverse BSS
Three Months Ended October 31, Change Nine Months Ended October 31, Change
2012 2011 Amount Percent 2012 2011 Amount Percent
(Dollars in thousands)
Revenue:
Total revenue $ 65,947 $ 117,731 $ (51,784 ) (44.0 )% $ 192,679 $ 278,403 $ (85,724 ) (30.8 )%
Costs and expenses:
Cost of revenue 46,561 64,823 (18,262 ) (28.2 )% 127,793 154,320 (26,527 ) (17.2 )%
Research and
development, net 8,499 15,458 (6,959 ) (45.0 )% 25,482 46,967 (21,485 ) (45.7 )%
Selling, general and
administrative 4,027 7,022 (2,995 ) (42.7 )% 13,515 20,774 (7,259 ) (34.9 )%
Other operating
expenses - 15 (15 ) (100.0 )% - 81 (81 ) (100.0 )%
Total costs and
expenses 59,087 87,318 (28,231 ) (32.3 )% 166,790 222,142 (55,352 ) (24.9 )%
Income from operations $ 6,860 $ 30,413 $ (23,553 ) (77.4 )% $ 25,889 $ 56,261 $ (30,372 ) (54.0 )%
Computation of segment
performance:
Segment revenue $ 65,947 $ 117,731 $ (51,784 ) (44.0 )% $ 192,679 $ 278,403 $ (85,724 ) (30.8 )%
Total costs and
expenses $ 59,087 $ 87,318 $ (28,231 ) (32.3 )% $ 166,790 $ 222,142 $ (55,352 ) (24.9 )%
Segment expense
adjustments:
Amortization of
acquisition-related
intangibles 3,976 4,245 (269 ) (6.3 )% 12,048 13,241 (1,193 ) (9.0 )%
Compliance-related
compensation and other
expenses - (1 ) 1 N/M 678 2,066 (1,388 ) (67.2 )%
Other 2 - 2 N/M 2 - 2 N/M
Segment expense
adjustments 3,978 4,244 (266 ) (6.3 )% 12,728 15,307 (2,579 ) (16.8 )%
Segment expenses 55,109 83,074 (27,965 ) (33.7 )% 154,062 206,835 (52,773 ) (25.5 )%
Segment performance $ 10,838 $ 34,657 $ (23,819 ) (68.7 )% $ 38,617 $ 71,568 $ (32,951 ) (46.0 )%
Revenue
Three Months Ended October 31, 2012 compared to Three Months Ended October 31,
2011. Revenue from Comverse BSS customer solutions was $32.2 million for the
three months ended October 31, 2012, a decrease of $50.1 million, or 60.8%,
compared to the three months ended October 31, 2011. The decrease in revenue
from Comverse BSS customer solutions was primarily attributable to (i) material
modifications of certain existing contracts during the three months ended
October 31, 2011 that allowed the recognition of additional revenue of
approximately $30.8 million during the prior period (ii) a 28.6% decrease in
revenue from customer acceptances in the three months ended October 31, 2012
compared to the three months ended October 31, 2011 and (iii) changes in scope
and settlements of certain customer contracts.
Comverse BSS maintenance revenue was $33.7 million for the three months ended
October 31, 2012, a decrease of $1.7 million, or 4.9%, compared to the three
months ended October 31, 2011. The decrease was primarily attributable to timing
of entering into renewals of maintenance contracts with customers.
Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31,
2011. Revenue from Comverse BSS customer solutions was $92.4 million for the
nine months ended October 31, 2012, a decrease of $75.9 million, or 45.1%,
compared to the nine months ended October 31, 2011. The decrease in revenue from
Comverse BSS customer solutions was primarily attributable to (i) material
modifications of certain existing contracts during the nine months ended October
31, 2011 that allowed the recognition of additional revenue of approximately
$24.0 million during the prior period (ii) a 23.6% decrease in revenue from
customer acceptances in the nine months ended October 31, 2012 compared to the
nine months ended October 31, 2011 and (iii) changes in scope and settlements of
certain customer contracts.
Comverse BSS maintenance revenue was $100.3 million for the nine months ended
October 31, 2012, a decrease of $9.8 million, or 8.9%, compared to the nine
months ended October 31, 2011. The decrease was primarily attributable to
decreased collections that resulted in a delay in the recognition of revenue,
timing of entering into renewals of maintenance contracts, termination of
maintenance contracts and a reduction in maintenance fees compared to the prior
period.
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Revenue by Geographic Region
Three Months Ended October 31, 2012 compared to Three Months Ended October 31,
2011. Revenue in the Americas, Europe, Middle East and Africa (or EMEA) and Asia
Pacific (or APAC) represented approximately 28%, 42% and 30% of Comverse BSS's
revenue, respectively, for the three months ended October 31, 2012 compared to
approximately 12%, 53% and 35% of Comverse BSS's revenue, respectively, for the
three months ended October 31, 2011.
Europe continued to suffer from significant weakness in market conditions and,
accordingly, European customers continued to closely monitor their costs and
maintain lower levels of spending. In addition, the decrease in Comverse BSS's
revenue in Europe was impacted by material modifications of certain existing
contracts entered into during the prior period that allowed the recognition of
additional revenue of approximately $24.4 million as well as changes in scope
and settlements of certain customer contracts. As a result, Comverse BSS's
revenue from its European customers declined during the three months ended
October 31, 2012 compared to the three months ended October 31, 2011. The
decrease in total revenue for Comverse BSS in APAC was primarily attributable to
a decrease in revenue recognized due to changes in scope and settlements of
certain customer contracts and customer acceptances in certain large-scale
projects with no comparable projects in the prior period.
Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31,
2011. Revenue in the Americas, Europe, Middle East and Africa (or EMEA) and Asia
Pacific (or APAC) represented approximately 24%, 45% and 31% of Comverse BSS's
revenue, respectively, for the nine months ended October 31, 2012 compared to
approximately 17%, 53% and 30% of Comverse BSS's revenue, respectively, for the
nine months ended October 31, 2011.
Europe continued to suffer from significant weakness in market conditions and,
accordingly, European customers continued to closely monitor their costs and
maintain lower levels of spending. In addition, the decrease in Comverse BSS's
revenue in Europe was impacted by material modifications of certain existing
contracts entered into during the prior period that allowed the recognition of
additional revenue of approximately $22.9 million as well as changes in scope
and settlements of certain customer contracts. As a result, Comverse BSS's
revenue from its European customers declined during the nine months ended
October 31, 2012 compared to the nine months ended October 31, 2011. The
decrease in total revenue for Comverse BSS in APAC was primarily attributable to
a decrease in revenue recognized due to changes in scope and settlements of
certain customer contracts and customer acceptances in certain large-scale
projects with no comparable projects in the prior period.
Foreign Currency Impact on Revenue
Three Months Ended October 31, 2012 compared to Three Months Ended October 31,
2011. Fluctuations in the U.S. dollar relative to foreign currencies in which
Comverse BSS conducted business for the three months ended October 31, 2012
compared to the three months ended October 31, 2011 unfavorably impacted revenue
by $1.5 million.
Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31,
2011. Fluctuations in the U.S. dollar relative to foreign currencies in which
Comverse BSS conducted business for the nine months ended October 31, 2012
compared to the nine months ended October 31, 2011 unfavorably impacted revenue
by $5.7 million.
Cost of Revenue
Three Months Ended October 31, 2012 compared to Three Months Ended October 31,
2011. Cost of revenue was $46.6 million for the three months ended October 31,
2012, a decrease of $18.3 million, or 28.2%, compared to the three months ended
October 31, 2011. The decrease was primarily attributable to:
• a $14.9 million decrease in material costs and overhead primarily due
to decreased revenue; and
• an $7.3 million decrease in personnel-related costs principally due to progress of projects accounted for under the percentage of completion
method.
These decreases were partially offset by a $3.9 million increase in
sub-contractor costs on certain projects.
Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31,
2011. Cost of revenue was $127.8 million for the nine months ended October 31,
2012, a decrease of $26.5 million, or 17.2%, compared to the nine months ended
October 31, 2011. The decrease was primarily attributable to:
• a $19.5 million decrease in material costs primarily due to decreased
revenue and decreases in provisions for contract loss;
• a $13.8 million decrease in personnel-related costs principally due to progress of projects accounted for under the percentage of completion
method.
These decreases were partially offset by a $5.0 million increase in
sub-contractor costs on certain projects.
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Research and Development, Net
Three Months Ended October 31, 2012 compared to Three Months Ended October 31,
2011. Research and development expenses, net, were $8.5 million for the three
months ended October 31, 2012, a decrease of $7.0 million, or 45.0%, compared to
the three months ended October 31, 2011. The decrease was primarily attributable
to a $3.4 million decrease in personnel-related costs and a $1.4 million
decrease in allocated overhead costs relating to research and development, both
principally due to workforce reductions as part of the Phase II Business
Transformation, and a $1.7 million decrease in personnel-related costs due to
allocation of research and development personnel to specific revenue generating
projects recorded in cost of revenue in lieu of research and development
expenses, net.
Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31,
2011. Research and development expenses, net, were $25.5 million for the nine
months ended October 31, 2012, a decrease of $21.5 million, or 45.7%, compared
to the nine months ended October 31, 2011. The decrease was primarily
attributable to an $11.5 million decrease in personnel-related costs and bonus
expenses and a $3.6 million decrease in allocated overhead costs relating to
research and development, both principally due to workforce reductions as part
of the Phase II Business Transformation and a $5.5 million decrease in
personnel-related costs due to allocation of research and development personnel
to specific revenue generating projects recorded in cost of revenue in lieu of
research and development expenses, net.
Selling, General and Administrative
Three Months Ended October 31, 2012 compared to Three Months Ended October 31,
2011. Selling, general and administrative expenses were $4.0 million for the
three months ended October 31, 2012, a decrease of $3.0 million, or 42.7%,
compared to the three months ended October 31, 2011. The decrease was primarily
attributable to:
• a $1.9 million decrease in personnel-related costs;
• a $0.4 million decrease in bad debt expense related to specific
customers in the prior period; and
• a $0.2 million decrease in overhead allocations related to selling,
general and administrative expenses.
Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31,
2011. Selling, general and administrative expenses were $13.5 million for the
nine months ended October 31, 2012, a decrease of $7.3 million, or 34.9%,
compared to the nine months ended October 31, 2011. The decrease was primarily
attributable to:
• a $3.5 million decrease in personnel-related costs principally due to
workforce reductions as part of the Phase II Business Transformation;
• a $1.6 million decrease in agent and employee sales commissions expense
principally due to the mix of bookings generated from certain projects
and in certain geographic locations with respect to which Comverse BSS
pays lower sales commissions; and
• a $0.6 million decrease in overhead allocations related to selling,
general and administrative expenses.
Segment Performance
Three Months Ended October 31, 2012 compared to Three Months Ended October 31,
2011. Segment performance was $10.8 million for the three months ended October
31, 2012 based on segment revenue of $65.9 million, representing a segment
performance margin of 16.4% as a percentage of segment revenue. Segment
performance was $34.7 million for the three months ended October 31, 2011 based
on segment revenue of $117.7 million, representing a segment performance margin
of 29.4% as a percentage of segment revenue. The decrease in segment performance
margin was primarily attributable to a decrease in segment revenue, partially
offset by a decrease in segment expenses for the three months ended October 31,
2012 compared to the three months ended October 31, 2011.
Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31,
2011. Segment performance was $38.6 million for the nine months ended October
31, 2012 based on segment revenue of $192.7 million, representing a segment
performance margin of 20.0% as a percentage of segment revenue. Segment
performance was $71.6 million for the nine months ended October 31, 2011 based
on segment revenue of $278.4 million, representing a segment performance margin
of 25.7% as a percentage of segment revenue. The decrease in segment performance
margin was primarily attributable to a decrease in segment revenue, partially
offset by a decrease in segment expenses for the nine months ended October 31,
2012 compared to the nine months ended October 31, 2011.
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Comverse VAS
Three Months Ended October
31, Change Nine Months Ended October 31, Change
2012 2011 Amount Percent 2012 2011 Amount Percent
(Dollars in thousands)
Revenue:
Total revenue $ 111,457 $ 112,655 $ (1,198 ) (1.1 )% $ 268,668 $ 276,234 $ (7,566 ) (2.7 )%
Costs and expenses:
Cost of revenue 57,380 55,632 1,748 3.1 % 144,179 151,325 (7,146 ) (4.7 )%
Research and
development, net 8,936 6,786 2,150 31.7 % 28,398 19,434 8,964 46.1 %
Selling, general and
administrative 1,262 1,865 (603 ) (32.3 )% 5,192 6,454 (1,262 ) (19.6 )%
Other operating
expenses - - - - - 4 (4 ) N/M
Total costs and
expenses 67,578 64,283 3,295 5.1 % 177,769 177,217 552 0.3 %
Income from operations $ 43,879 $ 48,372 $ (4,493 ) (9.3 )%
$ 90,899 $ 99,017 $ (8,118 ) (8.2 )%
Computation of segment
performance:
Segment revenue $ 111,457 $ 112,655 $ (1,198 ) (1.1 )% $ 268,668 $ 276,234 $ (7,566 ) (2.7 )%
Total costs and
expenses $ 67,578 $ 64,283 $ 3,295 5.1 % $ 177,769 $ 177,217 $ 552 0.3 %
Segment expense
adjustments:
Compliance-related
compensation and other
expenses - 295 (295 ) N/M 916 1,531 (615 ) (40.2 )%
Impairment charges - - - - - 5 (5 ) N/M
Segment expense
adjustments - 295 (295 ) (100.0 )% 916 1,536 (620 ) (40.4 )%
Segment expenses 67,578 63,988 3,590 5.6 % 176,853 175,681 1,172 0.7 %
Segment performance $ 43,879 $ 48,667 $ (4,788 ) (9.8 )% $ 91,815 $ 100,553 $ (8,738 ) (8.7 )%
Revenue
Three Months Ended October 31, 2012 compared to Three Months Ended October 31,
2011. Revenue from Comverse VAS customer solutions was $77.3 million for the
three months ended October 31, 2012, an increase of $7.5 million, or 10.8%,
compared to the three months ended October 31, 2011. The increase in revenue
from Comverse VAS customer solutions was primarily attributable to an increase
in revenue recognized upon cash collection due to increased collections from
certain customers partially offset by a decrease in revenue resulting from
customer acceptances in certain large-scale projects in the three months ended
October 31, 2011, with no comparable customer acceptances in the three months
ended October 31, 2012.
Comverse VAS maintenance revenue was $34.2 million for the three months ended
October 31, 2012, a decrease of $8.7 million, or 20.3%, compared to the three
months ended October 31, 2011. The decrease was primarily attributable to the
timing of entering into renewals of maintenance contracts, termination of
maintenance contracts and a decrease in maintenance revenue attributable to
maintenance services provided to customers during the initial service period
corresponding to a decline in new installed base value.
Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31,
2011. Revenue from Comverse VAS customer solutions was $170.5 million for the
nine months ended October 31, 2012, an increase of $18.0 million, or 11.8%,
compared to the nine months ended October 31, 2011. The increase in revenue from
Comverse VAS customer solutions was primarily attributable to an increase in
revenue recognized upon cash collection due to increased collections from
certain customers and timing of completion of project milestones. This increase
was partially offset by a decrease in the number of customer acceptances in
large-scale deployments of next generation voicemail products (including visual
voicemail) during the nine months ended October 31, 2011 with no comparable
customer acceptances in the nine months ended October 31, 2012.
Comverse VAS maintenance revenue was $98.2 million for the nine months ended
October 31, 2012, a decrease of $25.5 million, or 20.6%, compared to the nine
months ended October 31, 2011. The decrease was primarily attributable to the
timing of entering into renewals of maintenance contracts, termination of
maintenance contracts and a decrease in maintenance revenue attributable to
maintenance services provided to customers during the initial service period
corresponding to a decline in new installed base value.
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Revenue by Geographic Region
Three Months Ended October 31, 2012 compared to Three Months Ended October 31,
2011. Revenue in the Americas, EMEA and APAC represented approximately 39%, 23%
and 38% of Comverse VAS's revenue, respectively, for the three months ended
October 31, 2012 compared to approximately 27%, 52% and 21% of Comverse VAS's
revenue, respectively, for the three months ended October 31, 2011.
The increase in revenue as a percentage of total revenue for Comverse VAS in the
Americas was primarily attributable to significant revenue recognized due to
customer acceptances in certain large-scale projects in the three months ended
October 31, 2012, with no comparable customer acceptances in the three months
ended October 31, 2011. Conversely, the decrease in revenue as a percentage of
total revenue for Comverse VAS in Europe was primarily attributable to
significant revenue recognized due to customer acceptances in certain
large-scale projects in the three months ended October 31, 2011, with no
comparable customer acceptances in the three months ended October 31, 2012. The
increase in revenue for Comverse VAS in APAC was primarily attributable to
revenue recognized upon cash collection due to increased collections from
certain customers.
Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31,
2011. Revenue in the Americas, EMEA and APAC represented approximately 41%, 28%
and 31% of Comverse VAS's revenue, respectively, for the nine months ended
October 31, 2012 compared to approximately 27%, 47% and 26% of Comverse VAS's
revenue, respectively, for the nine months ended October 31, 2011.
The increase in revenue as a percentage of total revenue for Comverse VAS in the
Americas was primarily attributable to significant revenue recognized due to
customer acceptances in certain large-scale projects in the nine months ended
October 31, 2012, with no comparable customer acceptances in the nine months
ended October 31, 2011. Conversely, the decrease in revenue as a percentage of
total revenue for Comverse VAS in Europe was primarily attributable to
significant revenue recognized due to customer acceptances in certain
large-scale projects in the nine months ended October 31, 2011, with no
comparable customer acceptances in the nine months ended October 31, 2012. The
increase in revenue for Comverse VAS in APAC was primarily attributable to
revenue recognized upon cash collection due to increased collections from
certain customers.
Foreign Currency Impact on Revenue
Three Months Ended October 31, 2012 compared to Three Months Ended October 31,
2011. Fluctuations in the U.S. dollar relative to foreign currencies in which
Comverse VAS conducted business for the three months ended October 31, 2012
compared to the three months ended October 31, 2011 unfavorably impacted revenue
by $0.6 million.
Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31,
2011. Fluctuations in the U.S. dollar relative to foreign currencies in which
Comverse VAS conducted business for the nine months ended October 31, 2012
compared to the nine months ended October 31, 2011 unfavorably impacted revenue
by $0.3 million.
Cost of Revenue
Three Months Ended October 31, 2012 compared to Three Months Ended October 31,
2011. Cost of revenue was $57.4 million for the three months ended October 31,
2012, an increase of $1.7 million, or 3.1%, compared to the three months ended
October 31, 2011. The increase was primarily attributable to a $7.6 million
increase in personnel-related costs principally due to progress of projects
related to customer solutions.
This increase was offset by the following:
• a $2.9 million decrease in material costs primarily due to lower
product costs associated with revenue recognized during the period;
• a $1.4 million decrease in allocation of overhead costs relating to
cost of revenue; and
• a $0.9 million decrease in contractor costs recorded based on progress
of projects related to customer solutions.
Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31,
2011. Cost of revenue was $144.2 million for the nine months ended October 31,
2012, a decrease of $7.1 million, or 4.7%, compared to the nine months ended
October 31, 2011. The decrease was primarily attributable to:
• a $3.1 million decrease in material costs primarily due to lower
product costs associated with revenue recognized during the period; and
• a $4.8 million decrease in allocation of overhead costs relating to
cost of revenue.
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Research and Development, Net
Three Months Ended October 31, 2012 compared to Three Months Ended October 31,
2011. Research and development expenses, net, were $8.9 million for the three
months ended October 31, 2012, an increase of $2.2 million, or 31.7%, compared
to the three months ended October 31, 2011. The increase resulted primarily from
a $1.7 million increase in personnel-related costs mainly due to increased
research and development headcount attributable to the launch of two new
services of VAS solution offerings and an increase of $0.7 million in allocated
overhead cost relating to research and development, net.
Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31,
2011. Research and development expenses, net, were $28.4 million for the nine
months ended October 31, 2012, an increase of $9.0 million, or 46.1%, compared
to the nine months ended October 31, 2011. The increase resulted primarily from
an $8.1 million increase in personnel-related costs mainly due to increased
research and development headcount attributable to the launch of two new
services of VAS solution offerings.
Selling, General and Administrative
Three Months Ended October 31, 2012 compared to Three Months Ended October 31,
2011. Selling, general and administrative expenses were $1.3 million for the
three months ended October 31, 2012, a decrease of $0.6 million, or 32.3%,
compared to the three months ended October 31, 2011. The decrease was primarily
attributable to a $0.3 million decrease in agent and employee sales commissions
expense principally due to the mix of bookings generated from certain projects
and in certain geographic locations with respect to which Comverse VAS pays
lower sales commission and a $0.3 million decrease in personnel-related costs.
Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31,
2011. Selling, general and administrative expenses were $5.2 million for the
nine months ended October 31, 2012, a decrease of $1.3 million, or 19.6%,
compared to the nine months ended October 31, 2011. The decrease was primarily
attributable to a $1.4 million decrease in agent and employee sales commissions
expense principally due to the mix of bookings generated from certain projects
and in certain geographic locations with respect to which Comverse VAS pays
lower sales commission and a decrease in personnel-related costs of $0.6
million, partially offset by a $0.5 million increase in bad debt expenses.
Segment Performance
Three Months Ended October 31, 2012 compared to Three Months Ended October 31,
2011. Segment performance was $43.9 million for the three months ended October
31, 2012 based on segment revenue of $111.5 million, representing a segment
performance margin of 39.4% as a percentage of segment revenue. Segment
performance was $48.7 million for the three months ended October 31, 2011 based
on segment revenue of $112.7 million, representing a segment performance margin
of 43.2% as a percentage of segment revenue. The decrease in segment performance
margin was primarily attributable an increase in segment expenses for the three
months ended October 31, 2012 compared to the three months ended October 31,
2011.
Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31,
2011. Segment performance was $91.8 million for the nine months ended October
31, 2012 based on segment revenue of $268.7 million, representing a segment
performance margin of 34.2% as a percentage of segment revenue. Segment
performance was $100.6 million for the nine months ended October 31, 2011 based
on segment revenue of $276.2 million, representing a segment performance margin
of 36.4% as a percentage of segment revenue. The decrease in segment performance
margin was primarily attributable to the decrease in segment revenue, for the
nine months ended October 31, 2012 compared to the nine months ended October 31,
2011.
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Comverse Other
Three Months Ended October 31, Change Nine Months Ended October 31, Change
2012 2011 Amount Percent 2012 2011 Amount Percent
(Dollars in thousands)
Revenue:
Total revenue $ 7,796 $ 13,411 $ (5,615 ) (41.9 )% $ 32,829 $ 34,979 $ (2,150 ) (6.1 )%
Costs and expenses:
Cost of revenue 14,230 23,513 (9,283 ) (39.5 )% 44,800 59,840 (15,040 ) (25.1 )%
Research and
development, net 2,944 3,029 (85 ) (2.8 )% 5,363 7,589 (2,226 ) (29.3 )%
Selling, general and
administrative 34,467 34,330 137 0.4 % 100,546 106,608 (6,062 ) (5.7 )%
Other operating
expenses 5,582 1,823 3,759 206.2 % 6,689 14,803 (8,114 ) (54.8 )%
Total costs and
expenses 57,223 62,695 (5,472 ) (8.7 )% 157,398 188,840 (31,442 ) (16.7 )%
Loss from operations $ (49,427 ) $ (49,284 ) $ (143 ) 0.3 % $ (124,569 ) $ (153,861 ) $ 29,292 (19.0 )%
Computation of segment
performance:
Total revenue $ 7,796 $ 13,411 $ (5,615 ) (41.9 )% $ 32,829 $ 34,979 $ (2,150 ) (6.1 )%
Segment revenue
adjustment - - - - - - - -
Segment revenue $ 7,796 $ 13,411 $ (5,615 ) (41.9 )% $ 32,829 $ 34,979 $ (2,150 ) (6.1 )%
Total costs and
expenses $ 57,223 $ 62,695 $ (5,472 ) (8.7 )% $ 157,398 $ 188,840 $ (31,442 ) (16.7 )%
Segment expense
adjustments:
Stock-based
compensation expense 1,880 974 906 93.0 % 5,512 2,671 2,841 106.4 %
Compliance-related
professional fees 176 4,162 (3,986 ) (95.8 )% 189 14,629 (14,440 ) (98.7 )%
Compliance-related
compensation and other
expenses 288 1,281 (993 ) (77.5 )% 247 1,885 (1,638 ) (86.9 )%
Impairment of goodwill 5,605 - 5,605 N/M 5,605 - 5,605 N/M
Impairment of property
and equipment 15 1,118 (1,103 ) (98.7 )% 50 1,270 (1,220 ) (96.1 )%
Litigation settlements
and related costs 413 - 413 N/M 170 474 (304 ) N/M
Restructuring (23 ) 1,838 (1,861 ) (101.3 )% 1,084 14,888 (13,804 ) (92.7 )%
Other 1 (8 ) 9 (112.5 )% (207 ) (55 ) (152 ) N/M
Segment expense
adjustments 8,355 9,365 (1,010 ) (10.8 )% 12,650 35,762 (23,112 ) (64.6 )%
Segment expenses 48,868 53,330 (4,462 ) (8.4 )% 144,748 153,078 (8,330 ) (5.4 )%
Segment performance $ (41,072 ) $ (39,919 ) $ (1,153 ) 2.9 % $ (111,919 ) $ (118,099 ) $ 6,180 (5.2 )%
Revenue
Revenue includes revenue generated primarily by Comverse MI and our Netcentrex
operations (or Netcentrex).
Three Months Ended October 31, 2012 compared to Three Months Ended October 31,
2011. Total revenue was $7.8 million for the three months ended October 31,
2012, a decrease of $5.6 million, or 41.9%, compared to the three months ended
October 31, 2011. The decrease was primarily attributable to revenue decreases
at Netcentrex of $4.8 million. For the three months ended October 31, 2012 and
2011, Comverse MI's total revenue were $5.5 million and $5.6 million,
respectively, and Netcentrex' total revenue were $1.7 million and $6.5 million,
respectively.
Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31,
2011. Total revenue was $32.8 million for the nine months ended October 31,
2012, a decrease of $2.2 million, or 6.1%, compared to the nine months ended
October 31, 2011. The decrease was primarily attributable to revenue decreases
at Netcentrex of $5.8 million, partially offset by a $2.0 million and $1.8
million revenue increases at Comverse MI and other miscellaneous operations,
respectively. For the nine months ended October 31, 2012 and 2011, Comverse MI's
total revenue was $17.4 million and $15.4 million, respectively, and Netcentrex'
total revenue was $11.5 million and $17.3 million, respectively.
Cost of Revenue
Cost of revenue is primarily attributable to Comverse MI and Netcentrex. Cost of
revenue also includes shared services costs associated with
percentage-of-completion projects, including at Comverse BSS and Comverse VAS.
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Three Months Ended October 31, 2012 compared to Three Months Ended October 31,
2011. Cost of revenue was $14.2 million for the three months ended October 31,
2012, a decrease of $9.3 million, or 39.5%, compared to the three months ended
October 31, 2011. The decrease was primarily attributable to a $14.2 million
decrease in personnel-related costs relating to employees, whose
personnel-related costs were included in Comverse Other for the three months
ended October 31, 2011 and were transferred to specific projects at the Comverse
BSS and Comverse VAS segments for the three months ended October 31, 2012.
Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31,
2011. Cost of revenue was $44.8 million for the nine months ended October 31,
2012, a decrease of $15.0 million, or 25.1%, compared to the nine months ended
October 31, 2011. The decrease was primarily attributable to:
• a $13.5 million decrease in personnel-related costs relating to
employees, whose personnel-related costs were included in Comverse
Other for the nine months ended October 31, 2011 and were transferred
to specific projects at the Comverse BSS and Comverse VAS segments for
the nine months ended October 31, 2012; and
• a $1.4 million decrease in contractor costs.
Research and Development, Net
Research and development expenses, net primarily include expenses incurred by
our global corporate functions in connection with shared services provided to
our operations, including Comverse BSS and Comverse VAS.
Three Months Ended October 31, 2012 compared to Three Months Ended October 31,
2011. Research and development expenses, net, were $2.9 million for the three
months ended October 31, 2012, a decrease of $0.1 million, or 2.8%, compared to
the three months ended October 31, 2011.
Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31,
2011. Research and development expenses, net, were $5.4 million for the nine
months ended October 31, 2012, a decrease of $2.2 million, or 29.3%, compared to
the nine months ended October 31, 2011. The decrease was primarily attributable
to a decrease in allocated overhead costs relating to research and development.
Selling, General and Administrative
Selling, general and administrative expenses consist of expenses incurred by our
global corporate functions in connection with shared services provided to our
operations, including, Comverse BSS and Comverse VAS.
Three Months Ended October 31, 2012 compared to Three Months Ended October 31,
2011. Selling, general and administrative expenses were $34.5 million for the
three months ended October 31, 2012, an increase of $0.1 million, or 0.4%,
compared to the three months ended October 31, 2011. The increase was primarily
attributable to:
• a $3.0 million increase as a result of a higher percentage of overhead
costs allocated to selling, general and administrative; and
• a $1.7 million increase in personnel-related costs primarily due to
bonus expenses. Fluctuations in foreign currency exchange rates had a
favorable impact on personnel-related costs of approximately $1.0
million for the three months ended October 31, 2012.
These increases were partially offset by a $4.0 million decrease in
compliance-related professional fees in connection with CTI's efforts to become
current in its periodic reporting obligations under the federal securities laws.
Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31,
2011. Selling, general and administrative expenses were $100.5 million for the
nine months ended October 31, 2012, a decrease of $6.1 million, or 5.7%,
compared to the nine months ended October 31, 2011. The decrease was primarily
attributable to:
• a $14.4 million decrease in compliance-related professional fees in
connection with CTI's efforts to become current in its periodic
reporting obligations under the federal securities laws; and
• a $4.9 million decrease in rent and utilities as a result of
consolidation of facilities during the current fiscal period.
These decreases were partially offset by:
• a $9.5 million increase in overhead allocation relating to selling,
general and administrative expenses; and
• a $6.4 million increase in agent and employee sales commissions due to
the mix of bookings generated from certain projects and in certain geographic locations with respect to which we pay higher commissions.
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Other Operating Expenses
Three Months Ended October 31, 2012 compared to Three Months Ended October 31,
2011. Other operating expenses were $5.6 million for the three months ended
October 31, 2012, an increase of $3.8 million, or 206.2%, compared to the three
months ended October 31, 2011. The increase was primarily attributable a $5.6
million charge for impairment of goodwill related to the Comverse MI reporting
unit, partially offset by a $1.9 million decrease in restructuring charges.
Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31,
2011. Other operating expenses were $6.7 million for the nine months ended
October 31, 2012, a decrease of $8.1 million, or 54.8%, compared to the nine
months ended October 31, 2011. The decrease was primarily attributable to a
$13.8 million decrease in restructuring charges incurred during the nine months
ended October 31, 2011, partially offset by a $5.6 million charge for impairment
of goodwill related to the Comverse MI reporting unit.
Loss from Operations
Three Months Ended October 31, 2012 compared to Three Months Ended October 31,
2011. Loss from operations was $49.4 million for the three months ended October
31, 2012, an increase in loss of $0.1 million, or 0.3%, compared to the three
months ended October 31, 2011 due primarily to the reasons discussed above. For
the three months ended October 31, 2012, Comverse MI had income from operations
of $0.7 million compared to a loss from operations of $0.6 million for the three
months ended October 31, 2011. The change was primarily attributable to a
decrease in cost of revenue and selling, general and administrative expenses.
For the three months ended October 31, 2012 and 2011, Netcentrex had a loss from
operations of $1.9 million and $0.1 million, respectively. The increase in loss
was primarily attributable to a $4.8 million decrease in total revenue partially
offset by a decrease in research and development expenses, net and cost of
revenue.
Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31,
2011. Loss from operations was $124.6 million for the nine months ended October
31, 2012, a decrease in loss of $29.3 million, or 19.0%, compared to the nine
months ended October 31, 2011 due primarily to the reasons discussed above. For
the nine months ended October 31, 2012, Comverse MI had income from operations
of $0.5 million compared to a loss from operations of $2.3 million for the nine
months ended October 31, 2011. The change was primarily attributable to a $2.0
million increase in total revenue. For the nine months ended October 31, 2012
and 2011, Netcentrex had a loss from operations of $0.1 million and
$3.6 million, respectively. The decrease in loss was primarily attributable to a
decrease in research and development expenses, net and cost of revenue partially
offset by a $5.8 million decrease in total revenue.
Segment Performance
Three Months Ended October 31, 2012 compared to Three Months Ended October 31,
2011. Segment performance was a $41.1 million loss for the three months ended
October 31, 2012 an increase in loss of $1.2 million, or 2.9%, compared to the
three months ended October 31, 2011. The increase in loss was primarily
attributable to the decrease in segment revenue, partially offset by a decrease
in segment expenses.
Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31,
2011. Segment performance was a $111.9 million loss for the nine months ended
October 31, 2012, a decrease in loss of $6.2 million, or 5.2%, compared to the
nine months ended October 31, 2011. The decrease in loss was primarily
attributable to a decrease in segment expenses, primarily related to
restructuring charges and compliance-related professional fees, partially offset
by a decrease in segment revenue.
LIQUIDITY AND CAPITAL RESOURCES
Overview
Our principal sources of liquidity historically have consisted of cash and cash
equivalents, cash flows from operations, including changes in working capital,
borrowings from CTI, and the sale of investments and assets. We believe that our
future sources of liquidity will include cash and cash equivalents, and may
include new borrowings, cash generated from asset divestitures, or proceeds from
the issuance of equity or debt securities.
During the nine months ended October 31, 2012 our principal uses of liquidity
were to fund operating expenses, make capital expenditures, repay indebtedness,
and pay significant professional fees and other expenses in connection with
CTI's efforts to become current in, and continue to meet its periodic reporting
obligations under, the federal securities laws. In addition, we expended
resources and made investments to improve our internal control over financial
reporting through the hiring of additional experienced finance and accounting
personnel, redesigning of processes, implementing accounting and finance systems
and performing additional business analytics. These expenses declined
significantly for the nine months ended
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October 31, 2012 compared to the nine months ended October 31, 2011. Following
the Share Distribution, we will not incur expenses in connection with CTI's
periodic reporting requirements. However, we expect that following the Share
Distribution, our accounting, tax and legal fees associated with compliance with
our periodic reporting obligations under, federal securities laws and
maintenance of internal control over financial reporting will increase.
Financial Condition
Cash and Cash Equivalents
As of October 31, 2012, we had cash, cash equivalents, bank time deposits and
restricted cash of approximately $248.3 million, compared to approximately
$153.9 million as of July 31, 2012. In connection with the completion of the
Share Distribution, we received from CTI a cash capital contribution of $38.5
million and all indebtedness payable by us to CTI was settled through a capital
contribution to our equity by CTI. In addition, we received $37.2 million of
cash consideration from the Starhome Disposition including $4.9 million held in
escrow pursuant to the terms of the Starhome Share Purchase Agreement to cover
potential post-closing indemnification claims. Any cash balance remaining
following the escrow period will be released to us.
Restricted Cash
Restricted cash aggregated $43.1 million and $37.6 million as of October 31,
2012 and July 31, 2012, respectively. Restricted cash includes compensating cash
balances related to existing lines of credit and deposits that are pledged as
collateral or restricted for use to settle specified performance guarantees to
customers and vendors, letters of credit, foreign currency transactions in the
ordinary course of business and pending tax judgments.
Liquidity Forecast
We currently forecast that available cash and cash equivalents will be
sufficient to meet our liquidity needs, including capital expenditures, for at
least the next 12 months.
Management's current forecast is based upon a number of assumptions including,
among others: continued implementation of initiatives to reduce operating costs;
restricted cash and bank time deposits in amounts consistent with current
levels; slight reductions in the unrestricted cash levels required to support
the working capital needs of the business; reductions in compliance-related
costs and other professional fees; and intra-quarter working capital
fluctuations consistent with historical trends. Management believes that the
above-noted assumptions are reasonable. However, should one or more of the
assumptions prove incorrect, or should one or more of the risks or uncertainties
described in Part II, Item 1A, "Risk Factors" of this Quarterly Report
materialize, we may experience a shortfall in the cash required to support
working capital needs.
Sources of Liquidity
The following is a discussion that highlights our primary sources of liquidity,
cash and cash equivalents, and changes in those amounts due to operations,
financing, and investing activities and the liquidity of our investments.
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Cash Flows
Nine Months Ended October 31, 2012 Compared to Nine Months Ended October 31,
2011
Nine Months Ended October 31,
2012 2011
(In thousands)Net cash used in operating activities - continuing
operations
$ (29,407 ) $ (34,871 )
Net cash used in investing activities - continuing
operations
(2,933 ) (13,189 )
Net cash provided by (used in) financing activities -
continuing operations
47,680 (2,487 )
Net cash (used in) provided by discontinued operations (1,574 ) 8,076
Effects of exchange rates on cash and cash equivalents (1,708 ) 3,608
Net increase (decrease) in cash and cash equivalents 12,058 (38,863 )
Cash and cash equivalents, beginning of period including
cash of discontinued operations
193,192 213,038
Cash and cash equivalents, end of period including cash of
discontinued operations
205,250 174,175
Less: Cash and cash equivalents of discontinued
operations, end of period - (29,285 )
Cash and cash equivalents, end of period $ 205,250 $ 144,890
Operating Cash Flows
Our operating cash flows vary significantly from period to period based on
timing of collections of accounts receivable, receipts of deposits on
work-in-process and achievement of milestones. During the nine months ended
October 31, 2012, we used net cash of $29.4 million for operating activities.
Net cash used in operating activities was primarily attributable to a decrease
in deferred revenue and an increase in inventory, partially offset by a decrease
in accounts receivable, a decrease in prepaid expenses and other current assets
and net income from operations for the nine months ended October 31, 2012.
Such cash used in operating activities was partially offset by non-cash charges
and a decrease in deferred cost of revenue.
Investing Cash Flows
During the nine months ended October 31, 2012, net cash used in investing
activities was $2.9 million. Net cash used in investing activities was primarily
attributable to a $5.3 million increase in restricted cash in bank time deposits
and $3.9 million of cash used for purchases of property and equipment, partially
offset by $6.3 million of proceeds from the sale of Starhome.
Financing Cash Flows
During the nine months ended October 31, 2012, net cash provided by financing
activities was $47.7 million. Net cash provided by financing activities was
primarily attributable to a $38.5 million cash capital contribution from CTI and
$9.5 million of borrowings under the note payable to CTI.
Effects of Exchange Rates on Cash and Cash Equivalents
The majority of our cash and cash equivalents are denominated in U.S. dollars.
However, due to the nature of our global business, we also hold cash denominated
in other currencies, primarily the euro, the NIS and the British pound. For the
nine months ended October 31, 2012, the fluctuation in foreign currency exchange
rates had an unfavorable impact of $1.7 million on cash and cash equivalents.
Sale of Starhome
On August 1, 2012, CTI, certain other Starhome shareholders and Starhome entered
into a Share Purchase Agreement (the "Starhome Share Purchase Agreement") with
Fortissimo Capital Fund II (Israel), L.P., Fortissimo Capital Fund III (Israel),
L.P. and Fortissimo Capital Fund III (Cayman), L.P. (collectively, "Fortissimo")
pursuant to which Fortissimo agreed to purchase all of the outstanding share
capital of Starhome (the "Starhome Disposition"). On September 19, 2012, CTI, in
order to ensure it could meet the conditions of the Verint Merger, contributed
to us its interest in Starhome, including its rights and obligations under the
Starhome Share Purchase Agreement. The Starhome Disposition was completed on
October 19, 2012.
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Under the terms of the Starhome Share Purchase Agreement, Starhome's
shareholders received aggregate cash proceeds of approximately $81.3 million,
subject to adjustment for fees, transaction expenses and certain taxes. Of this
amount, $10.5 million is held in escrow to cover potential post-closing
indemnification claims, with $5.5 million being released after 18 months and the
remainder released after 24 months, in each case, less any claims made on or
prior to such dates. We received aggregate net cash consideration (including
$4.9 million deposited in escrow at closing) of approximately $37.2 million,
after payments that CTI agreed to make to certain other Starhome shareholders of
approximately $4.5 million.
Merger of CTI and Verint
Under the Verint Merger Agreement, CTI has agreed to place $25.0 million in cash
in escrow to support indemnification claims to the extent made against us by CTI
and its affiliates (including Verint after the Verint Merger), and any cash
balance remaining in such escrow fund 18 months after the closing of the Verint
Merger will be released to us. The escrow funds cannot be used for claims
related to the Israeli optionholder suit. For more information see Note 21 to
our condensed consolidated and combined financial statements included in this
Quarterly Report.
Under the Distribution Agreement we and CTI entered into in connection with the
Share Distribution, we have agreed to indemnify CTI and its affiliates
(including Verint after the Verint Merger) against certain losses that may arise
as a result of the Verint Merger and the Share Distribution. Certain of our
indemnification obligations are capped at $25.0 million and certain are
uncapped. CTI has agreed to place $25.0 million in cash in escrow, upon the
closing of the Verint merger, to support indemnification claims to the extent
made against us by CTI and its affiliates (including Verint after the Verint
Merger). The escrow funds cannot be used for claims related to the Israeli
Optionholder suit. We will also assume all pre-Share Distribution tax
obligations of each of us and CTI. For more information, see note 3 to our
condensed consolidated and combined financial statements included in this
Quarterly Report.
Indebtedness
Comverse Ltd. Lines of Credit
As of October 31, 2012 and January 31, 2012, Comverse Ltd., our wholly-owned
Israeli subsidiary, had a $20.0 million line of credit with a bank to be used
for various performance guarantees to customers and vendors, letters of credit
and foreign currency transactions in the ordinary course of business. This line
of credit is not available for borrowings. The line of credit bears no interest
and is subject to renewal on an annual basis. Comverse Ltd. is required to
maintain cash balances with the bank of no less than the capacity under the line
of credit at all times regardless of amounts utilized under the line of credit.
As of October 31, 2012 and January 31, 2012, Comverse Ltd. had utilized $16.9
million and $17.8 million, respectively, of capacity under the line of credit
for guarantees and foreign currency transactions.
As of October 31, 2012 and January 31, 2012, Comverse Ltd. had an additional
line of credit with a bank for $8.0 million, to be used for borrowings, various
performance guarantees to customers and vendors, letters of credit and foreign
currency transactions in the ordinary course of business. The line of credit
bears no interest other than on borrowings thereunder and is subject to renewal
on an annual basis. Borrowings under the line of credit bear interest at an
annual rate of London Interbank Offered Rate (or LIBOR) plus a variable margin
determined based on the bank's underlying cost of capital. Comverse Ltd. is
required to maintain cash balances with the bank of no less than the capacity
under the line of credit at all times regardless of amounts borrowed or utilized
under the line of credit. As of October 31, 2012 and January 31, 2012, Comverse
Ltd. had no outstanding borrowings under the line of credit. As of October 31,
2012 and January 31, 2012, Comverse Ltd. had utilized $7.4 million and $3.3
million, respectively, of capacity under the line of credit for guarantees and
foreign currency transactions.
Other than Comverse Ltd.'s requirement to maintain cash balances with the banks
as discussed above, the lines of credit have no financial covenants. These cash
balances required to be maintained with the banks were classified as "Restricted
cash and bank time deposits" and long-term restricted cash included in "Other
assets" within the consolidated and combined balance sheets as of October 31,
2012 and January 31, 2012.
Note Payable to CTI
On January 11, 2011, we entered into a promissory note to borrow up to $10.0
million from CTI, with the note scheduled to mature on January 11, 2016.
Borrowings could be prepaid by us without penalty. The contractual interest rate
applicable to borrowings under this promissory note was LIBOR plus 4.0%. The
interest expense was $0.3 million for the nine months ended October 31, 2012 and
$0.4 million for the nine months ended October 31, 2011 and the amount owed to
CTI as of October 31,
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2012 and at January 31, 2012, including accrued interest, was approximately $9.4
million and $8.5 million, respectively. The note payable to CTI was settled
through a capital contribution to our equity by CTI concurrently with the Share
Distribution.
Loan Agreement with CTI
On May 9, 2012, we entered into a revolving loan agreement (referred to as the
loan agreement) with CTI, pursuant to which CTI extended us a $25.0 million
revolving credit facility. Borrowings under the loan agreement were used to fund
our operating expenses and working capital needs. As of October 31, 2012, $9.0
million of borrowings were outstanding under the loan agreement. The borrowings
under the loan agreement with CTI were settled through a capital contribution to
our equity by CTI concurrently with the Share Distribution. The interest expense
was $0.1 million for the nine months ended October 31, 2012.
Borrowings under the loan agreement bore interest at the one-month LIBOR plus
4.00%. The loan agreement provided for the mandatory prepayment of the principal
and interest outstanding under the loan agreement with all cash swept from our
bank accounts from time to time in accordance with our cash management
operations with CTI.
Our obligations under the loan agreement were unsecured. The loan agreement did
not contain any restrictive covenants but did contain customary events of
default.
Restructuring Initiatives
We review our business, manage costs and align resources with market demand. As
a result, we have taken several actions to improve our cash position, reduce
fixed costs, eliminate redundancies, strengthen operational focus and better
position us to respond to market pressures or unfavorable economic conditions.
While such restructuring initiatives are expected to have positive impact on our
operating cash flows in the long term, they also have led and will lead to some
charges. For more information relating to our restructuring initiatives,
including our financial obligations in respect thereof, see note 8 to the
condensed consolidated and combined financial statements included in this
Quarterly Report.
During the nine months ended October 31, 2012, we recorded and paid severance
and facility-related costs attributable to existing restructuring initiatives of
$1.4 million and $3.9 million. The remaining costs of $0.9 million relating to
existing restructuring initiatives are expected to be substantially paid by July
31, 2013. For additional information relating to our financial obligations in
respect of restructuring initiatives, see note 8 to the condensed consolidated
and combined financial statements included in this Quarterly Report.
Guarantees and Restrictions on Access to Subsidiary Cash
Guarantees
We provide certain customers in the ordinary course of business with financial
performance guarantees, which in certain cases are backed by standby letters of
credit or surety bonds, the majority of which are cash collateralized and
accounted for as restricted cash and bank time deposits. We are only liable for
the amounts of those guarantees in the event of our nonperformance, which would
permit the customer to exercise the guarantee. As of October 31, 2012 and
January 31, 2012, we believe that we were in compliance with our performance
obligations under all contracts for which there is a financial performance
guarantee, and that any liabilities arising in connection with these guarantees
will not have a material adverse effect on our condensed consolidated and
combined results of operations, financial position or cash flows. We also
obtained bank guarantees primarily to provide customer assurance relating to the
performance of certain obligations required by customer agreements for the
guarantee of certain payment obligations. These guarantees, which aggregated
$29.8 million and $27.2 million as of October 31, 2012 and January 31, 2012,
respectively, are generally scheduled to be released upon our performance of
specified contract milestones, a majority of which are scheduled to be completed
at various dates through January 31, 2016.
Dividends from Subsidiaries
The ability of our Israeli subsidiaries to pay dividends is governed by Israeli
law, which provides that dividends may be paid by an Israeli corporation only
out of earnings as defined in accordance with the Israeli Companies Law of 1999,
provided that there is no reasonable concern that such payment will cause such
subsidiary to fail to meet its current and expected liabilities as they come
due.
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We operate our business internationally. A significant portion of our cash and
cash equivalents are held by various foreign subsidiaries. As of October 31,
2012 and January 31, 2012, cash and cash equivalents held by our foreign
subsidiaries was $125.2 million and $142.3 million, respectively. If cash and
cash equivalents held outside the United States are distributed to the United
States resident corporate parents in the form of dividends or otherwise, we may
be subject to additional U.S. income taxes (subject to an adjustment for foreign
tax credits) and foreign withholding taxes. We may incur substantial withholding
taxes if we repatriate our cash from certain foreign subsidiaries.
OFF-BALANCE SHEET ARRANGEMENTS
As of October 31, 2012, we had no material off-balance sheet arrangements, other
than performance guarantees disclosed in "-Liquidity and Capital
Resources-Guarantees and Restrictions on Access to Subsidiary Cash-Guarantees."
There were no material changes in our off-balance sheet arrangements since
January 31, 2012. For a more comprehensive discussion of our off-balance sheet
arrangements as of January 31, 2012, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included in the Preliminary
Information Statement filed as Exhibit 99.1 to our Registration Statement on
Form 10 filed with the SEC on October 10, 2012.
CONTRACTUAL OBLIGATIONS
There were no material changes in our contractual obligations as of January 31,
2012. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included in the Preliminary Information Statement filed
as Exhibit 99.1 to our Registration Statement on Form 10 filed with the SEC on
October 10, 2012.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We described the significant accounting policies and methods used in the
preparation of our consolidated and combined financial statements in note 1 to
the consolidated and combined financial statements included in the Preliminary
Information Statement filed as Exhibit 99.1 to our Registration Statement on
Form 10 filed with the SEC on October 10, 2012. The accounting policies that
reflect our more significant estimates, judgments and assumptions in the
preparation of our consolidated and combined financial statements are described
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in the Preliminary Information Statement filed as Exhibit
99.1 to our Registration Statement on Form 10 filed by us with the SEC on
October 10, 2012, and include the following:
• revenue recognition;
• extended payment terms;
• expense allocation;
• stock-based compensation;
• recoverability of goodwill;
• impairment of long-lived and intangible assets;
• allowance for doubtful accounts;
• income taxes; and
• litigation and contingencies.
We do not believe that there were any significant changes in our critical
accounting policies during the nine months ended October 31, 2012.
RECENT ACCOUNTING PRONOUNCEMENTS TO BE IMPLEMENTED
For information related to recent accounting pronouncements to be implemented,
see note 2 to the condensed consolidated and combined financial statements
included in this Quarterly Report.
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