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AIRVANA INC 10-K 2009 Documents found in this filing:
Table of Contents
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
Commission file number:
001-33576
19 Alpha
Road
Chelmsford, Massachusetts 01824 (Address of Principal Executive Offices) (Zip Code)
(978) 250-3000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
Securities registered pursuant to Section 12(g) of the
Act:
None
(Title of
Class)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule
12b-2 of the
Exchange Act. (Check one):
The Aggregate market value of voting and non-voting common
equity held by non-affiliates of the registrant as of
June 27, 2008, based on the closing price of common stock
as reported by The NASDAQ Global Market on such date, was
approximately $109.4 million.
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
The number of shares of the registrant’s common stock, par
value $0.001, outstanding as of February 17, 2009
was: 62,610,229
Portions of the registrant’s definitive proxy statement for
its 2009 annual meeting of stockholders, to be files pursuant to
Regulation 14A with the Securities and Exchange Commission
not later than 120 days after the registrant’s fiscal
year end of December 28, 2008, are incorporated by
reference into this
Form 10-K.
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This Annual Report on
Form 10-K
contains “forward-looking statements” that involve
risks and uncertainties, as well as assumptions that, if they
never materialize or prove incorrect, could cause our results to
differ materially from those expressed or implied by such
forward-looking statements. The statements contained in this
Annual Report on
Form 10-K
that are not purely historical are forward-looking statements
within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Such forward-looking
statements include any expectation of earnings, revenues,
billings or other financial items; development of femtocell
alliances and shipments; any statements of the plans, strategies
and objectives of management for future operations; statements
related to the effect of Nortel Networks’ bankruptcy;
factors that may affect our operating results; statements
concerning new products or services; statements related to
future capital expenditures; statements related to future
economic conditions or performance; statements as to industry
trends and other matters that do not relate strictly to
historical facts or statements of assumptions underlying any of
the foregoing. These statements are often identified by the use
of words such as, but not limited to, “anticipate,”
“believe,” “continue,” “could,”
“estimate,” “expect,” “intend,”
“may,” “will,” “plan,”
“target,” “continue,” and similar
expressions or variations intended to identify forward-looking
statements. These statements are based on the beliefs and
assumptions of our management based on information currently
available to management. Such forward-looking statements are
subject to risks, uncertainties and other important factors that
could cause actual results and the timing of certain events to
differ materially from future results expressed or implied by
such forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to,
those identified below, and those discussed in the section
titled “Risk Factors” included elsewhere in this
Annual Report on
Form 10-K
and in our other filings with the Securities and Exchange
Commission or SEC. Furthermore, such forward-looking statements
speak only as of the date of this report. We undertake no
obligation to update any forward-looking statements to reflect
events or circumstances after the date of such statements.
Table of Contents
Part I
We are a leading provider of network infrastructure products
used by wireless operators to provide mobile broadband services.
We specialize in helping operators transform the mobile
experience of users worldwide. Our high performance technology
and products, from comprehensive femtocell solutions to core
mobile network infrastructure, enable operators to deliver
broadband services to mobile subscribers, wherever they are.
Broadband multimedia services are growing rapidly as business
users and consumers increasingly use mobile devices to work,
communicate, play music and video and access the Internet. By
expanding wireless broadband services, operators are able to
increase their data services revenue and mitigate the decline in
voice revenue caused by heightened competition. We expect that
the introduction of voice-over-Internet Protocol, or VoIP,
telephony services on mobile broadband networks, continued
capacity expansion of operator networks and accelerated use of
multimedia applications will increasingly make mobile broadband
networks the primary method for mobile communications and
entertainment.
Our products leverage our expertise in three
technologies — wireless communications, Internet
Protocol, or IP, and broadband networking. IP technology is the
foundation of our solutions. Our products enable new services
and deliver carrier-grade mobility, scalability and reliability
with relatively low operating and capital costs. As a result,
our products have advantages over products based on circuit
switching or legacy communication protocols.
Most of our current products are based on a wireless
communications standard known as CDMA2000
1xEV-DO, or
EV-DO. In 2002, we began delivering commercial infrastructure
products based on the first generation EV-DO standard known as
Rev 0. The second generation EV-DO standard is known as Rev A
and supports push-to-talk, VoIP and faster Internet services. We
delivered our first Rev A software release in April 2007. Prior
to 2008, most of our EV-DO sales were driven by operator
deployments focused on coverage — with operators
extending their broadband services across larger portions of
their subscriber geographies. Operators in some markets continue
to deploy our products to expand coverage. Data traffic and
service revenue growth continues to outpace voice growth at many
major wireless operators around the world. Our EV-DO sales in
2008 were driven by capacity growth as operators looked to
expand their capacity to accommodate increased data traffic
fueled by greater consumer use of handheld devices, web
browsing, and third generation wireless standards, or 3G,
multimedia applications. Over the longer term, we expect our
EV-DO sales to continue to be driven by capacity growth as
operators acquire more broadband subscribers that consume more
broadband data.
We have developed a special business model to serve mobile
operators and our original equipment manufacturer, or OEM,
customers with embedded software products. Our software is
deployed in an OEM’s installed base of wireless networks.
These networks are designed to deliver high quality wireless
services to millions of consumers and are built and regularly
upgraded over long periods of time, often 10 to 15 years. A
key element of our strategy is to deliver significant increases
in performance and functionality to both our OEM customers and
to operators through software upgrades to these networks. In
2007, we delivered two major EV-DO software releases that
provide for deployment of high-performance multi-media
applications by enabling faster downlink and uplink speeds,
supporting push-to-talk services, and adding new proprietary
“clustering” features that are designed to
dramatically improve network scalability. In 2008 we delivered
two additional EV-DO software releases which enable mobile
operators to more efficiently increase capacity and accelerate
the roll-out of next-generation multimedia services.
We are also investing significantly in fixed mobile convergence,
or FMC, products that transform the experience of using mobile
devices indoors, providing benefits such as better coverage,
better quality and performance of broadband applications, and
lower costs for both users and operators. Our FMC products
enable operators to take advantage of wireline broadband
connections such as cable, digital subscriber line, or DSL, and
fiber that already exist in most offices and homes to connect
mobile devices to an operator’s services. There are two
ways to accomplish this. The first is to use Wi-Fi and the
second is to place a personal base station, or what the industry
refers to as a femtocell access point, in the home or office. To
address both of these market opportunities, we have developed
our universal access gateway, or UAG, product to manage security
and hand-offs when
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connecting a Wi-Fi phone or a femtocell product to an
operator’s network. Currently, there is significant
operator interest in our FMC products, especially our
femtocells, as they work with existing handsets. Our FMC
products include versions to support networks based on either of
the world’s most prevalent wireless standards, code
division multiple access, or CDMA, and universal mobile
telephone standard, or UMTS. Our FMC products are an important
component of our growth and diversification strategy. Users also
utilize our mobile broadband technology and products to create
private mobile networks.
We were founded in March 2000 and sold our first product in the
second quarter of fiscal 2002. Our growth has been driven
primarily by sales through our OEM customers to wireless
operators already using our EV-DO products as they increase the
capacity and geographic coverage of their networks, and by an
increase in the number of wireless operators that decide to
deploy our EV-DO products on their networks. We have sold nearly
55,000 channel card licenses for use by over 70 operators
worldwide.
Mobile phones and other handheld mobile devices, such as
Blackberry devices and smartphones, have become ubiquitous.
iSuppli Corporation predicts that the total number of worldwide
mobile device subscribers will grow from 2.7 billion in
2006 to 3.7 billion by 2010. Historically, demand for voice
communications has driven the rapid growth in wireless services.
The availability of affordable mobile phones and lower service
costs, such as flat-rate pricing for long distance calling, has
increased demand for mobile voice communications. Until
recently, mobile phones were used primarily for voice
communication. The continued growth of mobile broadband services
and introduction of flat-rate plans which include both voice and
data have driven significant growth in the use of data services.
Data revenues continue to grow rapidly and represent a growing
portion of operators’ wireless services revenues and,
hence, constitute a major growth opportunity for the industry.
Both consumers and business users have a need for mobile
broadband services. For consumers, mobile broadband presents an
opportunity to access wirelessly all of the multimedia services
they normally access from their home or office using their
wireline broadband connections. These services include music
downloads, video streaming, gaming, information access
(searches, news, weather, financial data) and electronic
commerce. For business professionals, mobile broadband provides
access to high speed wireless email, file downloads and online
information through their mobile phones, smartphones and laptop
computers.
Mobile broadband can also help operators increase their revenues
and profitability. We believe that just as wireline broadband
created demand for new multimedia services, the availability of
mobile broadband will create demand for new services through
wireless networks.
While email and instant messaging are currently among the
primary applications for wireless data, faster and more reliable
wireless networks are enabling operators to offer new multimedia
services tailored for mobile users, providing an opportunity for
higher revenues. As a result, wireless operators have joined
efforts with media providers to develop content for mobile
phones. This content has led to increased use of multimedia
services, such as music downloads, video streaming, gaming,
IP-TV and
location-based services.
As people increasingly use wireless services as their primary
means of communication, the mobile phone is becoming the primary
phone for many users. Accordingly, more and more mobile phone
calls are happening indoors. However, the experience of using
mobile devices indoors is often inferior to that of landline
devices or the use of mobile devices outdoors. At the same time,
cheap, high-capacity broadband services are increasingly
available in homes and offices via landline (i.e. DSL and cable
data technologies) connections.
FMC products allow operators to deliver converged services to
mobile phones through a combination of wide-area mobile and
in-building wireless networks. There are two ways to deliver FMC
services in-building. The first method utilizes dual-mode
mobile/Wi-Fi phones to access an operator’s voice and data
services. Using this method, when the user is in-building, the
phone uses Wi-Fi instead of its mobile radio and communicates
with the operator’s
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network through a Wi-Fi access point, which in turn is connected
to the Internet. The second method utilizes traditional mobile
phones to access an operator’s voice and data services.
Using this method, when the user is in-building, the mobile
phone communicates with a small, inexpensive
“personal” access point that connects to the
operator’s network through a broadband Internet connection
in the home or office. The industry calls these
“femtocell” access points.
Users may benefit from FMC products through improved coverage
and quality of wireless service, greater convenience, and
reduced spending on the combination of wireline and wireless
services. Operators may benefit from FMC products by driving
more in-building usage of wireless services and by reducing the
cost to provide these services. Wireline operators who are
mobile virtual network operators, or MVNOs, may benefit from FMC
products by retaining customers on their fixed networks when
they are at home or in the office.
Traditional circuit-switched networks cannot effectively deliver
mobile broadband services. The delivery of mobile multimedia
services requires a technology optimized for the Internet and
capable of transmission at broadband speed. To offer multimedia
services, wireless operators have required a new
solution — a mobile broadband architecture based on IP
technology. This solution has to be deployable at relatively low
cost, sufficiently scalable to support a very large number of
users and capable of delivering carrier-grade reliability.
Operators also require scalable FMC solutions that will enable
subscribers to access securely and reliably both a mobile
network and in-building network through a single mobile phone.
The development of these solutions requires a combination of
three disciplines: wireless communications, IP and broadband
networking.
We were founded to apply broadband and IP technologies to mobile
networks. We have developed a suite of
IP-based
wireless infrastructure products that allow operators to provide
users of mobile phones, laptop computers and other mobile
devices with access to mobile broadband services. We have been
able to develop our products because of our expertise in the
three key technologies essential for mobile
broadband — wireless communications, IP and broadband
networking. Our products offer the following benefits:
Our EV-DO mobile network products enable operators to deliver a
broad range of new mobile broadband services, including:
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Our EV-DO products allow the base stations in a mobile network
to connect to multiple radio network controllers in order to
increase the reliability of handoffs of mobile users at mobile
site boundaries. Operators can increase the capacity of their
base stations simply by installing additional channel cards. Our
clustering software enables wireless operators to scale their
networks incrementally and to react quickly and reliably to
increased demand for capacity without introducing any network
boundaries. In addition, our clustering architecture is designed
to enable the clustering of multiple radio network controllers
so they appear as one high-capacity virtual controller. With our
architecture, base stations will not be impacted by the failure
of a single controller because they can continue to be served by
the other controllers in the cluster.
Our EV-DO products enable operators to reduce their capital and
operating expenses by taking advantage of efficiencies
associated with the use of IP technology. An EV-DO network
employing our
IP-based
architecture uses high-volume, off-the-shelf components, such as
IP routers, and allows mobile sites to connect to radio network
controllers through an IP data network, such as a lower-cost
metropolitan Ethernet network.
We are developing FMC products that will enable operators to
take advantage of broadband and Wi-Fi connections that already
exist in most offices and homes. Our initial FMC products
include our UAG and femtocell access point products. Our UAG is
a high-capacity, carrier-grade network product that allows
operators to deliver mobile voice and data services to their
subscribers using a combination of mobile and Wi-Fi networks.
Our femtocell access point products, together with our UAG, will
allow operators to deliver mobile voice and data services to
subscribers in-building using a combination of mobile and fixed
broadband networks. Customers will benefit from increased
coverage and quality of service and a reduction in combined
spending for wireline and wireless services. Operators will
benefit from reduced network operating costs, increased revenue
and greater customer satisfaction.
Our strategy is to enhance our leadership in the mobile
broadband infrastructure market by growing and expanding our
EV-DO and FMC product offerings, acquiring new customers and
acquiring selected complementary businesses. Principal elements
of our strategy include the following:
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Our Internet website address is
http://www.airvana.com.
Through our website, we make available, free of charge, our
annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and any amendments to those reports, as soon as reasonably
practicable after we electronically file such material with, or
furnish it to, the Securities and Exchange Commission, or SEC.
These SEC reports can be accessed through the investor relations
section of our website. The information found on our website is
not part of this or any other report we file with or furnish to
the SEC.
You may read and copy any materials we file with the SEC at the
SEC’s Public Reference Room at 100 F Street, NE,
Washington, DC 20549. You may obtain information on the
operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330.
The SEC also maintains an Internet website that contains
reports, proxy and information statements, and other information
regarding the Company and other issuers that file electronically
with the SEC. The SEC’s Internet website address is
http://www.sec.gov.
We have two categories of products — mobile network
EV-DO products and FMC products.
Our mobile network EV-DO products are
IP-based and
comply with the CDMA2000 1xEV-DO standard. A typical mobile
radio access network, or RAN, consists of a specific combination
of base stations, radio network controllers, or RNCs, and a
network management system. Our mobile network EV-DO products
consist primarily of software for all three RAN elements. These
three elements are designed to work in conjunction with each
other and
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cannot be deployed independently. We also design and offer base
station channel cards and other hardware for use with our
software.
AIRVANA
PRODUCTS IN AN EV-DO RADIO ACCESS NETWORK
Base
Stations and OEM Base Station Channel Cards
Mobile base stations send and receive signals to mobile phones
and other mobile devices connected to the network. They
generally reside immediately beside a mobile tower. OEM base
station channel cards and our software are the primary elements
of an EV-DO base station and serve as its intelligence. Nortel
Networks Inc., or Nortel Networks, our largest OEM customer,
manufactures Rev A OEM base station channel cards under license
from us.
Radio
Network Controllers
A radio network controller, or RNC, directs and controls many
base stations. Our RNC consists of proprietary software and a
carrier-grade, off-the-shelf hardware platform. Our RNC software
manages EV-DO mobility as users move between cell towers. Our
RNCs are significantly smaller in size and offer higher capacity
than RNCs used in traditional mobile networks. Our RNCs use IP
technology to communicate with our software running on base
station mobile cards. To enhance scalability, we are also
developing a software upgrade that will allow our RNCs to be
clustered together to serve as a larger, virtual RNC. We offer
our RNC software on a stand-alone basis or bundled with a
hardware platform.
Network
Management System
Our AirVista Network Management System is software designed for
the remote management of all of our components in a mobile
network deployment. This high-capacity system provides a common
management platform for all of our EV-DO and FMC products. Our
AirVista software is used to access securely, configure and
control all of our RAN elements over an IP network.
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Our FMC products under development include femtocell access
points, which we expect to make commercially available in 2009.
When deployed in homes and offices, femtocell access points will
allow users to use existing mobile phones in-building with
improved coverage and increased broadband wireless performance.
Femtocell products under development include versions to support
UMTS and CDMA. As part of our femtocell solution, we are also
developing a Femtocell Service Manager, which controls the
access points, and our UAG, which provides security by
encrypting femtocell packets over the Internet.
Our femtocell solutions will include the following key benefits:
AIRVANA
FMC PRODUCT PLAN
Technology
The distinguishing feature of our mobile broadband network
architecture is our proprietary use of IP technology to deliver
the following:
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Our IP RAN architecture is designed to take advantage of the
flexibility of IP networks. Our EV-DO solutions were among the
first commercially deployed radio networks to rely solely on IP
for the transport of packets between nodes. Traditional mobile
networks use point-to-point T1/E1 circuits to connect base
stations with radio network controllers. Using IP transport
between base stations and radio network controllers allows
wireless operators to take advantage of widely-available IP
equipment, such as routers, to terminate T1/E1 circuits or use
alternative low-cost IP transport services such as Metro
Ethernet. Our IP backhaul capability reduces the size and cost
of the required radio network controller equipment.
Our products eliminate the strict hierarchical relationships
between base stations and RNCs. In traditional circuit-based
radio access networks, each base station is controlled by a
designated RNC. In our IP RAN architecture, on the other hand,
each base station can be served by multiple RNCs. This leads to
improvements in handling subscriber mobility, increasing the
scalability and reliability of the RAN.
In traditional radio access networks, where each base station is
served by a single RNC, base stations that are served by a given
RNC form a geographic zone, called a subnet. When a mobile user
travels outside the subnet, handoffs have to be performed
between RNCs. These handoffs are often the cause of dropped
calls and create unnecessary radio traffic. When a mobile user
moves along the subnet boundary, repeated handoffs may occur,
further exacerbating the problem.
Because wireless operators want to minimize the frequency of
handoffs between RNCs, they often seek high capacity RNCs to
make subnets as large as possible. However, individual RNC
capacity is limited by the state-of-the-art in available
microprocessors and memory. The clustering software we are
developing will allow a wireless operator to increase the subnet
size by clustering multiple RNCs and making them behave as if
they were a single, much larger, virtual RNC. When a mobile
subscriber requests resources from the RAN, the base station
will be able to route this request to the specific RNC within
the cluster using our proprietary algorithms. As a result,
subnets will be able to be made very large and handoff
boundaries between RNCs may be reduced.
RNC clustering also can improve the reliability of the RAN. In a
traditional radio access network, when an RNC fails, all base
stations that are served by that RNC go out of service. In our
IP RAN architecture, when one RNC fails, the remaining RNCs in
the cluster will continue to serve subscribers.
Our IP RAN architecture also supports multi-homing technology,
which allows an RNC to continue to serve a mobile subscriber on
an active call when that subscriber moves outside the current
subnet. In traditional radio network architectures, handoffs
between RNCs are handled using so-called inter-RNC handoff
procedures, which require signaling and user traffic to flow
through two RNCs. With our multi-homing technology, signaling
and user traffic will flow only between the serving base station
and the serving RNC and never have to traverse multiple RNCs. By
keeping the mobile subscriber attached to a given RNC, this
technology reduces latency and minimizes the processing load on
RNCs.
Quality-of-Service, or QoS, refers to a network’s ability
to prioritize different kinds of traffic over others. For
example, voice traffic, which is very sensitive to delay, needs
priority over less delay-sensitive web-browsing traffic. All-IP
mobile broadband networks need to serve a variety of traffic
with very different QoS requirements. EV-DO
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standards define sophisticated methods for the subscriber’s
device to request QoS from the radio network. As these requests
are made, the RAN must then manage its available radio resources
to best satisfy the subscriber’s QoS requests. Our IP RAN
architecture includes proprietary algorithms for controlling the
admission of subscriber applications to the network and uses
technologies designed to deal with instances of network overload
in a predictable manner.
Our use of IP technologies also extends into our network
management systems, which is used by wireless operators to
manage and maintain their networks. Instead of using closed,
proprietary protocols to manage RAN nodes, our management system
uses Web-based protocols, such as XML, for communication between
the management system and network elements. This allows our
network management system to offer familiar web browser
interfaces to users.
Mobile broadband RANs serve user traffic in multiple types of
nodes. For example, in EV-DO networks, the base station, the
RNC, the packet data serving node, or PDSN, and the mobile IP
home agent all cooperate to serve user traffic. However, having
many different nodes in the network can add latency, increase
the capital and maintenance cost of the network and require
complex interactions between the nodes to deliver end-to-end QoS.
Our IP RAN architecture will support flatter architectures,
where either the RNC and PDSN, or the base station, RNC and
PDSN, can be combined in a single node. Since there is no strict
one-to-one relationship between base stations and RNCs in our IP
RAN, these elements can be combined in a single node without
introducing any handoff or subnet boundaries between the base
stations. Our RNC clustering technology will allow us to
integrate PDSN functionality into our RNC, without reducing the
effective base station footprint or subnet size.
As radio networks become more distributed, and base stations and
access points are placed closer to users, as with picocell base
stations and femtocell access points, we expect flat networks
will become the preferred architecture for wireless operators.
Paging is a critical capability in all mobile wireless systems.
To preserve battery life, subscriber devices are programmed to
turn off their radio circuitry and periodically wake up to
listen for any incoming calls. RANs alert the subscriber to an
incoming call by broadcasting a page message through all base
stations where the subscriber might be located. To facilitate
paging, in traditional RANs, subscriber devices inform the RAN
whenever they cross a certain geographic paging zone. When the
RAN wants to page the user, it does so through all the base
stations in the paging zone where the subscriber last reported
its location. Such paging mechanisms can create significant
unnecessary signaling traffic if subscribers move back and forth
between paging zones.
Our IP RAN architecture includes distance-based paging, which
uses dynamically varying circular paging zones centered on the
base station where a subscriber has last reported its location.
This technique avoids the problems caused by unnecessary
repeated location updates, but requires more sophisticated
handling in the RNC to keep track of the list of base stations
for paging. Distance-based paging also allows the operator to
configure very small paging areas in order to reduce the amount
of radio bandwidth that frequent broadcast pages take away from
normal user traffic. These considerations are especially
important in page intensive applications such as push-to-talk.
Our UAG is based on a proprietary combination of capabilities to
enable operators to deliver multimedia FMC services to a large
number of subscribers.
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We specifically designed our UAG to enable FMC services.
Traditional network solutions such as virtual private network
systems and session border controllers are unable to meet the
demands of FMC networks. A key distinguishing capability of our
UAG is the integration of three critical functions in a single
carrier-grade, high-capacity network node: strict security,
support for seamless subscriber mobility and support for rich
multimedia.
Using proprietary designs that include encryption and
decryption, access control lists, firewalls and intrusion
detection, our UAG will guard against security threats such as
service theft, denial of service, session hijacking and
compromised privacy. Our UAG will also hide the topology of the
operator’s IP network from subscribers. Our UAG will
support industry standard protocols, such as IPSec, IKEv2,
EAP-AKA and EAP-SIM, to ensure full interoperability with a
broad range of subscriber devices.
Our UAG can also enable secure mobility of the subscriber using
protocols that ensure fast, seamless handoffs at network
boundaries while maintaining security associations. Our
UAG’s secure mobility system design based on the MOBIKE
protocol supports very fast handoffs by integrating signaling
for mobility and security.
Our UAG is also designed to support rich multimedia services
with the capability to configure and enforce hundreds of
thousands of policies. Our UAG uses deep packet inspection to
examine critical fields in packet headers, allowing the UAG to
distinguish between subscribers and application flows in order
to enforce different policies. These capabilities will enable
operators to offer differentiated services and ensure fair use
of their network resources by their subscribers.
Our UAG product is being implemented on a high-capacity,
carrier-grade hardware platform. Based on the Advanced
Telecommunications Computing Architecture and carrier-grade
Linux operating system, this platform combines state-of-the-art,
high speed interconnect technologies with significant
improvements in reliability, availability and serviceability. A
key component of this platform is a custom-designed packet
processing module that includes network processors, a security
processor and a general-purpose microprocessor. This powerful
multi-processor architecture, along with a system software
architecture that separates signaling and user traffic and
provides real-time session mirroring, will enable the UAG to
achieve high session capacity and high availability. Using
proprietary switching interconnect designs and redundancy
support mechanisms, such as real-time session redundancy and
triple detection technology, our UAG will also enable fast
switch-over to redundant modules in case of failure. A fast
switch-over is critical for handling real-time applications such
as voice and video. The UAG platform will allow flexible
redundancy configurations for control processor, packet
processing and intelligent I/O modules. The UAG platform is
designed to support millions of subscribers and scale to 100s of
gigabits-per-second
throughput.
Our UAG can perform deep packet inspection, traffic
classification and policy enforcement on a per-session or
per-flow basis based on subscriber profiles or operator
policies. This allows operators to offer differentiated services
and provide for a subscriber’s use of network resources
consistent with his profile and the operator’s policies.
Our UAG will also perform proprietary call admission control and
domain partitioning based on different service policies. Our
UAG’s implementation will allow manual or dynamic policy
configuration, and is designed to support up to hundreds of
thousands of policies.
Like our mobile network products, our UAG also uses an
IP-based
management system for its configuration and maintenance. This
system offers users familiar web browser interfaces based on
protocols such as XML for communication between the management
system and UAG nodes.
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Our femtocell technology will consist of:
Our flat femtocell network architecture collapses the base
station, RNC and packet data nodes of a macro-cellular RAN into
a small femtocell access point. Our UAG provides the critical
security protections necessary for connecting femtocells to an
operator’s core network using the public Internet. Our
network architecture is designed to provide flexible options to
connect to a wireless operator’s core network, connecting
either to existing circuit-switched core networks, which include
mobile switching centers, or state-of-the-art packet-switched
core networks based on the session initiation protocol or the IP
multimedia system.
Our programmable hardware platform is designed to offer the
ability to upgrade the software and firmware running on the
femtocell after it has been installed in a user’s home, the
ability to rapidly evolve our femtocell solution to take
advantage of the latest available programmable processor
technology and to rapidly develop low-cost hard-wired
application-specific-integrated-circuits.
We believe that our extensive software and firmware solution for
femtocells will implement the critical modulation and
demodulation functions found in the physical layer and the
scheduling and power and rate control functions found in the
media access control layer. Our software and firmware solution
will also implement all necessary radio network controller,
packet data node and security functions.
Adapting macro-cellular RAN technology to small femtocells that
support a wide range of existing mobile phones requires
sophisticated signal processing and networking algorithms. We
are developing these algorithms in the following technology
areas:
Finally, our service manager will operate on a scalable server
platform and implement unique methods to facilitate the easy and
secure activation and maintenance of thousands of femtocells
from a central location in the network using the public Internet.
We have sold channel card licenses for use by over 70 operators
worldwide. These operators have purchased our products primarily
through our OEM customers. Some of the largest deployments to
date include networks operated by the following operators:
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We have strategic relationships with eight leading global
communications equipment vendors — Nortel Networks,
Nokia Siemens Networks, Thomson, Motorola, Alcatel-Lucent,
Hitachi, Pirelli Broadband Solutions and Qualcomm. We believe
these relationships provide several commercial advantages,
including extended sales and marketing reach, reduced accounts
receivable concerns and the mitigation of currency risk arising
from the global nature of the network infrastructure business.
Similarly, we believe these vendors benefit from our
relationships by leveraging our R&D expertise, reducing the
time-to-market for new products, and realizing incremental
revenue from the sale of complementary hardware, software and
services resulting from the incorporation of our technology into
or the interoperatiblity with their products.
We have sold our EV-DO mobile network solutions primarily
through Nortel Networks since 2001. Nortel Networks accounted
for 99% of our revenue and 93% of our billings in fiscal 2008,
99% of our revenue and 98% of our billings in fiscal 2007 and
95% of our revenue and 94% of our billings in fiscal 2006. We
originally entered into our OEM agreement with Nortel Networks
for the development of our proprietary EV-DO Rev 0 technology,
including base station channel card hardware and software, RNC
software, and network management system software. The agreement
is non-exclusive, contains no minimum purchase commitments, and
sets forth the terms and conditions under which Nortel Networks
licenses our proprietary EV-DO software. In 2005, Nortel
Networks exercised its right under the OEM agreement to license,
on a non-exclusive basis, our proprietary Rev A base station
channel card hardware design to enable it to manufacture such
hardware and derivatives thereof. These OEM base station channel
cards are inserted into Nortel Networks’ CDMA 2000 base
stations and, under our agreement, operate exclusively with our
EV-DO software. The term of the OEM agreement extends through
January 1, 2010, with automatic annual renewals, unless
either party gives 12 months prior notice of its intent not
to renew. Nortel Networks also has the right to terminate the
agreement at any time. We have amended the agreement several
times, most recently in November 2008 when we agreed to pricing
for software products and upgrades that were then under
development.
Nortel Networks has the option, under our agreement, to purchase
from us the specification for communications among base
stations, RNCs and network management systems. The specification
would enable Nortel Networks to develop EV-DO software to work
with the base station channel card software licensed from us and
deployed in the networks of Nortel Networks’ operator
customers. If Nortel Networks elects to exercise this option,
Nortel Networks will pay us a fixed fee as well as a significant
royalty on sales of current and future products that incorporate
this interface specification. The royalty rate varies with
annual volume but represents a portion of the license fees we
currently receive from our sales to Nortel Networks. If Nortel
Networks were to exercise the option, Nortel Networks would
receive the current interface specification at the time of
option exercise, updated with any upgrade then under
development, plus one additional upgrade subject to a
development agreement within a limited time after the option
exercise for an additional fee. If Nortel Networks were in the
future to develop its own EV-DO software, it could, by
exercising this option, enable its own software to communicate
with the base station channel cards currently installed in its
customers’ networks.
On January 14, 2009, Nortel Networks announced that it and
certain of its affiliates had filed for bankruptcy protection.
For additional information regarding the effect of Nortel
Networks’ bankruptcy filing, see Item 1A, Risk Factors
and Item 7, Management’s Discussion and Analysis of
Financial Condition and Results of Operations.
In August 2007, we entered into an agreement with Nokia Siemens
Networks to certify interoperability of our UMTS femtocell
product with Nokia Siemens Networks’ femto gateway product.
We and Nokia Siemens Networks plan to provide a joint solution
to operators and cooperate in joint marketing, sales and support
programs. The agreement is non-exclusive and sets forth the
terms under which we may use their propriety interface
specifications to their products.
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In January 2008, we entered into a global sourcing agreement
with Thomson to supply our UMTS femtocell technology. Pursuant
to the agreement, Thomson may use our femtocell products in
conjunction with its own residential gateway offerings. The
agreement is non-exclusive and sets forth the terms and
conditions under which Thomson may purchase our femtocell
products. The term of the agreement extends through January
2011, with automatic annual renewals. Either party may terminate
the agreement with 90 days notice.
In February 2008, we entered into a global sourcing agreement
with Motorola to provide our CDMA femtocell solution products.
The agreement is non-exclusive and sets forth the terms and
conditions under which Motorola may purchase our femtocell and
UAG products. The initial term of the agreement extends through
May 2010, with automatic annual renewals. Following the initial
term, Motorola may terminate the agreement with 180 days
notice.
In June 2008, we entered into an agreement with Alcatel-Lucent
to develop an integrated IP Multimedia Subsystem, or IMS,
femtocell solution for CDMA network operators that combines our
femtocell access point and femtocell network gateway with
Alcatel-Lucent’s IMS core network infrastructure.
In July 2008, we entered into an agreement with Hitachi to
develop a joint CDMA femtocell solution that integrates our
femtocell products with Hitachi’s core radio access network
infrastructure that Hitachi offers in Japan. In September 2008,
we entered into a supply agreement with Hitachi under which
Hitachi will provide marketing, sales and support activities for
our femtocell products. The initial term of the supply agreement
extends through June 2014 and provides for automatic annual
renewals, unless either party gives 180 days notice of its
intent not to renew.
In December 2008, we entered into a sourcing agreement with
Pirelli Broadband Solutions, or Pirelli, to add wireless
broadband connectivity to Pirelli’s portfolio of consumer
broadband devices by using our UMTS femtocell technology. The
agreement is non-exclusive and sets forth the terms and
conditions under which Pirelli may purchase our femtocell
products. The initial term of the agreement extends through
November 2010, with automatic annual renewals, unless either
party gives 90 days notice of its intent not to renew.
We have a supply and distribution agreement with Qualcomm for
our ipBTS products. The agreement has no minimum purchase
commitments and sets forth the terms and conditions under which
Qualcomm may purchase such products. Qualcomm has the exclusive
right in North America to distribute our ipBTS products for
networks that are not intended to be permanently installed. The
term of the agreement extends through July 28, 2009.
In January 2009, we entered into an agreement with Qualcomm to
develop and commercialize certain EV-DO software products for
Qualcomm. The term of the agreement extends through January 2012.
We market and sell our products both indirectly through our OEM
customers and directly to wireless operator customers. To date,
substantially all of our sales have been through our OEM
customers. In addition to our sales and marketing efforts
directed towards OEM customers, we augment the sales efforts of
our OEM customers by working with their delivery and operational
teams and assisting in the training and support of their sales
personnel. Increasingly, an important part of our sales effort
is creating demand for our products by working directly with
operators. We foster relationships with operators by discussing
technology trends, identifying market requirements, carrying out
field support trials of our technologies in conjunction with
teams from our OEM customers and
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providing training and education related to our technology.
Through these contacts with our end-customers, we believe we are
better able to understand their operations, incorporate feature
and product requirements into our solutions and better track the
technology needs of our end-customers.
As of December 28, 2008, we had 34 employees in sales
and marketing.
We offer technical support services to our OEM customers and, in
some cases, directly to wireless operators. Our OEM customers
are responsible for handling basic first-level customer support,
with our technical support personnel addressing complex issues
related to our technologies.
Our service and support efforts are divided into two main
categories: ongoing commercial network support, and
pre-commercial or new network rollout support. Our ongoing
customer support and services include live network product
rollout, around-the-clock technical support, software and
hardware maintenance services, emergency outage recovery and
service ticket tracking and management. Pre-commercial support
services include deployment optimization services, customer
network engineering and
on-site
deployment work related to system configuration and integration
with existing infrastructure.
We also provide customer consulting services including network
and radio frequency deployment planning, network optimization
and overall performance management. Our products and technology
are sold with a full range of technical documentation, including
planning, installation and operation guides. We also provide
standard and customized training targeted at management,
operational support personnel and network planners and engineers.
As of December 28, 2008, we had 32 employees in
service and support.
Investment in research and development is at the core of our
business strategy. As of December 28, 2008, we had 445
engineers in Chelmsford, Massachusetts, Bangalore, India and
Cambridge, United Kingdom with significant expertise in digital
communications, including wireless communications, IP and
broadband networking. Our research and development organization
is responsible for designing, developing and enhancing our
software and hardware products, performing product testing and
quality assurance activities, and ensuring the compatibility of
our products with third-party platforms. Our research and
development organization is also responsible for developing new
algorithms and concepts for our existing and future products.
We have made substantial investments in product and technology
development since our inception. Research and development
expense totaled $55.1 million in fiscal 2006,
$76.6 million in fiscal 2007 and $74.8 million in
fiscal 2008. We expect our research and development expense to
increase for certain product areas, primarily related to our
investment in FMC products, but decrease overall from fiscal
2008.
We develop and test our software products in-house and outsource
the manufacturing of the carrier-grade hardware components of
our products. We believe that outsourcing the manufacturing of
these hardware components enables us to conserve working
capital, better adjust manufacturing volumes to meet changes in
demand and more quickly deliver products.
As of December 28, 2008, we had 9 employees in
manufacturing and operations.
The market for network infrastructure products is highly
competitive and rapidly evolving. The market is subject to
changing technology trends, shifting customer needs and
expectations and frequent introduction of new products. We
believe we are able to compete successfully primarily on the
basis of our expertise in all-IP wireless communication, the
performance and reliability of our products and our OEM business
model.
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The nature of our competition varies by product. For our EV-DO
products, we face competition from several of the world’s
largest telecommunications equipment providers that offer either
a directly competitive product or a product based on alternative
technologies. Our competitors include Alcatel-Lucent, Hitachi,
Huawei, LG-Nortel and Samsung.
In our sales to OEM customers, we face the competitive risk that
OEMs might seek to develop in-house alternative solutions to
those currently licensed from us. Additionally, OEMs might elect
to source technology from our competitors.
The market for FMC solutions is in its early stages. We expect
to encounter competition from products already on the market, as
well as new products to be developed. Our competition includes
several public companies, including Cisco, Ericsson and Samsung,
as well as several private companies, including Huawei.
Our current and potential new competitors may have significantly
greater financial, technical, marketing and other resources than
we do and may be able to devote greater resources to the
development, promotion, sale and support of their products. In
addition, many of our competitors have more extensive customer
bases and broader customer relationships than we do, including
relationships with our potential customers. Our competitors may
therefore be in a stronger position to respond quickly to new
technologies and may be able to market or sell their products
more effectively. Moreover, further consolidation in the
communications equipment market could adversely affect our OEM
customer relationships and competitive position. Our products
may not continue to compete favorably and we may not be
successful in the face of increasing competition from new
products and enhancements introduced by existing competitors or
new companies entering the markets in which we provide products.
We believe that our continued success depends in large part on
our proprietary technology, the skills of our employees and the
ability of our employees to continue to innovate and incorporate
advances in wireless communication technology into our products.
We regard our products and the internally-developed software
embedded in our products as proprietary. The wireless industry
is dominated by large vendors with significant intellectual
property portfolios. To establish and protect our own
intellectual property rights, we rely on a combination of
patent, trademark, copyright and trade secret laws.
As of February 12, 2009, we had been issued 9 patents, with
2 additional patents allowed and had over 109 patent
applications pending in the United States and in foreign
jurisdictions.
We license our technology pursuant to agreements that impose
restrictions on customers’ ability to use the technology,
such as prohibiting reverse engineering and, in the case of
software products, limiting the use of software copies and
restricting access to our source code. We also seek to avoid
disclosure of our intellectual property using contractual
obligations, by requiring employees and consultants with access
to our proprietary information to execute nondisclosure,
non-compete and assignment of intellectual property agreements.
Despite our efforts to protect our intellectual property, our
means to protect our intellectual property rights may be
inadequate. Unauthorized parties may attempt to copy aspects of
our products, obtain and use information that we regard as
proprietary, or even elect to design around our current
intellectual property rights. In addition, the laws of some
foreign countries do not protect our proprietary rights to as
great an extent as do the laws of the United States and
many foreign countries do not enforce their intellectual
property laws as diligently as U.S. government agencies and
private parties. Litigation and associated expenses may be
necessary to enforce our property rights.
We have licensed from Qualcomm some of its EV-DO technology for
use in our products. Our software also relies on certain
application-specific integrated circuit, or ASIC, technology
from Qualcomm used in EV-DO products. An inability to access
these ASIC technologies could result in significant delays in
our product releases and could require substantial effort to
locate or develop replacement technology.
Many companies in the wireless industry have significant patent
portfolios. These companies and other parties may claim that our
products infringe their proprietary rights. We may become
involved in litigation as a result of
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allegations that we infringe the intellectual property rights of
others. For example, we have received letters from
Wi-LAN Inc.
asserting that some of our products infringe four issued United
States patents and an issued Canadian patent relating to
wireless communication technologies. A majority of our revenue
to date has been derived from the allegedly infringing EV-DO
products. We have evaluated various matters relating to
Wi-LAN’s
assertion and we do not believe that our products infringe any
valid claim of the patents identified by
Wi-LAN.
However, we may seek to obtain a license to use the relevant
technology from
Wi-LAN. We
cannot be certain that
Wi-LAN would
provide such a license or, if provided, what its economic terms
would be. If we were to seek to obtain such a license, and such
license were available from
Wi-LAN, we
could be required to make significant payments with respect to
past and/or
future sales of our products, and such payments may adversely
affect our financial condition and operating results. If
Wi-LAN
determines to pursue claims against us for patent infringement,
we might not be able to successfully defend against such claims.
As of December 28, 2008, we had approximately
555 employees, of which approximately 160 were located in
India, approximately 45 were located in the United Kingdom and
the vast majority of the remainder were based in the United
States. None of our employees is represented by a union or
covered by a collective bargaining agreement.
Our corporate headquarters is located in Chelmsford,
Massachusetts, where we lease approximately 85,000 square
feet of office space. This lease expires on April 30, 2012.
We also lease approximately 35,000 square feet of space in
Bangalore, India pursuant to a lease which expires in March 2012
and approximately 10,000 square feet of space in Cambridge,
United Kingdom pursuant to leases which expire in February 2012
and August 2012.
From time to time, we may be involved in disputes or litigation
relating to claims arising out of our operations. We are not
currently a party to any material legal proceedings.
Our business is subject to numerous risks. We caution you
that the following important factors, among others, could cause
our actual results to differ materially from those expressed in
forward-looking statements made by us or on our behalf in
filings with the SEC, press releases, communications with
investors and oral statements. Any or all of our forward-looking
statements in this Annual Report on
Form 10-K
and in any other public statements we make may turn out to be
wrong. They may be affected by inaccurate assumptions we might
make or by known or unknown risks and uncertainties. Many
factors mentioned in the discussion below will be important in
determining future results. Consequently, no forward-looking
statement can be guaranteed. Actual future results may vary
materially from those anticipated in forward-looking statements.
We undertake no obligation to update any forward-looking
statements, whether as a result of new information, future
events or otherwise. You are advised, however, to consult any
further disclosure we make in our reports filed with the SEC.
Risks
Relating to Our Business
We derived almost all of our revenue and billings in each of the
last several years from sales to a single OEM customer, Nortel
Networks. Nortel Networks accounted for 99% of our revenue and
93% of our billings in fiscal 2008, 99% of our revenue and 98%
of our billings in fiscal 2007 and 95% of our revenue and 94% of
our billings in fiscal 2006. On January 14, 2009, Nortel
Networks announced that it and certain of its affiliates had
filed for bankruptcy protection. At the time of that filing, we
had $21.8 million in outstanding invoices to Nortel
Networks and approximately $12 million to $13 million
of unbilled amounts related to royalties earned through
January 13, 2009. The collection of these amounts is
subject to Nortel Networks’ bankruptcy proceedings and it
is likely that a
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portion or all of these amounts will not be collected. As a
result, we have excluded the $21.8 million of outstanding
invoices to Nortel Networks from accounts receivable and
deferred revenue as of December 28, 2008 and billings for
the quarter and year ended December 28, 2008. Since the
date of Nortel Networks’ bankruptcy filing, we and Nortel
Networks have continued to deliver products and services to
Nortel Networks’ CDMA EV-DO wireless operators under the
terms of Nortel Networks’ existing agreement with us. We
are continuing to incur costs related to the research and
development of future software releases for Nortel Networks.
Although we intend to work with Nortel Networks to have our
agreement assumed, there can be no assurance that Nortel
Networks will assume its agreement with us or that we will
recover our costs. If our agreement with Nortel Networks is
assumed, Nortel Networks will be required to become current in
all of its outstanding obligations to us, including obligations
outstanding prior to January 14, 2009. If our agreement is
not assumed, all outstanding obligations (billed and unbilled
invoices) will be subject to discharge and we likely will not be
able to collect these receivables in full. Should Nortel
Networks not assume its agreement with us, we would cease to do
business with Nortel Networks unless we could agree with Nortel
Networks on the terms for a new agreement. Any new terms agreed
to could be less favorable to us than our current agreement. In
addition, because of Nortel Networks’ bankruptcy filing,
operators may slow their purchases of infrastructure solutions
from Nortel Networks, which would harm our business.
Furthermore, we anticipate that we will incur some costs related
to working with Nortel Networks to assume our contract and
collect our outstanding invoices. This process could be time
consuming and could divert management’s attention and
resources away from our business.
Even if Nortel Networks agrees to assume our contract, Nortel
Networks can terminate that contract at any time and, in any
event, the contract does not contain commitments for future
purchases of our products. The rate at which Nortel Networks
purchases products from us depends on its success in selling to
operators its own EV-DO infrastructure solutions that include
our products. There can be no assurance that Nortel Networks
will continue to devote and invest significant resources and
capital to its wireless infrastructure business or that it will
be successful in the future in such business. Nortel Networks
might seek to develop internally, or acquire from a third party,
alternative wireless solutions to those currently purchased from
us. In addition, Nortel Networks may seek to develop an
alternative solution by utilizing technology that has been
developed by LG Electronics, with which Nortel Networks has a
joint venture. Consolidation is common in the telecommunications
industry. Should Nortel Networks merge its wireless
infrastructure businesses with another telecommunications
company, Nortel Networks could seek to deploy alternative
solutions by utilizing technology that has been developed by the
other company. We expect to derive a substantial majority of our
revenue, billings and cash flow in fiscal 2009 from Nortel
Networks, and therefore any adverse change in our relationship
with Nortel Networks, or a significant decline or shortfall in
our sales to Nortel Networks, would significantly harm our
business and operating results.
Because
our OEM business model requires us to defer the recognition of
most of our revenue from product and service sales until we
deliver specified upgrades, and in some cases to further defer a
portion of our revenue until applicable warranty periods expire,
our revenue in any period is not likely to be indicative of the
level of our sales activity in that period.
We recognize revenue from the sale of products and services
under our OEM agreements only after we deliver specified
upgrades to those products that were committed at the time of
sale. The period of development of these upgrades can range from
12 to 24 months after the date of commitment. As a result,
most of our revenue in any quarter typically reflects license
fees under our OEM agreements for products and services
delivered and invoiced to customers several quarters earlier.
For these products and services, we generally record the amount
of the invoice as deferred revenue and then begin to recognize
such deferred revenue as revenue upon delivery of the committed
software upgrades. When we cannot establish vendor specific
objective evidence, or VSOE, of fair value for our maintenance
and support services, we recognize a portion of the product and
services revenue based on the portion of the maintenance period
that has elapsed when the revenue first becomes recognizable,
and we recognize the remaining portion of that product and
services revenue ratably over the remaining maintenance period.
As a result, our revenue is not likely to be indicative of the
level of our sales activity in any period. Due to our OEM
business model, we expect that, for the foreseeable future, any
quarter in which we recognize a significant amount of deferred
revenue as a result of our delivery of a previously committed
upgrade will be followed by one or more quarters of
insignificant revenue as we defer revenue while we develop
additional upgrades. Investors may
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encounter difficulties in tracking the performance of our
business because our revenue will not reflect the level of our
billings in any period, and these difficulties could adversely
affect the trading price of our common stock.
Almost all of our revenue and billings to date have been derived
from sales of our EV-DO products, and we expect EV-DO revenues
to remain a major contributor to revenue for the foreseeable
future. Continued market acceptance of these products is
critical to our future success. The future demand for our EV-DO
products depends, in large part, on the continued expansion of
the EV-DO-based wireless networks currently deployed by
operators and determinations by additional operators to deploy
EV-DO-based wireless networks. Demand for our EV-DO products
also depends on our ability to continue to develop and deliver
on a timely basis product upgrades to enable operators to
enhance the performance of their networks and implement new
mobile broadband services. Any decline in demand for EV-DO
products, or inability on our part to develop and deliver
product upgrades that meet the needs of operators, would
adversely affect our business and operating results.
There are multiple competing air interface standards for
wireless communications networks. A majority of our current
products are based exclusively on the CDMA2000 air interface
standard, which handles a majority of wireless subscribers in
the United States. Other standards, such as GSM/UMTS, are
currently the primary standards used by wireless operators in
mobile networks worldwide. Our EV-DO products do not operate in
networks using the GSM/UMTS standards.
We believe there are a limited number of operators that have not
already chosen the air interface standard to deploy in their 3G
wireless networks. Our success will therefore depend, to a
significant degree, on whether operators that have currently
deployed CDMA2000-based networks expand and upgrade their
networks and whether additional operators that have not yet
deployed 3G networks select CDMA2000 as their standard. Our
business will be harmed if operators currently utilizing the
CDMA2000 standard transition their networks to a competing
standard and we have not at that time developed and begun to
offer competitive products that are compatible with that
standard. Our business will also be harmed if operators that
have currently deployed both CDMA and GSM/UMTS networks
determine to focus more of their resources on their GSM/UMTS
networks.
The standards for mobile broadband solutions are expected to
evolve into a fourth generation of wireless standards, known as
4G. Wireless operators have announced plans to build networks
based on the 4G standard. For example, Verizon Wireless, Bell
Mobility and TELUS have each announced its intent to build 4G
networks using the Long Term Evolution, or LTE, standard and
Sprint Nextel has announced its intent to build a 4G network
using WiMAX technology. In addition, Bell Mobility and TELUS
each recently announced that it will overlay its CDMA networks
with UMTS technology as it migrates to the LTE standard. The
market for our existing EV-DO products is likely to decline if
and when operators begin to delay expenditures for EV-DO
products in anticipation of the availability of new 4G-based
products. Our primary OEM customer, Nortel Networks, has
publicly announced that it is developing 4G-based LTE products.
We do not have an agreement to supply Nortel Networks with any
4G-based
products. We believe that it is likely that Nortel Networks will
choose to enter into partnerships for
4G-based
products with one or more of our competitors or choose to
develop these products internally.
Our future success will depend on our ability to develop and
market new products compatible with 4G standards and the
acceptance of those products by operators. The development and
introduction of these products will be time consuming and
expensive, and we may not be able to correctly anticipate the
market for
4G-compatible
products and related business trends. Any inability to develop
successfully 4G-based products could harm significantly our
future business and operating results.
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Some of the technology that we incorporate into our EV-DO
products and sell to Nortel Networks is licensed from Qualcomm.
Historically, we utilized this technology under license
agreements between our company and Qualcomm and between Nortel
Networks and Qualcomm. Some of the royalties for this technology
were paid to Qualcomm by Nortel Networks. In March 2008,
Qualcomm undertook an audit of the royalties that were paid in
respect of the EV-DO products that we sold between 2003 and
2007. In connection with the audit, Qualcomm indicated that, due
to a change in its licensing arrangement with Nortel Networks,
we may owe additional royalties of up to approximately
$11 million to Qualcomm for products that we sold to Nortel
Networks beginning in 2007. We believe that we should not be
responsible for any such royalties to Qualcomm because, among
other things, we were delivering products to Nortel Networks
under Nortel Networks’ license agreement with Qualcomm and
we had established a course of dealing with Qualcomm in which
Nortel Networks paid the royalties for such licensed technology
and we had not been notified of the modifications to
Qualcomm’s licensing arrangement with Nortel Networks. As
such, we have not provided for any potential liability in regard
to this matter. If we are required to pay royalties on either
past or future sales of EV-DO products, such payments would
adversely affect our operating results.
The deployment by operators of wireless infrastructure equipment
that enables new end-user services typically occurs in stages,
and our quarterly billings will vary significantly depending on
the rate at which such deployments occur. Operators will
typically make significant initial investments for new equipment
to assure that new services facilitated by such equipment are
available to end-users throughout the operator’s network.
Operators typically will defer significant additional purchases
of such equipment until end-user usage of the services offered
through such equipment creates demand for increased capacity.
Our quarterly billings will typically increase significantly
when an operator either chooses initially to deploy an EV-DO
network or deploys a significant product upgrade introduced by
us, and our quarterly billings will decline in other quarters
when those deployments have been completed.
It is difficult to anticipate the rate at which operators will
deploy our wireless infrastructure products, the rate at which
the use of new mobile broadband services will create demand for
additional capacity, and the rate at which operators will
implement significant product upgrades. For example, our product
and service billings in fiscal 2006 reflected an increase in
sales of software for OEM base station channel cards that
support Rev A as operators ramped up their deployments of EV-DO
infrastructure. Our product and service billings for each of the
second half of fiscal 2007 and the first half of fiscal 2008
were less than our product and service billings for the first
half of fiscal 2007. Our product and service billings for the
second half of fiscal 2008 were greater than they were for the
first half of fiscal 2008. We believe that several large
operators completed their initial deployments of Rev A software
in the first half of fiscal 2007 and then moderated their
deployments over the remainder of the year. We believe that
several large operators began their capacity deployments in the
second half of 2008. The staged deployments of wireless
infrastructure equipment by customers of both our existing and
new OEMs are likely to continue to cause significant volatility
in our quarterly operating results.
We derive, and expect to continue to derive, all of our revenue
and billings from sales of mobile broadband infrastructure
products. We expect demand for mobile broadband services to be
the primary driver for growth and expansion of EV-DO networks.
The market for mobile broadband services is relatively new and
still evolving, and it is uncertain whether these services will
achieve and sustain high levels of demand and market acceptance.
The level of demand and continued market acceptance for these
services may be adversely affected by factors that limit or
interrupt the supply of mobile phones designed for EV-DO
networks. For example, an order, currently under appeal, that
was issued in 2007 by the United States International Trade
Commission in a patent dispute between Broadcom
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Corporation and Qualcomm, which bars importation into the United
States of some Qualcomm chips that are used in EV-DO mobile
phones may have the effect of hampering demand for mobile
broadband services. In addition, the unavailability of EV-DO
versions of popular mobile devices, such as the Apple i-Phone
that only work on UMTS technology, could hamper the expansion of
EV-DO networks. Another expected driver for the growth of EV-DO
networks is VoIP. The migration of voice traffic to EV-DO
networks will depend on many factors outside of our control. If
the demand for VoIP and other mobile broadband services does not
grow, or grows more slowly than expected, the need for our EV-DO
products would be diminished and our operating results would be
significantly harmed.
A substantial portion of our cumulative billings for fiscal
2006, 2007 and 2008 are attributable to sales of our EV-DO
products by Nortel Networks to two large wireless operators in
North America. Our sales of EV-DO products currently depend to a
significant extent on the rate at which these operators expand
and upgrade their CDMA networks. Our business and operating
results would be harmed if either of these operators were to
select a wireless network solution offered by a competitor or
for any other reason were to discontinue or reduce the use of
our products or product upgrades in their networks.
We are investing significantly in the development of both our
EV-DO based and UMTS based FMC products so that operators may
offer mobile broadband services using wireline broadband
connections and a combination of mobile and Wi-Fi networks. We
do not expect to have meaningful sales of our FMC products until
at least the second half of 2009, depending on operators’
deployment plans. However, it is possible that the market for
our FMC products will not develop as we expect. Even if a market
for our FMC products develops, it is uncertain whether our FMC
products will achieve and sustain high levels of demand, market
acceptance and profitability. Our ability to sell our FMC
products will depend, in part, on factors outside our control,
such as the commercial availability and market acceptance of
mobile phones designed to support FMC applications and the
market acceptance of femtocell access point products. The market
for our FMC products may be smaller than we expect, the market
may develop more slowly than we expect or our competitors may
develop alternative technologies that are more attractive to
operators. Our FMC products are an important component of our
growth and diversification strategy and, therefore, if we are
unable to successfully execute on this strategy, our sales,
billings and revenues could decrease and our operating results
could be harmed.
There are a limited number of OEMs that offer EV-DO solutions,
several of which have developed their own EV-DO technology
internally and, therefore, do not require solutions from us. We
currently have agreements with two OEM customers. We do not
expect to commence significant sales to one of these OEM
customers in the immediate future because the markets for the
products that we are developing for this customer are still
developing. The market for our FMC products is still developing.
We currently have three agreements with OEM customers to deliver
our UMTS femtocell product solutions and three agreements with
OEM customers to deliver our CDMA femtocell product solutions,
but have not yet had any significant sales to these customers.
Our operating results for the foreseeable future will depend to
a significant extent on our ability to effect sales to our
existing CDMA and UMTS OEM customers and to establish new OEM
relationships. Our OEM customers have substantial purchasing
power and leverage in negotiating pricing and other contractual
terms with us. In addition, further consolidation in the
communications equipment market could adversely affect our OEM
customer relationships. If we fail to generate significant
product and service billings through our existing OEM
relationships or if we fail to establish significant new OEM
relationships, we will not be able to achieve our anticipated
level of sales and our results of operations will suffer.
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Our operating results have varied significantly from period to
period, and we expect them to continue to vary significantly
from period to period for the foreseeable future due to a number
of factors in addition to the unpredictable purchasing patterns
of operators. The following factors, among others, can
contribute to the unpredictability of our operating results:
Our operating expenses are largely based on our anticipated
organizational and product and service billings growth,
especially as we continue to invest significant resources in the
development of future products and expand our international
presence. Most of our expenses, such as employee compensation,
are relatively fixed in the short term. As a result, any
shortfall in product and service billings in relation to our
expectations could cause significant changes in our operating
results from period to period and could result in negative cash
flow from operations.
We believe that comparing our operating results on a
period-to-period basis may not be meaningful. You should not
rely on our past results as an indication of our future
performance. It is likely that in some future periods, our
revenue, product and service billings, earnings, cash from
operations or other operating results will be below the
expectations of securities analysts and investors. In that
event, the price of our common stock may decrease substantially.
We began to recognize revenue in fiscal 2002, began to have
positive cash flow from operating activities in fiscal 2004 and
achieved profitability in fiscal 2006. We have only a limited
operating history on which you can base your evaluation of our
business, including our ability to continue to grow our revenue
and billings and to sustain cash flow from operating activities
and profitability. The amount and percentage of our operating
expenses that are fixed expenses have increased as
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we have grown our business. As we continue to expand and develop
our business, we will need to generate significant billings to
maintain positive cash flow from operating activities, and we
might not sustain positive cash flow from operating activities
for any substantial period of time. We do not expect to achieve
profitability for any fiscal year unless we are able to
recognize significant revenue from our OEM arrangements in that
fiscal year. If we are unable to increase our billings and
sustain cash flow from operating activities, the market price of
our common stock will likely fall.
On January 14, 2009, Nortel Networks announced that it and
certain of its affiliates had filed for bankruptcy protection.
At the time of that filing, we had $21.8 million of
outstanding invoices to Nortel Networks and approximately
$12 million to $13 million of unbilled amounts related
to royalties earned through January 13, 2009. The
collection of these amounts is subject to Nortel Networks’
bankruptcy proceedings and it is likely that a portion or all of
these amounts will not be collected. Had Nortel Networks not
filed for bankruptcy protection, these amounts would likely have
been paid in due course in the first quarter of fiscal 2009. Our
cash flows for the first quarter of 2009 will be negatively
impacted by $34 million to $35 million, representing
the total billed and unbilled amounts due from Nortel Networks
at the time of the filing.
Many companies in the wireless industry have significant patent
portfolios. These companies and other parties may claim that our
products infringe their proprietary rights. We may become
involved in litigation as a result of allegations that we
infringe the intellectual property rights of others. Any party
asserting that our products infringe their proprietary rights
would force us to defend ourselves, and possibly our customers,
against the alleged infringement. These claims and any resulting
lawsuit, if successful, could subject us to significant
liability for damages and invalidation of our proprietary
rights. We also could be forced to do one or more of the
following:
For example, in 2006, we received a letter from
Wi-LAN Inc.
asserting that some of our EV-DO products infringe two issued
United States patents and an issued Canadian patent relating to
wireless communication technologies. A majority of our revenue
to date has been derived from the allegedly infringing EV-DO
products. We have evaluated various matters relating to
Wi-LAN’s
assertion and we do not believe that such products infringe any
valid claim of the patents identified by
Wi-LAN in
that letter. In November 2007, we received an additional letter
from Wi-LAN
asserting that some of our other products infringe one of the
previously identified United States patents and that the
products identified in the first letter and some of our other
products infringe two other United States patents. We have
evaluated
Wi-LAN’s
claims related to the products and patents identified in its
November 2007 letter and we do not believe that our products
infringe any valid claim of the patents identified by
Wi-LAN in
that letter. Under certain circumstances we may seek to obtain a
license to use the relevant technology from
Wi-LAN. We
cannot be certain that
Wi-LAN would
provide such a license or, if provided, what its economic terms
would be. If we were to seek to obtain such a license, and such
license were available from
Wi-LAN, we
could be required to make significant payments with respect to
past and/or
future sales of our products, and such payments may adversely
affect our financial condition and operating results. If
Wi-LAN
determines to pursue claims against us for patent infringement,
we might not be able to successfully defend against such claims.
Intellectual property litigation can be costly. Even if we
prevail, the cost of such litigation could deplete our financial
resources. Litigation is also time consuming and could divert
management’s attention and resources away from our
business. Furthermore, during the course of litigation,
confidential information may be disclosed in the form of
documents or testimony in connection with discovery requests,
depositions or trial testimony. Disclosure of our confidential
information and our involvement in intellectual property
litigation could materially adversely affect our business. Some
of our competitors may be able to sustain the costs of complex
intellectual property
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litigation more effectively than we can because they have
substantially greater resources. In addition, any uncertainties
resulting from the initiation and continuation of any litigation
could significantly limit our ability to continue our operations.
The GSM/UMTS markets are characterized by the presence of many
patents held by third parties. We will need to obtain licenses
from third parties for intellectual property associated with our
development of GSM/UMTS products. Any required license might not
be available to us on acceptable terms, or at all. If we succeed
in obtaining these licenses, but the payments under these
licenses are higher than we anticipate, our costs for these
products would increase and our operating results would suffer.
If we failed to obtain a required license, our ability to
develop GSM/UMTS products would be impaired, we may not be able
to expand our business as expected and our business may suffer.
The market for our products is characterized by rapid
technological change, frequent new product introductions and
evolving industry standards. To achieve market acceptance for
our products, we must effectively anticipate operator
requirements, and we must offer products that meet changing
operator demands in a timely manner. Operators may require
product features and capabilities that our current products do
not have. If we fail to develop products that satisfy operator
requirements, our ability to create or increase demand for our
products will be harmed.
In developing our wireless infrastructure products, we seek to
identify the long-term trends of wireless operators and their
customers. The development cycle for our products and
technologies can take multiple years. The ultimate success of
our new products depends, in large part, on the accuracy of our
assessments of the long-term needs of the industry, and it is
difficult to change quickly the design or function of a planned
new product if the market need does not develop as we anticipate.
We may experience difficulties with software development,
industry standards, hardware design, manufacturing or marketing
that could delay or prevent our development, introduction or
implementation of new products and enhancements. The
introduction of new products by competitors, including some of
our OEM customers, the emergence of new industry standards or
the development of entirely new technologies that replace
existing product offerings could render our existing or future
products obsolete. If our products become technologically
obsolete, operators may purchase solutions offered by our
competitors and our ability to generate revenue and product and
service billings may be impaired.
Our future success depends in part on the ability of our OEM
customers to sell our products to large wireless operators
operating complex networks that serve large numbers of
subscribers and transport high volumes of traffic. Our OEM
customers operate in a highly competitive environment and may
need to reduce the prices they charge for our products in order
to maintain or expand their market share. We may reduce the
prices we charge our OEM customers for our products in order to
support their selling efforts. If our OEM customers incur
shortfalls in their sales of mobile broadband solutions to their
existing customers or fail to expand their customer base to
include additional operators that deploy our products in
large-scale networks serving significant numbers of subscribers
or if we reduce the prices we charge our OEM customers for our
products, our operating results will suffer.
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We depend on sole sources for certain components of our products
and also rely on contract manufacturers for the production of
our hardware products. We have not entered into long-term
agreements with any of our suppliers. We depend on several
software vendors for the operating system and other capabilities
used in our products. In addition, we and one of our OEM
customers purchase from Qualcomm the cell site modem chips used
in any base station and base station channel cards. If these
cell site modem chips were to become unavailable to us or to our
OEM customers, it would take us a significant period of time to
develop alternative solutions and it is likely that our
operating results would be significantly harmed.
The market for network infrastructure products is highly
competitive and rapidly evolving. The market is subject to
changing technology trends, shifting customer needs and
expectations and frequent introduction of new products.
We expect competition to persist and intensify in the future as
the market for network infrastructure products grows and new and
existing competitors devote considerable resources to
introducing and enhancing products. For our EV-DO products, we
face competition from several of the world’s largest
telecommunications equipment providers that provide either a
directly competitive product or a product based on alternative
technologies, including Alcatel-Lucent, Hitachi, Huawei,
LG-Nortel and Samsung. In our sales to OEM customers, we face
the competitive risk that OEMs might seek to develop internally
alternative solutions to those currently purchased from us.
Additionally, our OEM customers might elect to purchase
technology from our competitors. For our FMC products, our
competition includes several public companies, including Cisco
and Ericsson, as well as several private companies such as
Huawei.
Our current and potential competitors may have significantly
greater financial, technical, marketing and other resources than
we do and may be able to devote greater resources to the
development, promotion, sale and support of their products. In
addition, many of our competitors have more extensive customer
relationships than we do, and, therefore, our competitors may be
in a stronger position to respond quickly to new technologies
and may be able to market or sell their products more
effectively. Moreover, further consolidation in the
communications equipment market could adversely affect our OEM
customer relationships and competitive position. Our products
may not continue to compete favorably. We may not be successful
in the face of increasing competition from new products and
enhancements introduced by existing competitors or new companies
entering the markets in which we provide products. As a result,
we may experience price reductions for our products, order
cancellations and increased expenses. Accordingly, our business
may not grow as expected and our business may suffer.
Under our OEM agreement with Nortel Networks, Nortel Networks
has the option to purchase from us the specification for
communications among base stations, radio network controllers
and network management systems. The specification would enable
Nortel Networks to develop EV-DO software to work with the base
station channel card software licensed from us and deployed in
the networks of its wireless operator customers. If Nortel
Networks elects to exercise this option, Nortel Networks will
pay us a fixed fee as well as a significant royalty on sales of
current and future products that incorporate this specification.
The royalty rate varies with annual volume but represents a
portion of the license fees we currently receive from our sales
to Nortel Networks. If Nortel Networks were to exercise the
option, Nortel Networks would receive the current interface
specification at the time of option exercise, updated with an
upgrade then under development, plus one additional upgrade
subject to a development agreement within a limited time after
the option exercise for an additional fee. If Nortel Networks
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were in the future to develop its own EV-DO software, it could,
by exercising this option, enable its own software to
communicate with the base station channel cards currently
installed in its customers’ networks.
A prolonged economic downturn in the business or geographic
areas in which we sell our products could reduce demand for our
products and result in a decline in our revenue and billings.
Volatility and disruption of financial and credit markets could
limit customers’ ability to obtain adequate financing to
maintain operations and invest in network infrastructure and
therefore also could reduce demand for our products and result
in a decline in our revenues and billings.
In addition, during economic downturns, customers may slow the
rate at which they pay their vendors or become unable to pay
their debts as they become due. If any of our significant
customers do not pay amounts owed to us in a timely manner or
becomes unable to pay such amounts to us at a time when we have
substantial amounts receivable from such customers, our cash
flow and results of operations may suffer. At the time they
filed for bankruptcy protection, Nortel Networks had outstanding
invoices to us of $21.8 million and approximately
$12 million to $13 million of unbilled amounts which
are now subject to the bankruptcy process. We will not be able
to collect on these invoices when they otherwise would have been
due, and we may be unable to collect them in full, or at all.
Additionally, disruptions of the credit markets and any
limitations on the availability of credit to our customers could
impact their ability to invest in network infrastructure and
purchase our products.
Because
our business depends on the continued strength of the
communications industry, our operating results will suffer if
that industry experiences an economic downturn.
We derive most of our revenue and billings from purchases of our
products by customers in the communications industry. Our future
success depends upon the continued demand from wireless
operators for communications equipment. The communications
industry is cyclical and reactive to general economic
conditions. In the recent past, worldwide economic downturns,
pricing pressures, mergers and deregulation have led to
consolidations and reorganizations. These downturns, pricing
pressures and restructurings have caused delays and reductions
in capital and operating expenditures by many wireless
operators. These delays and reductions, in turn, have reduced
demand for communications products such as ours. A continuation
or recurrence of these industry patterns, as well as general
domestic and foreign economic conditions and other factors that
reduce spending by companies in the communications industry,
could harm our operating results in the future.
Our success depends to a degree upon the protection of our
software, hardware designs and other proprietary technology. We
rely on a combination of patent, copyright, trademark and trade
secret laws, and confidentiality provisions in agreements with
employees, contract manufacturers, consultants, customers and
other third parties to protect our intellectual property rights.
Other parties may not comply with the terms of their agreements
with us, and we may not be able to enforce our rights adequately
against these parties. In addition, unauthorized parties may
attempt to copy or otherwise obtain and use our products or
technology. Monitoring unauthorized use of our products is
difficult, and we cannot be certain that the steps we have taken
will prevent unauthorized use of our technology, particularly in
foreign countries where the laws may not protect our proprietary
rights as fully as in the United States. If competitors are able
to use our technology, our ability to compete effectively could
be harmed. For example, if a competitor were to gain use of
certain of our proprietary technology, it might be able to
develop and manufacture similarly designed and equipped mobile
broadband solutions at a reduced cost, which could result in a
decrease in demand for our products. Furthermore, we have
adopted a strategy of seeking limited patent protection both in
the United States and in foreign countries with respect to the
technologies used in or relating to our products. We do not know
whether any of our pending patent applications will result in
the issuance of patents or whether the examination process will
require us to narrow our claims, and even if patents are issued,
they may be contested,
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circumvented or invalidated over the course of our business.
Moreover, the rights granted under any issued patents may not
provide us with proprietary protection or competitive
advantages, and, as with any technology, competitors may be able
to develop and obtain patents for technologies that are similar
to or superior to our technologies. If that happens, we may need
to license these technologies and we may not be able to obtain
licenses on reasonable terms, if at all, thereby causing great
harm to our business. In addition, if we resort to legal
proceedings to enforce our intellectual property rights, the
proceedings could become burdensome and expensive, even if we
were to prevail.
We intend to pursue acquisitions of companies or assets in order
to enhance our market position or expand our product portfolio.
We may not be able to find suitable acquisition candidates and
we may not be able to complete acquisitions on favorable terms,
if at all. If we do complete acquisitions, we cannot be sure
that they will ultimately strengthen our competitive position or
that they will not be viewed negatively by customers, securities
analysts or investors. In addition, any acquisitions that we
make could lead to difficulties in integrating personnel and
operations from the acquired businesses and in retaining and
motivating key personnel from those businesses. Acquisitions may
disrupt our ongoing operations, divert management from
day-to-day responsibilities, increase our expenses and harm our
operating results or financial condition. Future acquisitions
may reduce our cash available for operations and other uses and
could result in an increase in amortization expense related to
identifiable assets acquired, potentially dilutive issuances of
equity securities or the incurrence of debt, which could harm
our business, financial condition and operating results.
Generally Accepted Accounting Principles in the United States
are subject to interpretation by the Financial Accounting
Standards Board, or FASB, the American Institute of Certified
Public Accountants, or AICPA, the SEC and various other bodies
formed to promulgate and interpret appropriate accounting
principles. A change in these principles or interpretations
could have a significant effect on our reported financial
results, and they could affect the reporting of transactions
completed before the announcement of a change.
For example, we recognize substantially all of our revenue in
accordance with AICPA Statement of Position
97-2,
Software Revenue Recognition , or
SOP No. 97-2.
The AICPA and its Software Revenue Recognition Task Force
continue to issue interpretations and guidance for applying the
relevant accounting standards to a wide range of sales contract
terms and business arrangements that are prevalent in software
licensing arrangements and arrangements for the sale of hardware
products that contain more than an insignificant amount of
software. We collaborate with our OEM customers to develop and
negotiate pricing for specific features for future product
releases and specified software upgrades. Because we do not sell
the same products and upgrades to more than one customer, we are
unable to establish fair value for these products and upgrades.
As a result, under
SOP No. 97-2,
we are required to defer most of our revenue from sales to our
OEM customers until after we ship specified upgrades that were
committed to the OEM customer at the time of sale. Future
interpretations of existing accounting standards, including
SOP No. 97-2,
or changes in our business practices could result in future
changes in our revenue recognition accounting policies that have
a material adverse effect on our results of operations.
In August 2008, the SEC decided to seek public comments on the
potential mandatory adoption of International Financial
Reporting Standards, or IFRS, by all U.S. issuers. The
proposed roadmap targets potential mandatory adoption of IFRS in
the U.S. beginning in 2014, but lays out several milestones
that would need to be achieved prior to the SEC mandating use of
IFRS for all U.S. issuers. The proposed rule would allow
certain qualifying domestic issuers to use IFRS as early as
fiscal years ending on or after December 15, 2009. Should
we be required to adopt IFRS, our operating results for past,
current, or future periods may be adversely affected. We have
not yet assessed the impact of potentially applying IFRS.
In December 2008, the FASB and the International Accounting
Standards Board issued a discussion paper which detailed their
preliminary views on a single, assets-and liabilities-based
revenue recognition model that they believe will improve
financial reporting. If and when a new revenue recognition model
is finalized, it may change
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the way in which we recognize and record revenue and could
adversely affect our operating results in current or future
periods. We have not yet assessed the impact of this preliminary
revenue recognition model.
We are highly dependent upon the continued service and
performance of our senior management team and key technical and
sales personnel, including our President and Chief Executive
Officer, Chief Technical Officer, and Vice President, Femto
Business and Corporate Development. None of these officers is a
party to an employment agreement with us, and any of them
therefore may terminate employment with us at any time with no
advance notice. The replacement of these officers likely would
involve significant time and costs, and the loss of these
officers may significantly delay or prevent the achievement of
our business objectives.
We face intense competition for qualified individuals from
numerous technology, software and manufacturing companies. For
example, our competitors may be able to attract and retain a
more qualified engineering team by offering more competitive
compensation packages. If we are unable to attract new engineers
and retain our current engineers, we may not be able to develop
and service our products at the same levels as our competitors
and we may, therefore, lose potential customers and sales
penetration in certain markets. Our failure to attract and
retain suitably qualified individuals could have an adverse
effect on our ability to implement our business plan and, as a
result, our ability to compete effectively in the mobile
broadband solutions market could decrease, our operating results
could suffer and our revenues could decrease.
We
have incurred, and will continue to incur, significant increased
costs as a result of operating as a public company as compared
with our history as a private company, and our management is
required to devote substantial time to public company compliance
initiatives. If we are unable to absorb these increased costs or
maintain management focus on development and sales of our
product offerings and services, we may not be able to achieve
our business plan.
As a public company, we have incurred, and will continue to
incur, significant legal, accounting and other expenses that we
did not incur as a private company. In addition, the
Sarbanes-Oxley Act, as well as rules subsequently implemented by
the SEC and the NASDAQ Stock Market, have imposed a variety of
requirements on public companies, including requiring changes in
corporate governance practices. Our management and other
personnel have and will continue to devote a substantial amount
of time to these compliance initiatives. Moreover, these rules
and regulations have increased our legal and financial
compliance costs and have made some activities more
time-consuming and costly. For example, we believe these new
rules and regulations have made it more difficult and expensive
for us to obtain director and officer liability insurance.
We assessed the effectiveness of our internal control over
financial reporting as of December 28, 2008 and assessed
all deficiencies on both an individual basis and in combination
to determine if, when aggregated, they constitute a material
weakness. As a result of this evaluation, no material weaknesses
were identified.
We expect to continue to incur significant costs, including
increased accounting fees and increased staffing levels, in
order to maintain compliance with Section 404 of the
Sarbanes-Oxley Act. We continue to monitor our controls for any
weaknesses or deficiencies. No evaluation can provide complete
assurance that our internal controls will detect or uncover all
failures of persons within our company to disclose material
information otherwise required to be reported. The effectiveness
of our controls and procedures could also be limited by simple
errors or faulty judgments. In addition, as we continue to
expand globally, the challenges involved in implementing
appropriate internal controls will increase and will require
that we continue to improve our internal controls over financial
reporting.
In the future, if we fail to complete our Sarbanes-Oxley 404
evaluation in a timely manner, or if our independent registered
public accounting firm cannot attest in a timely manner to our
evaluation, we could be subject to regulatory scrutiny and a
loss of public confidence in our internal controls which could
adversely impact
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the market price of our common stock. We or our independent
registered public accounting firm may identify material
weaknesses in internal controls over financial reporting which
may result in a loss of public confidence in our internal
controls and adversely impact the market price of our common
stock. In addition, any failure to implement required, new or
improved controls, or difficulties encountered in their
implementation, could harm our operating results or cause us to
fail to meet our reporting obligations.
We anticipate that further expansion of our infrastructure and
headcount may be required to achieve planned expansion of our
product offerings and planned increases in our customer base.
Our growth has placed, and is expected to continue to place, a
significant strain on our administrative and operational
infrastructure. Our ability to manage our operations and growth
will require us to continue to refine our operational, financial
and management controls, human resource policies, and reporting
systems and procedures.
We may not be able to implement improvements to our management
information and control systems in an efficient or timely manner
and may discover deficiencies in existing systems and controls.
If we are unable to manage future expansion, our ability to
provide high quality products and services could be harmed,
which would damage our reputation and brand and substantially
harm our business and results of operations.
We may need to raise additional funds through public or private
debt or equity financings in order to:
Any additional capital raised through the sale of equity may
dilute our current stockholders’ percentage ownership of
our common stock. Capital raised through debt financing would
require us to make periodic interest payments and may impose
potentially restrictive covenants on the conduct of our
business. Furthermore, additional financings may not be
available on terms favorable to us, or at all, particularly in
the current economic environment. A failure to obtain additional
funding could prevent us from making expenditures that may be
required to grow or maintain our operations.
Once our products are deployed within an operator’s
network, the operator and our OEM customer depend on our support
organization to resolve issues relating to our products. A high
level of support is critical for the successful marketing and
sale of our products. If we do not effectively assist operators
in deploying our products, succeed in helping operators quickly
resolve post-deployment issues, and provide effective ongoing
support it would adversely affect our ability to sell our
products. As a result, our failure to maintain high quality
support and services would have a material adverse effect on our
business and operating results.
Our products are highly technical and complex and are critical
to the operation of many networks. Our products have contained
and are expected to continue to contain one or more undetected
errors, defects or security vulnerabilities. Some errors in our
products may only be discovered after a product has been
installed and used by
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an operator. For example, we have encountered errors in our
software products that have caused operators using our products
to experience a temporary loss of certain network services. Any
errors, defects or security vulnerabilities discovered in our
products after commercial release could result in loss of
revenue or delay in revenue recognition, loss of customers and
increased service and warranty cost, any of which could
adversely affect our business, results of operations and
financial condition. In addition, we could face claims for
product liability, tort or breach of warranty, including claims
related to changes to our products made by our OEM customers.
Our contracts for the sale of our products contain provisions
relating to warranty disclaimers and liability limitations,
which in certain cases may not be upheld. Defending a lawsuit,
regardless of its merit, is costly and may divert
management’s attention and adversely affect the
market’s perception of us and our products. In addition, if
our business liability insurance coverage proves inadequate or
future coverage is unavailable on acceptable terms or at all,
our financial condition could be harmed.
We have sales personnel in seven countries worldwide, nearly 160
engineers and support staff in Bangalore, India and
approximately 45 engineers and support staff in Cambridge,
United Kingdom. We expect to continue to add personnel in
foreign countries, especially at our Bangalore, India and
Cambridge, United Kingdom facilities. Our international
operations subject us to a variety of risks, including:
As we continue to expand our business globally, our success will
depend, in large part, on our ability to anticipate and
effectively manage these and other risks associated with our
international operations. Our foreign operations incur expenses
in local currencies. Because we incur a substantial portion of
our operating expenses in India and the United Kingdom, we are
subject to currency exchange risks between the U.S. Dollar on
the one hand, and the Indian Rupee and British Pound, on the
other. We may derive some of our future revenue from customers
in foreign countries that pay for our products in the form of
their local currency, which also would subject us to currency
exchange risks. Our failure to manage any of these risks
successfully could harm our international operations and reduce
our international sales, adversely affecting our business,
operating results and financial condition.
Concerns over the effects of radio frequency emissions, even if
unfounded, may have the effect of discouraging the use of
wireless devices, which would decrease demand for our products
and those of our licensees and customers. In recent years, the
FCC and foreign regulatory agencies have updated the guidelines
and methods they use for evaluating radio frequency emissions
from radio equipment, including wireless phones and other
wireless devices. In addition, interest groups have requested
that the FCC investigate claims that wireless communications
technologies pose health concerns and cause interference with
airbags, hearing aids and other medical devices. Concerns have
also been expressed over the possibility of safety risks due to
a lack of attention associated with the use of wireless devices
while driving. Any legislation that may be adopted in response
to these expressions of concern could reduce demand for our
products and those of our licensees and customers in the United
States as well as foreign countries.
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Risks
Relating to Ownership of Our Common Stock
Our common stock has a limited trading history. The trading
prices of the securities of technology companies have been
highly volatile. Some of the factors that may cause the market
price of our common stock to fluctuate include:
In addition, if the market for technology stocks or the stock
market in general experiences a loss of investor confidence, the
trading price of our common stock could decline for reasons
unrelated to our business, financial condition or results of
operations. If any of the foregoing occurs, it could cause our
stock price to fall and may expose us to class action lawsuits
that, even if unsuccessful, could be costly to defend and a
distraction to management.
The trading market for our common stock will rely in part on the
research and reports that equity research analysts publish about
us and our business. We do not control these analysts. The price
of our stock could decline if one or more equity analysts
downgrade our stock or if those analysts issue other unfavorable
commentary or cease publishing reports about us or our business.
If our existing stockholders sell a large number of shares of
our common stock or the public market perceives that existing
stockholders might sell shares of common stock, the market price
of our common stock could decline significantly.
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The holders of a majority of our common stock have rights,
subject to some conditions, to require us to file registration
statements under the Securities Act or to include their shares
in registration statements that we may file in the future for
ourselves or other stockholders. If we register their shares of
common stock, they could sell those shares in the public market.
Our directors and executive officers and their affiliates
beneficially owned a majority of our outstanding common stock as
of December 28, 2008. As a result, these stockholders, if
they act together, will be able to influence our management and
affairs and all matters requiring stockholder approval,
including the election of directors and approval of significant
corporate transactions. This concentration of ownership may have
the effect of delaying or preventing a change in control of our
company and might affect the market price of our common stock.
Provisions of our certificate of incorporation, our by-laws or
Delaware law may discourage, delay or prevent a merger,
acquisition or other change in control that stockholders may
consider favorable, including transactions in which our
stockholders might otherwise receive a premium for their shares
of our common stock. These provisions may also prevent or
frustrate attempts by our stockholders to replace or remove our
management. These provisions include:
In addition, Section 203 of the Delaware General
Corporation Law prohibits a publicly-held Delaware corporation
from engaging in a business combination with an interested
stockholder, generally a person which together with its
affiliates owns, or within the last three years has owned, 15%
of our voting stock, for a period of three years after the date
of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a
prescribed manner.
The existence of the foregoing provisions and anti-takeover
measures could limit the price that investors might be willing
to pay in the future for shares of our common stock. They could
also deter potential acquirers of our company, thereby reducing
the likelihood that stockholders could receive a premium for
their common stock in an acquisition.
Although we paid a special cash dividend on our capital stock in
April 2007, we do not intend to pay any cash dividends on our
common stock for the foreseeable future. We currently intend to
invest our future earnings, if any, to fund our growth.
Therefore, stockholders are not likely to receive any dividends
on shares of common stock for the foreseeable future.
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None.
We lease approximately 85,000 square feet of office space
in Chelmsford, Massachusetts pursuant to leases that expire in
April 2012. We lease approximately 35,000 square feet of
office space in Bangalore, India pursuant to a lease that
expires in March 2012. We lease approximately 10,000 square
feet of office space in Cambridge, United Kingdom pursuant
to leases that expire in February 2012 and August 2012. We also
maintain sales offices in Dallas, Texas; Madrid, Spain;
Darmstadt, Germany; Beijing, China; Singapore; and Tokyo, Japan.
We believe that our current facilities are suitable and adequate
to meet our current needs. We intend to add new facilities or
expand existing facilities as we add employees, and we believe
that suitable additional or substitute space will be available
as needed to accommodate any such expansion of our operations.
We are not a party to any material legal proceedings.
No matters were submitted to a vote of our security holders
during the fourth quarter of the fiscal year ended
December 28, 2008.
Our common stock has traded on the Nasdaq Global Market under
the symbol “AIRV” since our initial public offering on
July 19, 2007. Prior to our initial public offering, there
was no public market for our common stock.
The following table sets forth for the indicated periods the
high and low sales prices of our common stock as reported by the
Nasdaq Global Market.
The last reported sale price for our common stock on the Nasdaq
Global Market on February 17, 2009 was $5.46 per share.
As of February 17, 2009, there were 165 stockholders
of record of our common stock.
In April 2007, prior to our initial public offering, we paid a
special cash dividend of $1.333 per share on shares of our
capital stock, totaling an aggregate of $72.7 million. We
have not declared any cash dividends since this date. Based on
our current financial plans and expected cash balances, we do
not expect to declare any cash dividends for the foreseeable
future.
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Information relating to our equity compensation plans will be
included in our proxy statement in connection with our 2009
Annual Meeting of Stockholders, under the caption “Equity
Compensation Plan Information.” That portion of our proxy
statement is incorporated herein by reference.
Purchases
of Equity Securities by the Issuer and Affiliated
Purchasers
On August 8, 2008, our board of directors authorized the
repurchase of up to $20.0 million of our common stock. As
part of the authorized share repurchase program, we entered into
a written trading plan in compliance with
Rule 10b5-1
under the Securities Exchange Act of 1934 to purchase up to an
aggregate of $20.0 million of our common stock.
During the fourth quarter of fiscal 2008, we repurchased shares
of our common stock as follows:
On February 10, 2009, our board of directors authorized
the repurchase of up to an additional $20.0 million of our
common stock following the completion of the initial stock
repurchase program approved in August 2008.
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The following performance graph and related information shall
not be deemed “soliciting material” or to be
“filed” with the Securities and Exchange Commission,
nor shall such information be incorporated by reference into any
future filing under the Securities Act of 1933 or Securities
Exchange Act of 1934, each as amended, except to the extent that
we specifically incorporate it by reference into such filing.
The comparative stock performance graph below compares the
cumulative total stockholder return (assuming reinvestment of
dividends, if any) from investing $100 on July 20, 2007,
the date on which our common stock was first publicly traded, to
the close of the last trading day of 2008, in each of
(i) our common stock, (ii) the NASDAQ Composite Index
and (iii) the Dow Jones Wilshire 5000 Telecommunications
Equipment Index, or DJ Wilshire Telecommunications Index.
COMPARISON
OF 17 MONTH CUMULATIVE TOTAL RETURN*
Among Airvana, Inc., The NASDAQ Composite Index and the DJ Wilshire Telecommunications Index 
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The following selected consolidated financial data should be
read in conjunction with our audited consolidated financial
statements and related notes thereto and with Management’s
Discussion and Analysis of Financial Condition and Results of
Operations which are included elsewhere in this Annual Report.
The historical results are not necessarily indicative of the
results to be expected for any future period. Our fiscal year
ends on the Sunday closest to December 31. The consolidated
statement of operations data for the fiscal years ended 2006,
2007 and 2008 and the selected consolidated balance sheet data
as of December 30, 2007 and December 28, 2008 are
derived from, and are qualified by reference to, the audited
consolidated financial statements included in this Annual Report
on
Form 10-K.
The consolidated statement of operations data for the fiscal
years ended 2004 and 2005, and the consolidated balance sheet
data as of January 2, 2005, January 1, 2006 and
December 31, 2006 are derived from audited consolidated
financial statements, which are not included in this Annual
Report. In fiscal 2007, we acquired 3-Way Networks Limited. We
used the purchase method of accounting in accordance with
SFAS No. 141, Business Combinations to account
for the acquisition. On May 22, 2007, our Board of
Directors approved, and on June 18, 2007, our stockholders
approved, a
1-for-1.333
reverse stock split of our common stock, which was effective on
June 29, 2007. All share and per-share data have been
retroactively restated to reflect this stock split for all
periods presented.
We recognize revenue from the sale of products and services
under our OEM agreements only after we deliver specified
software upgrades that were committed at the time of sale. We
further delay recognition of portions of our revenue when we are
unable to establish VSOE of fair value for maintenance and
support services that we sell with our products. We record as
deferred revenue the product and service billings that we are
unable to recognize as revenue. This revenue is recognized later
upon delivery of these specified software upgrades. As a result,
we believe that our revenue, taken in isolation, provides
limited insight into the performance of our business. Therefore,
we also present in the following tables: product and service
billings, which reflects our sales activity in a period; cost
related to product and service billings, which reflects the cost
associated with our product and service billings; gross profit
on product and service billings, which reflects our product and
service billings less cost related to product and service
billings; operating income on product and service billings,
which represents gross profit on billings less operating
expenses; deferred revenue at the end of the period, which
reflects the cumulative billings that we were unable to
recognize under our revenue recognition policy; deferred product
and service cost at the end of a period, which reflects the cost
associated with our deferred revenue; and cash flow from
operating activities. We evaluate our performance by assessing
our product and service billings and the cost related to product
and service billings, in addition to other financial metrics
presented in accordance with GAAP.
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39
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This Annual Report on
Form 10-K
contains “forward-looking statements” that involve
risks and uncertainties, as well as assumptions that, if they
never materialize or prove incorrect, could cause our results to
differ materially from those expressed or implied by such
forward-looking statements. The statements contained in this
Annual Report on
Form 10-K
that are not purely historical are forward-looking statements
within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Such forward-looking
statements include any expectation of earnings, revenues,
billings or other financial items; development of femtocell
alliances and shipments; statements related to the effect of
Nortel Networks’ bankruptcy; any statements of the plans,
strategies and objectives of management for future operations;
factors that may affect our operating results; statements
concerning new products or services; statements related to
future capital expenditures; statements related to future
economic conditions or performance; statements as to industry
trends and other matters that do not relate strictly to
historical facts or statements of assumptions underlying any of
the foregoing. These statements are often identified by the use
of words such as, but not limited to, “anticipate,”
“believe,” “continue,” “could,”
“estimate,” “expect,” “intend,”
“may,” “will,” “plan,”
“target,” “continue,” and similar
expressions or variations intended to identify forward-looking
statements. These statements are based on the beliefs and
assumptions of our management based on information currently
available to management. Such forward-looking statements are
subject to risks, uncertainties and other important factors that
could cause actual results and the timing of certain events to
differ materially from future results expressed or implied by
such forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to,
those identified below, and those discussed in the section
titled “Risk Factors” included elsewhere in this
Annual Report on
Form 10-K
and in our other filings with the SEC. Furthermore, such
forward-looking statements speak only as of the date of this
report. We undertake no obligation to update any forward-looking
statements to reflect events or circumstances after the date of
such statements.
We are a leading provider of network infrastructure products
used by wireless operators to provide mobile broadband services.
We specialize in helping operators transform the mobile
experience of users worldwide. Our high performance technology
and products, from comprehensive femtocell solutions to core
mobile network infrastructure, enable operators to deliver
broadband services to mobile subscribers, wherever they are.
Most of our current products are based on a wireless
communications standard known as CDMA2000
1xEV-DO, or
EV-DO. In 2002, we began delivering commercial infrastructure
products based on the first generation EV-DO standard known as
Rev 0. The second generation EV-DO standard is known as Rev A,
and supports push-to-talk, VoIP and faster Internet services. We
delivered our first Rev A software release in April 2007. Prior
to 2008, most of our
EV-DO sales
were driven by operator deployments focused on
coverage — with operators extending their broadband
services across larger portions of their subscriber geographies.
Operators in some markets continue to deploy our products to
expand coverage. Data traffic and service revenue growth
continues to outpace voice growth at many major wireless
operators around the world. Our EV-DO sales in 2008 were driven
by capacity growth as operators looked to expand their capacity
to accommodate increased data traffic fueled by greater consumer
use of handheld devices, web browsing and 3G multimedia
applications. Over the longer term, we expect our EV-DO sales to
continue to be driven by capacity growth as operators acquire
more broadband subscribers that consume more broadband data.
We have developed a special business model to serve mobile
operators and our OEM customers with embedded software products.
Our software is deployed in an OEM’s installed base of
wireless networks. These networks are designed to deliver high
quality wireless services to millions of consumers and are built
and regularly upgraded over long periods of time, often 10 to
15 years. A key element of our strategy is to deliver
significant increases in performance and functionality to both
our OEM customers and to operators through software upgrades to
these networks. In 2007, we delivered two major EV-DO software
releases that provide for deployment of high-performance
multi-media applications by enabling faster downlink and uplink
speeds, supporting push-to-talk services, and adding new
proprietary “clustering” features that are designed to
dramatically improve network scalability. In 2008 we delivered
two additional EV-DO software releases which enable mobile
operators to more efficiently increase capacity and accelerate
the roll-out of
next-generation
multimedia services.
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We are also investing significantly in fixed mobile convergence
products that transform the experience of using mobile devices
indoors, providing benefits such as better coverage, better
quality and performance of broadband applications, and lower
costs for both users and operators. Our FMC products enable
operators to take advantage of wireline broadband connections
such as cable, DSL and fiber that already exist in most offices
and homes to connect mobile devices to an operator’s
services. There are two ways to accomplish this. The first is to
use Wi-Fi and the second is to place a personal base station, or
what the industry refers to as a femtocell access point in the
home or office. To address both of these market opportunities,
we have developed our universal access gateway, or UAG, product
to manage security and hand-offs when connecting a Wi-Fi phone
or a femtocell product to an operator’s network. Currently,
there is significant operator interest in our FMC products,
especially our femtocells, as they work with existing handsets.
Our FMC products include versions to support CDMA and UMTS
networks. Our FMC products are an important component of our
growth and diversification strategy. Users also utilize our
mobile broadband technology and products to create private
mobile networks.
We were founded in March 2000 and sold our first product in the
second quarter of fiscal 2002. Our growth has been driven
primarily by sales through our OEM customers to wireless
operators already using our EV-DO products as they increase the
capacity and geographic coverage of their networks, and by an
increase in the number of wireless operators that decide to
deploy our EV-DO products on their networks. We have sold nearly
55,000 channel card licenses for use by over 70 operators
worldwide.
In April 2007, we acquired 3Way Networks, a United Kingdom-based
provider of femtocell products and solutions for UMTS networks,
for an aggregate purchase price of approximately
$11.0 million in cash and 441,845 shares of common
stock. The acquisition furthered our strategy to address the
UMTS market and to deliver FMC and in-building mobile broadband
solutions.
In July 2007, we completed our IPO, in which we sold and issued
8.3 million shares of our common stock at an issue price of
$7.00 per share. We raised a total of $58.1 million in
gross proceeds from our IPO, or $50.8 million in net
proceeds after deducting underwriting discounts and commissions
of $4.1 million and other offering costs of approximately
$3.2 million.
In August 2007, we entered into an agreement with Nokia Siemens
Networks to certify interoperability of our UMTS femtocell
product with Nokia Siemens Networks’ femto gateway product.
We and Nokia Siemens Networks plan to provide a joint solution
to operators, and cooperate in joint marketing, sales and
support programs. The agreement is non-exclusive and sets forth
the terms under which we may use their proprietary interface
specifications of their products.
In September 2007, we entered into an agreement with Nortel
Networks amending certain provisions of the Development and
Purchase and Sale Agreement for CDMA High Data Rate (1xEV-DO)
Products, dated as of October 1, 2001, between us and
Nortel Networks, in which we agreed to pricing for our products
and services, including pricing for software products and
upgrades that were under development at the time and were
subsequently delivered in June 2008. Our agreement with Nortel
Networks is subject to rejection and discharge in Nortel
Networks’ bankruptcy. Although we intend to work with
Nortel Networks to have our agreement assumed, there can be no
assurance that Nortel Networks will assume its agreement with us.
In January 2008, we entered into a global sourcing agreement
with Thomson to supply our UMTS femtocell technology. Pursuant
to the agreement, Thomson may use our femtocell products in
conjunction with its own residential gateway offerings. The
agreement is non-exclusive and sets forth the terms and
conditions under which Thomson may purchase our femtocell
products. The term of the agreement extends through January
2011, with automatic annual renewals. Either party may terminate
the agreement with 90 days notice.
In February 2008, we entered into a global OEM agreement with
Motorola to provide our CDMA femtocell solution products. The
agreement is non-exclusive and sets forth the terms and
conditions under which Motorola may purchase our femtocell and
UAG products. The initial term of the agreement extends through
May 2010, with automatic annual renewals. Following the initial
term, Motorola may terminate the agreement with 180 days
notice.
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In June 2008, we entered into an agreement with Alcatel-Lucent
to develop an integrated IP Multimedia Subsystem, or IMS
femtocell solution for CDMA network operators that combines
Airvana’s femtocell access point and femtocell network
gateway with Alcatel-Lucent’s IMS core network
infrastructure.
In July 2008, we entered into an agreement with Hitachi to
develop a joint CDMA femtocell solution that integrates our
femtocell products with Hitachi’s core radio access network
infrastructure that Hitachi offers in Japan. In September 2008,
we entered into a supply agreement with Hitachi under which
Hitachi will provide marketing, sales and support activities for
our femtocell products. The initial term of the supply agreement
extends through June 2014 and provides for automatic annual
renewals, unless either party gives 180 days notice of its
intent not to renew.
In November 2008, we entered into another agreement with Nortel
Networks amending certain provisions of the Development and
Purchase and Sale Agreement for CDMA High Data Rate (1xEV-DO)
Products, dated as of October 1, 2001, between us and
Nortel Networks, in which we agreed to pricing for software
products and upgrades that were under development at the time.
Our agreement with Nortel Networks is subject to rejection and
discharge in Nortel Networks’ bankruptcy. Although we
intend to work with Nortel Networks to have our agreement
assumed, there can be no assurance that Nortel Networks will
assume its agreement with us.
In December 2008, we entered into a sourcing agreement with
Pirelli Broadband Solutions to add wireless broadband
connectivity to Pirelli’s portfolio of consumer broadband
devices by using our UMTS femtocell technology. The agreement is
non-exclusive and sets forth the terms and conditions under
which Pirelli may purchase our femtocell products. The initial
term of the agreement extends through November 2010, with
automatic annual renewals, unless either party gives
90 days notice of its intent not to renew.
We operate in the highly consolidated and competitive market for
mobile broadband equipment. To compete in this market, we have
developed OEM channels, unique products and a business approach
that targets the needs of large equipment vendors and their end
customers, wireless operators. Wireless operators invest
significantly in building out large-scale wireless networks,
which are very costly to replace. Equipment vendors compete
aggressively to win market share and they retain their market
position by upgrading their installed systems regularly, thereby
enabling their wireless operator customers to deliver new
services to their subscribers. These vendors develop detailed
product roadmaps and look to us to design and deliver software
upgrades that are consistent with their roadmaps.
We collaborate with our OEM customers to develop specific
features for products that they sell to their wireless operator
customers. We expect to continue to develop, for each OEM
customer, products based on our core technology that are
configured specifically to meet the requirements of each OEM and
its customers. We also offer our OEM customers the option to
purchase and make available to their wireless operator customers
new products and specified upgrades at prices that we set
typically several months prior to the new product or specified
upgrade release. We expect that we will release one or more
specified upgrades per year.
Our OEM customers typically are also potential competitors of
ours in the markets that they serve. We face the competitive
risk that our OEM customers might seek to develop internally
alternative solutions or to purchase alternative products from
our competitors. Our future success depends on our ability to
continue to develop products that offer advantages over
alternative solutions that our OEM customers might develop or
purchase from others.
Our typical sales arrangements involve multiple elements,
including: perpetual licenses for our software products and
specified software upgrades; the sale of hardware, maintenance
and support services; and the sale of professional services,
including training. Software is more than incidental to all of
our products and, as a result, we recognize revenue in
accordance with the American Institute of Certified Public
Accountants’ Statement of Position, or SOP,
No. 97-2,
Software Revenue Recognition.
To recognize revenue from current product shipments, we must
establish vendor specific objective evidence, or VSOE, of fair
value for all undelivered elements of our sales arrangements,
including our specified software upgrades. The best objective
evidence of fair value would be to sell these specified software
upgrades separately to
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multiple customers for the same price. However, because of our
OEM business model, the features and functionality delivered in
our software upgrades are defined in collaboration with our OEMs
based on each OEM’s particular requirements. As a result,
it is highly unlikely that we will ever be able to sell the same
standalone software upgrade to a different OEM customer and thus
establish VSOE of fair value for such upgrade.
As a result, we defer all revenue from sales to OEMs until all
elements without VSOE of fair value have been delivered. This
deferral is required because there is no basis to allocate
revenue between the delivered and undelivered elements of the
arrangement without VSOE of fair value. The revenue deferral is
necessary even though (1) our specified software upgrades
are not essential to the standalone functionality of any product
currently deployed, (2) the purchase of our upgrades are
based on separate decisions by our OEM customers and generally
require separate payment at the time of delivery and
(3) there is no refund liability for payments received on
any previously shipped and installed product in the event we are
not able to deliver the specified upgrade.
We recognize deferred revenue from sales to an OEM customer only
when we deliver a specified upgrade that we have previously
committed. When we commit to an additional upgrade before we
have delivered a previously committed upgrade, we defer all
revenue from product sales after the date of such commitment
until we deliver the additional upgrade. Any revenue that we had
deferred prior to the additional commitment is recognized when
the previously committed upgrade is delivered.
We anticipate that the revenue recognition related to the our
fixed-mobile convergence products will be complex given that a
number of our current arrangements for the development and
supply of these products contain significant customization
services, volume discounts, specified upgrades and multiple
elements for new service offerings for which VSOE of fair value
does not currently exist. To date, there have been no material
revenues recognized with respect to these products.
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The following diagram presents a hypothetical example of how
software product releases and commitments to specified upgrades
affect the relationship between product billings, product
revenue and deferred product revenue under a business model
similar to our current EV-DO OEM business model. The diagram
does not reflect the actual timing of any of our software
releases, the actual level of our product and service billings,
revenue or deferred revenue in any period, the actual timing of
recognition of our product and service revenues, or the deferral
of product revenue that can result from the inability to
establish VSOE of fair value for maintenance and support
services.
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As illustrated in this example, we begin to recognize our
revenue in periods during which we deliver specified upgrades.
When we have such revenue recognition events, we begin to
recognize revenue from sales invoiced during multiple prior
periods. As a result, we believe that our revenue, taken in
isolation, provides limited insight into the performance of our
business. We evaluate our performance by also assessing: product
and service billings, which reflects our sales activity in a
period; cost related to product and service billings, which
reflects the cost associated with our product and service
billings; deferred revenue at the end of the period, which
reflects the cumulative billings that we were unable to
recognize under our revenue recognition policy; deferred product
cost at the end of a period, which reflects the cumulative costs
that we were unable to recognize under our revenue recognition
policy associated with our deferred product revenue; and cash
flow from operating activities. We expect this pattern of
commitments and delivery of future specified upgrades and the
resulting impact on the timing of revenue recognition to
continue with respect to our OEM business. As we introduce new
products, the variability of the total revenue recognized in any
fiscal period may moderate, provided that we are able to
establish VSOE of fair value for these new products or upgrades
to these new products, and as sales of these new products
represent a larger percentage of our overall business.
Key
Elements of Financial Performance
Our revenue consists of product revenue and service revenue from
sales through our OEM customers and directly to our end
customers.
Product Revenue. Our product revenue is
principally currently derived from the sale of our EV-DO mobile
network products that are used by wireless operators to provide
mobile broadband services. These products include four major
components: base stations or OEM base station channel cards;
radio network controllers; network management systems; and
software upgrades to the OEM’s installed base. We have sold
OEM base station channel cards both as hardware/software
combinations and as software licenses when the OEM customer
chooses to have the hardware manufactured for it by a third
party. RNCs and network management systems are usually sold as
software licenses as the OEM customer procures off-the-shelf
hardware from third party suppliers. Almost all of our revenue
and product and service billings to date have been derived from
sales of our EV-DO products through our OEM agreement with
Nortel Networks. Revenue from our FMC products have not been
material to date.
We first derived revenue and product and service billings in
fiscal 2002 from the sale of first generation EV-DO mobile
network products based on the Rev 0 version of the standard.
Prior to the third quarter of fiscal 2006, we sold Rev 0-based
base station channel cards, which were manufactured for us by a
third party, and licensed Rev 0 software for these OEM base
station channel cards, as well as for RNCs and network
management systems. In connection with the transition to
products based on the Rev A version of the standard, Nortel
Networks exercised its right to license our hardware design in
order to manufacture the OEM base station channel cards that
support Rev A instead of purchasing this hardware from us. As a
result, beginning in the third quarter of fiscal 2006, our
product sales to Nortel Networks are derived solely from the
license of software, specifically Rev 0 and Rev A software, RNCs
and network management systems, as well as Rev A software for
OEM base station channel cards and system upgrades.
Under our revenue recognition policy, as described above, we
begin to recognize revenue from sales to an OEM customer only
after we deliver a specified upgrade that we have previously
committed. When we commit to an additional upgrade before we
have delivered a previously committed upgrade, we defer all
revenue from product sales after the date of such commitment
until we deliver the additional upgrade.
Our product revenue in fiscal 2006 consisted primarily of
software license fees and hardware shipments to our primary OEM
customer from fiscal 2002 through the first quarter of fiscal
2005, which is when we made an additional commitment for a
specified future software upgrade. We refer to that software
upgrade as our April 2005 specified upgrade or software version
4.0. In the first quarter of fiscal 2007, we delivered software
version 4.0. As a result, we recognized product revenue of
$141.5 million that consisted primarily of software license
fees and hardware shipments to our primary OEM customer from
April 2005 through September 2006, which is when we
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made another commitment for a specified future software upgrade.
We refer to that software upgrade as our September 2006
specified upgrade or software version 5.0. In the fourth quarter
of fiscal 2007, we delivered software version 5.0. As a result,
we recognized product revenue of $137.4 million that
consisted primarily of software license fees and hardware
shipments to our primary OEM customer from September 2006
through June 2007, which is when we made another commitment for
a specified future software upgrade. We refer to that software
upgrade as the June 2007 specified upgrade or software version
6.0. In the second quarter of fiscal 2008, we delivered software
version 6.0. As a result, we recognized product revenue of
$59.0 million that consisted primarily of billings from
software license fees to our primary OEM customer from June 2007
through December 2007, when we made another commitment for a
specified future software upgrade. We refer to that software
upgrade as the December 2007 specified upgrade or software
version 7.0. In the fourth quarter of fiscal 2008, we delivered
software version 7.0. As a result, we recognized product revenue
of $57.1 million that consisted primarily of billings from
software license fees to our primary OEM customer from December
2007 through July 2008, when we made another commitment for a
specified future software upgrade. We refer to that software
upgrade as the July 2008 specified upgrade or software version
8.0. In October 2008, we made another commitment for a specified
software upgrade, which we refer to as the October 2008
specified upgrade or software version 8.1. As of
December 28, 2008, there were two specified software
upgrades that we had not yet delivered, software version 8.0,
which we expect to deliver in the second quarter of fiscal 2009
and software version 8.1, which we expect to deliver in the
second half of fiscal 2009.
Service Revenue. Our service revenue is
derived from support and maintenance services, which we refer to
as post-contract customer support or PCS, for our EV-DO products
and other professional services, including training. Our support
and maintenance services consist of the repair or replacement of
defective hardware, around-the-clock help desk support,
technical support and the correction of bugs in our software.
Our annual support and maintenance fees are based on a
fixed-dollar amount associated with, or a percentage of the
initial sales price for, the applicable hardware and software
products. Included in the price for the product, we provide
maintenance and support during our product warranty period,
which is two years for our base station channel cards and one
year for our software products.
As discussed above, we defer all revenue, including revenue
related to maintenance and support services, until all specified
upgrades outstanding at the time of shipment have been
delivered. When VSOE of fair value for PCS does not exist, all
revenue related to product sales and software-only license fees,
including bundled PCS, is deferred until all specified software
upgrades outstanding at the time of shipment are delivered. At
the time of the delivery of all such upgrades, we recognize a
proportionate amount of all such revenue previously deferred
based on the portion of the applicable warranty period that has
elapsed at the time of such delivery. The unearned revenue is
recognized ratably over the remainder of the applicable warranty
period. When VSOE of fair value for PCS exists, we allocate a
portion of the initial product revenue and software-only license
fees to the bundled PCS based on the fees we charge for annual
PCS when sold separately. When all specified software upgrades
outstanding at the time of shipment are delivered, under the
residual method, we recognize the previously deferred product
revenue and software-only license fees, as well as the earned
PCS revenue, based on the portion of the applicable warranty
period that has elapsed. The unearned PCS revenue is recognized
ratably over the remainder the applicable warranty period.
Notwithstanding our inability to establish VSOE of fair value of
maintenance and support services to Nortel Networks under
SOP No. 97-2
for revenue recognition purposes, we are permitted to present
product revenue and service revenue separately on our
consolidated statements of operations based on historical
maintenance and support services renewal rates at the time of
sale.
Our support and maintenance arrangements for our EV-DO products
are typically renewable for one-year periods. We invoice our
support and maintenance fees in advance of the applicable
maintenance period, and we recognize revenue from maintenance
and support services ratably over the term of the applicable
maintenance and support period as services are delivered.
We also offer professional services such as deployment
optimization, network engineering and radio frequency deployment
planning, and provide training for network planners and
engineers. We generally recognize revenue for these services as
the services are performed.
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Product and service billings, which is a non-GAAP measure,
represents the amount invoiced for products and services that
are delivered and services that are to be delivered to our end
customers directly or through our OEM channels for which we
expect payment will be made in accordance with normal payment
terms. Software-only product sales under our OEM agreements are
invoiced monthly upon notification of sale by the OEM customer.
We present the product and service billings metric because we
believe it provides a consistent basis for understanding our
sales activity and our OEM channel sales from period to period.
We use product and service billings as a measure to assess our
business performance and as a key factor in our incentive
compensation program.
Wireless operators generally purchase communications equipment
in stages — driven first by coverage and later by
capacity. The initial stage involves deploying new services in
selected parts of their networks, often those geographic regions
with the highest concentration of customers. Wireless operators
then typically expand coverage throughout their network. Later
purchases are driven by a desire to expand capacity as the usage
of new services grows. Initial purchases usually occur around
the time that we and our OEM customers offer products that
substantially improve the performance of the network. Subsequent
purchases to expand the geographic coverage and capacity of an
operator’s wireless network are difficult to predict
because they are typically related to consumer demand for mobile
broadband services. As a result, our product and service
billings have fluctuated significantly from period to period and
we expect them to continue to fluctuate significantly from
period to period for the foreseeable future.
On January 14, 2009, Nortel Networks announced that it had
filed for bankruptcy protection. At the time of that filing, we
had outstanding invoices to Nortel Networks in the amount of
$21.8 million and approximately $12 million to
$13 million of unbilled amounts related to royalties earned
through January 13, 2009. The collection of these amounts
is subject to Nortel Networks’ bankruptcy proceedings. As a
result, we excluded the $21.8 million of pre-bankruptcy
filing outstanding invoices to Nortel Networks from billings for
the quarter and year ended December 28, 2008. Billed and
unbilled receivables as of the date of the Nortel Networks
filing will be accounted for on a cash basis as collected.
Our product and service billings were $140.6 million in
fiscal 2006, $142.2 million in fiscal 2007 and
$125.1 million in fiscal 2008. Product and service billings
to Nortel Networks were 94% of billings in fiscal 2006, 98% of
billings in fiscal 2007 and 93% of billings in fiscal 2008 .
The following table reconciles revenue to product and service
billings:
Product and service billings for invoiced shipments and software
license fees, and related maintenance services, as well as
non-recurring engineering and other development services for
which revenue is not recognized in the current period are
recorded as deferred revenue. Deferred revenue increases each
fiscal period by the amount of product and service billings that
are deferred in the period and decreases by the amount of
revenue recognized in the period. We classify deferred revenue
that we expect to recognize during the next twelve months as
current deferred revenue on our balance sheet and the remainder
as long-term deferred revenue. As of December 28, 2008,
$61.3 million of deferred revenue is included in current
liabilities and $5.6 million of deferred revenue is
included in long-term liabilities.
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Cost of product revenue consists primarily of:
Cost of service revenue consists primarily of salaries, benefits
and stock-based compensation for employees that provide support
services to customers and manage the supply chain.
In 2008, Qualcomm indicated to us that we may owe them royalties
of up to approximately $11 million for EV-DO products that
we sold to Nortel Networks beginning in 2007. See Note 16
to the financial statements contained in Part II,
Item 8 below, “Related Party Transactions.”
Although we believe we are not obligated to pay these royalties,
if we are required to pay additional royalties on past or future
sales, our cost of product revenue would increase.
Cost related to product and service billings, which is a
non-GAAP measure, includes the cost of products delivered and
invoiced to our customers, the cost directly attributable to the
sale of software-only products by our OEM partners and the cost
of services in the current period. Cost related to product
billings is recorded as deferred product and service cost until
such time as the related deferred revenue is recognized as
revenue. At the time of revenue recognition, we expense the
related deferred product and service costs in our income
statement as cost of revenue.
Cost related to product billings for invoiced shipments and
software-only license fees for which revenue is not recognized
in the current period is recorded as deferred product cost. In
addition, when the Company performs development services that
are essential to the functionality of the initial delivery of a
new product where the associated revenues have been deferred due
to the fact that they do not qualify as units of accounting
separate from the delivery of the software, the Company defers
direct and incremental development costs in accordance with
Statement of Financial Accounting Standards (SFAS) No. 91,
Accounting for Nonrefundable Fees and Costs Associated With
Originating or Acquiring Loans and Initial Direct Costs of
Leases. The costs deferred consist of employee compensation
and benefits for those employees directly involved with
performing the development, as well as other direct and
incremental costs. All costs incurred in excess of the related
revenues are expensed as incurred. Deferred product and service
costs increases each fiscal period by the amount of product and
service costs associated with product and service billings that
are deferred in the period and decreases by the amount of
product and service costs associated with revenue recognized in
the period. We classify deferred product cost that we expect to
recognize during the next twelve months as current deferred
product and service costs on our balance sheet. As of
December 28, 2008, $1.9 million of deferred product
cost was included in current assets and $1.3 million of
deferred service cost was included in long-term assets.
Our gross profit represents revenue recognized during the period
less related cost and is primarily attributable to OEM product
shipments and software license fees. Our gross profit varies
from period to period according to the mix of revenue from
hardware products, software products and services.
Our gross profit on billings, a non-GAAP measure, represents
product and service billings during the period less cost related
to product and service billings and is primarily attributable to
OEM product shipments and software
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license fees. Our gross profit on billings varies from period to
period according to our mix of billings from hardware products,
software products and services.
Due to the Nortel Networks’ bankruptcy filing on
January 14, 2009, we excluded the $21.8 million of
pre-bankruptcy
filing outstanding invoices to Nortel Networks from billings for
the quarter and year ended December 28, 2008. As a result,
our gross profit on billings was reduced by the same amount for
the quarter and year ended December 28, 2008.
Research and Development. Research and
development expense consists primarily of:
We expense all research and development cost as it is incurred.
Our research and development is performed by our engineering
personnel in the United States, India and the United Kingdom. We
intend to continue to invest significantly in our research and
development efforts, which we believe are essential to
maintaining our competitive position and the development of new
products for new markets. Accordingly, we expect research and
development expense to remain similar in amount through fiscal
2009.
Sales and Marketing. Sales and marketing
expense consists primarily of:
We expense sales commissions at the time they are earned, which
typically is when the associated product and service billings
are recorded or when a customer agreement is executed. We expect
sales and marketing expense to increase in amount and as a
percentage of product and service billings for the foreseeable
future as we continue to augment our sales and marketing
functions, primarily outside the United States.
General and Administrative. General and
administrative expense consists primarily of:
General and administrative expense has increased in amount and
as a percentage of product and service billings in 2008 and we
expect this trend to continue in 2009 as we invest in
infrastructure to support continued growth and incur additional
expenses related to being a publicly-traded company, including
additional audit and legal fees, costs of compliance with the
Sarbanes-Oxley Act of 2002, disclosure obligations and other
regulations, investor relations expense and insurance premiums.
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We adopted the requirements of SFAS No. 123(R) in the
first quarter of fiscal 2006. SFAS No. 123(R)
addresses all forms of shared-based payment awards, including
shares issued under employee stock purchase plans, stock
options, restricted stock and stock appreciation rights.
SFAS No. 123(R) requires us to expense share-based
payment awards with compensation cost for share-based payment
transactions measured at fair value.
Based on current stock option grants, we expect to recognize a
future expense for non-vested options of $14.9 million over
a weighted-average period of 2.73 years as of
December 28, 2008. We expect stock-based compensation
expense will increase for the foreseeable future as we expect to
continue to grant stock-based incentives to our employees.
Operating income on billings, which is a non-GAAP measure,
varies from period to period according to the amount of gross
profit on billings less operating expenses for the period.
Interest income, net, primarily relates to interest earned on
our cash, cash equivalents and investments. In fiscal 2008,
interest income was partially offset by interest expense from
our outstanding debt and non-cash interest expense relating to
our preferred stock warrants.
Customer collections and, consequently, cash flow from operating
activities are driven by sales transactions and related product
and service billings, rather than recognized revenues. We
believe cash flow from operating activities is a useful measure
of the performance of our business because, in contrast to
income statement profitability metrics that rely principally on
revenue, cash flow from operating activities captures the
contribution of changes in deferred revenue and deferred
charges. We present cash flow from operating activities because
it is a metric that management uses to track business
performance and, as such, is a key factor in our incentive
compensation program. In addition, management believes this
metric is frequently used by securities analysts, investors and
other interested parties in the evaluation of software companies
with significant deferred revenue balances.
Due to the Nortel Networks bankruptcy filing on January 14,
2009, we excluded the $21.8 million of pre-bankruptcy
filing outstanding invoices to Nortel Networks from accounts
receivable for the quarter and year ended December 28,
2008. In addition, we had approximately $12 million to
$13 million of unbilled amounts related to royalties earned
through January 13, 2009. The collection of these amounts
is subject to Nortel Networks’ bankruptcy proceedings, and
as a result, we can not determine when we may collect these
amounts, if at all. These amounts will be treated on a cash
basis, as collected. We expect cash flows for the first quarter
of 2009 to be negatively impacted by $34 million to
$35 million, representing the total amount of billed and
unbilled amounts due from Nortel Networks at the time of the
filing.
We had unrestricted cash and cash equivalents and investments
totaling $222.0 million as of December 30, 2007 and
$228.4 million as of December 28, 2008. Our existing
cash and cash equivalents and investments are invested primarily
in money market funds, high grade government sponsored
enterprises (AAA/A1+), high-grade commercial paper (A1+/P1), and
high grade corporate notes (A1/A+). We do not invest in any
types of asset backed securities such as those backed by
mortgages or auto loans. None of our investments have incurred
defaults or have been downgraded. We do not hold auction rate
securities. We hold unrestricted cash and cash equivalents for
working capital purposes. We do not enter into investments for
trading or speculative purposes. We have an investment policy
that guides our investing activities. Among other things, our
investment policy limits the concentration of our investments in
any one issuer (with the exception of investments in
U.S. Treasury and U.S. agency debt obligations and
SEC-registered money market funds) to no more than 10% of the
book value of
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our investment portfolio at the time of purchase. Currently, we
have investments in one issuer, the value of which equals
approximately 12% of our portfolio. We intend to reduce our
investment in this issuer as the securities mature to meet the
concentration limits of our investment policy. We are otherwise
in compliance with our investment policy. The primary objectives
of our investment activities are to preserve principal, maintain
proper liquidity to meet operating needs, maximize yields and
maintain proper fiduciary control over our investments.
Fiscal
Year
Our fiscal year ends on the Sunday closest to December 31.
Our fiscal quarters end on the Sunday that falls closest to the
last day of the third calendar month of the quarter.
Critical
Accounting Policies and Estimates
This management’s discussion and analysis of financial
condition and results of operations is based on our financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the United States.
The preparation of these financial statements requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. On an ongoing basis, management
evaluates its estimates and judgments, including those related
to revenue recognition. Management bases its estimates and
judgments on historical experience and on various other factors
that it believes to be reasonable under the circumstances, the
results of which form the basis for making judgments about the
carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
We regard an accounting estimate or assumption underlying our
financial statements as a “critical accounting
estimate” where (i) the nature of the estimate or
assumption is material due to the level of subjectivity and
judgment necessary to account for highly uncertain matters or
the susceptibility of such matters to change; and (ii) the
impact of the estimates and assumptions on financial condition
or operating performance is material.
We derive revenue from the licensing of software products and
software upgrades; the sale of hardware products, maintenance
and support services; and the sale of professional services,
including training. Our products incorporate software that is
more than incidental to the related hardware. Accordingly, we
recognize revenue in accordance with the American Institute of
Certified Public Accountants’ Statement of Position, or
SOP,
No. 97-2,
Software Revenue Recognition.
Under multiple-element arrangements where several different
products or services are sold together, we allocate revenue to
each element based on VSOE of fair value. We use the residual
method when fair value does not exist for one or more of the
delivered elements in a multiple-element arrangement. Under the
residual method, the fair value of the undelivered elements are
deferred and subsequently recognized when earned. For a
delivered item to be considered a separate element, the
undelivered items must not be essential to the functionality of
the delivered item and there must be VSOE of fair value for the
undelivered items in the arrangement. Fair value is generally
limited to the price charged when the we sell the same or
similar element separately or, when applicable, the stated
substantive renewal rate. If evidence of the fair value of one
or more undelivered elements does not exist, all revenue is
deferred and recognized when delivery of those elements occurs
or when fair value can be established. For example, in
situations where we sell a product during a period when we have
a commitment for the delivery or sale of a future specified
software upgrade, we defer revenue recognition until the
specified software upgrade is delivered.
Significant judgments in applying the accounting rules and
regulations to our business practices principally relate to the
timing and amount of revenue recognition given our current
concentration of revenues with one customer and our inability to
establish VSOE of fair value for specified software upgrades.
We sell our products primarily through OEM arrangements with
telecommunications infrastructure vendors such as Nortel
Networks. We have collaborated with our OEM customers on a best
efforts basis to develop initial
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product features and subsequent enhancements for the products
that are sold by a particular OEM to its wireless operator
customers. For each OEM customer, we expect to continue to
develop products based on our core technology that are
configured for the requirements of the OEM’s base stations
and its operator customers.
This business practice is common in the telecommunications
equipment industry and is necessitated by the long planning
cycles associated with wireless network deployments coupled with
rapid changes in technology. Large and complex wireless networks
support tens of millions of subscribers and it is critical that
any changes or upgrades be planned well in advance to ensure
that there are no service disruptions. The evolution of our
infrastructure technology therefore must be planned, implemented
and integrated with the wireless operator’s plans for
deploying new applications and services and any equipment or
technology provided by other vendors.
Given the nature of our business, the majority of our sales are
generated through multiple-element arrangements comprised of a
combination of product, maintenance and support services and,
importantly, specified product upgrades. We have established a
business practice of negotiating with OEMs the pricing for
future purchases of new product releases and specified software
upgrades. We expect that we will release one or more optional
specified upgrades annually. To determine whether these optional
future purchases are elements of current purchase transactions,
we assess whether such new products or specified upgrades will
be offered to the OEM customer at a price that represents a
significant and incremental discount to current purchases.
Because we sell uniquely configured products through each OEM
customer, we do not maintain a list price for our products and
specified software upgrades. Additionally, as we do not sell
these products and upgrades to more than one customer, we are
unable to establish VSOE of fair value for these products and
upgrades. Consequently, we are unable to determine if the
license fees we charge for the optional specified upgrades
include a significant and incremental discount. As such, we
defer all revenue related to current product sales,
software-only license fees, maintenance and support services and
professional services until all specified upgrades committed at
the time of shipment have been delivered. For example, we
recognize deferred revenue from sales to an OEM customer only
when we deliver a specified upgrade that we had previously
committed. However, when we commit to an additional upgrade
before we have delivered a previously committed upgrade, we
defer all revenue from product sales after the date of such
commitment until we deliver the additional upgrade. Any revenue
that we have deferred prior to the additional commitment is
recognized after the previously committed upgrade is delivered.
If there are no commitments outstanding for specified upgrades,
we recognize revenue when all of the following have occurred:
(1) delivery (FOB origin), provided that there are no
uncertainties regarding customer acceptance; (2) there is
persuasive evidence of an arrangement; (3) the fee is fixed
or determinable; and (4) collection of the related
receivable is reasonably assured, as long as all other revenue
recognition criteria have been met. If there are uncertainties
regarding customer acceptance, we recognize revenue and related
cost of revenue when those uncertainties are resolved. Any
adjustments to software license fees are recognized when
reported to us by an OEM customer.
For arrangements where we receive initial licensing fees or
customization fees for new products under development, we defer
recognition of these fees until the final product has been
delivered and accepted, and then we recognize the fees over the
expected customer relationship period. Revenue from
pre-production units is deferred and recognized once the final
product has been delivered and accepted, provided that the other
criteria for revenue recognition are met, including but not
limited to the establishment of VSOE of fair value for
post-contract support. If VSOE of fair value cannot be
established for undelivered elements, we defer all revenues
until VSOE of fair value can be established or the undelivered
element is delivered. If the only remaining undelivered element
is post-contract support, we recognize revenue ratably over the
contractual post-contract support period.
For arrangements that include annual volume commitments and
pricing levels, where such discounts are significant and
incremental and where the maximum discount to be provided can
not be quantified prior to the expiration of the arrangement, we
recognize revenue, provided that delivery and acceptance has
occurred and provided that no other commitments such as
specified upgrades are outstanding, based on the lowest pricing
level stated in the arrangement. Any amounts invoiced in excess
of the lowest pricing level are deferred and recognized ratably
over the remaining discount period, which typically represents
the greater of the PCS period or the remaining contractual
period.
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For our direct sales to end user customers, which have not been
material to date, we recognize product revenue upon delivery
provided that all other revenue recognition criteria have been
met.
Our support and maintenance services consist of the repair or
replacement of defective hardware, around-the-clock help desk
support, technical support and the correction of bugs in our
software. Our annual support and maintenance fees are based on a
percentage of the initial sales or list price of the applicable
hardware and software products and may include a fixed amount
for help desk services. Included in the price of the product, we
provide maintenance and support during the product warranty
period, which is typically one year. As discussed above, we
defer all revenue, including revenue related to maintenance and
support services (“post-contract customer support” or
“PCS”), until all specified upgrades outstanding at
the time of shipment have been delivered. In connection with an
amendment to the Company’s OEM arrangement with Nortel
Network in 2007, we can no longer assert VSOE of fair value for
PCS to Nortel Networks. When VSOE of fair value for PCS cannot
be established, all revenue related to product sales and
software-only license fees, including bundled PCS, is deferred
until all specified software upgrades outstanding at the time of
shipment are delivered. At the time of the delivery of all such
upgrades, we recognize a proportionate amount of all such
revenue previously deferred based on the portion of the
applicable warranty period that has elapsed as of the time of
such delivery. The unearned revenue is recognized ratably over
the remainder of the applicable warranty period. When VSOE of
fair value for PCS can be established, we allocate a portion of
the initial product revenue and software-only license fees to
the bundled PCS based on the fees we charge for annual PCS when
sold separately. When all specified software upgrades
outstanding at the time of shipment are delivered, under the
residual method, we recognize the previously deferred product
revenue and software-only license fees, as well as the earned
PCS revenue, based on the portion of the applicable warranty
period that has elapsed. The unearned PCS revenue is recognized
ratably over the remainder the applicable warranty period.
Notwithstanding our inability to establish VSOE of fair value of
maintenance and support services to Nortel Networks under
SOP No. 97-2
for revenue recognition purposes, we present product revenue and
service revenue separately on our consolidated statements of
income based on historical maintenance and support services
renewal rates at the time of sale.
For maintenance and service renewals, we recognize revenue for
such services ratably over the service period as services are
delivered.
We provide professional services for deployment optimization,
network engineering and radio frequency deployment planning, and
provides training for network planners and engineers. We
generally recognize revenue for these services as the services
are performed as we have deemed such services not essential to
the functionality of our products. We have not issued any
refunds on products sold. As such, no provisions have been
recorded against revenue or related receivables for potential
refunds.
In addition, certain of our contracts include guarantees
regarding failure rates. Historically, the we have not incurred
substantial costs relating to these guarantees and we currently
expense such costs as they are incurred. We review these costs
on a regular basis as actual experience and other information
becomes available; and should they become more substantial, we
would accrue an estimated exposure and consider the potential
related effects of the timing of recording revenue on our
license arrangements. We have not accrued any costs related to
these warranties in the accompanying consolidated financial
statements.
In accordance with EITF Issue
No. 00-10,
Accounting for Shipping and Handling Fees, we classify
the reimbursement by customers of shipping and handling costs as
revenue and the associated cost as cost of revenue. We record
reimbursable out-of-pocket expenses in both product and services
revenues and as a direct cost of product and services in
accordance with EITF Issue
No. 01-14,
Income Statement Characterization of Reimbursements Received
for Out-of-Pocket Expenses Incurred
(“EITF 01-14”).
For fiscal 2006, 2007 and 2008, shipping and handling and
reimbursable out-of-pocket expense were not material.
We have neither issued nor do we anticipate issuing any refunds
on products sold. As such, no provisions have been recorded
against deferred revenues, revenue or any related receivables
for potential refunds.
We anticipate that the revenue recognition related to the our
fixed-mobile convergence products will be complex given that a
number of our current arrangements for the development and
supply of these products contain significant customization
services, volume discounts, specified upgrades and multiple
elements for new service
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offerings for which vendor-specific evidence of fair value does
not currently exist. To date, there have been no material
revenues recognized with respect to these products.
We determine the appropriate categorization of investments in
securities at the time of purchase. As of December 30, 2007
and December 28, 2008, our investments were categorized as
held-to-maturity and are presented at their amortized cost. We
classify securities on our balance sheet as short-term or
long-term based on the date we reasonably expect the securities
to mature or liquidate.
As of December 28, 2008, we held 3 securities in an
unrealized loss position totaling less than $12,000. The
unrealized losses on these individual securities were less than
1% of amortized cost and represented less than 1% of total
amortized cost of all investments. Given the creditworthiness of
the issuers of the securities that are in an unrealized loss
position at December 28, 2008, we concluded there is no
other-than-temporary impairment on any of these investments.
Through the year ended January 1, 2006, we accounted for
our stock-based awards to employees using the intrinsic value
method prescribed in Accounting Principles Board, or APB,
Opinion No. 25, Accounting for Stock Issued to
Employees, and elected the disclosure-only requirements of
SFAS No. 123, Accounting for Stock-Based
Compensation and SFAS No. 148, Accounting for
Stock-Based Compensation — Transition and
Disclosure — an Amendment of FASB Statement
No. 123. Under the intrinsic value method, compensation
expense is measured on the date of the grant as the difference
between the deemed fair value of our common stock and the
exercise or purchase price multiplied by the number of stock
options or restricted stock awards granted. We followed the
provisions of Emerging Issues Task Force, or EITF,
No. 96-18,
Accounting for Equity Instruments that are Issued to Other
than Employees for Acquiring, or in Conjunction with Selling,
Goods and Services, to account for grants made to
non-employees.
In December 2004, the FASB issued SFAS No. 123
(revised 2004), Share-Based Payment, or
SFAS No. 123(R), which is a revision of
SFAS No. 123. SFAS No. 123(R) requires all
share-based payments to employees, including grants of employee
stock options, to be recognized in the income statement based on
their estimated fair values. In accordance with
SFAS No. 123(R), we recognize the compensation cost of
share-based awards on a straight-line basis over the vesting
period of the award, which is generally four to five years, and
have elected to use the Black-Scholes option pricing model to
determine fair value. SFAS No. 123(R) eliminated the
alternative of applying the intrinsic value method of APB
Opinion No. 25 to stock compensation awards. We adopted the
provisions of SFAS No. 123(R) on the first day of
fiscal 2006 using the prospective-transition method. As such, we
will continue to apply APB Opinion No. 25 in future periods
to equity awards granted prior to the adoption of
SFAS No. 123(R).
As there was no public market for our common stock prior to
July 19, 2007, the date of our IPO, we determined the
volatility percentage used in calculating the fair value of
stock options it granted based on an analysis of the historical
stock price data for a peer group of companies that issued
options with substantially similar terms. The expected
volatility percentage used in determining the fair value of
stock options granted in the year ended December 30, 2007
was between 67% and 78% and in the year ended December 28,
2008 was between 54% and 58%. The expected life of options was
determined utilizing the “simplified” method as
prescribed by the SEC’s Staff Accounting Bulletin
No. 107, Share-Based Payments and SFAS 123(R).
The expected life of options granted during the year ended
December 30, 2007 was between 6.25 and 6.5 years and
during the year ended December 28, 2008 was
6.25 years. For the years ended December 30, 2007 and
December 28, 2008, the weighted-average risk free interest
rates used were 4.54% and 2.01%-3.6%, respectively. The
risk-free interest rate is based on a weighted average of a
5-year and
7-year
treasury instrument whose term is consistent with the expected
life of the stock options. Although we paid a one-time special
cash dividend in April 2007, the expected dividend yield is
assumed to be zero as we do not currently anticipate paying cash
dividends on our common stock in the future. The weighted
average grant-date fair value of options granted during fiscal
2007 and fiscal 2008 was $3.71 per share and $5.32 per share,
respectively. In addition, SFAS No. 123(R) requires
companies to utilize an estimated forfeiture rate when
calculating the expense for the period, whereas
SFAS No. 123 permitted companies to record forfeitures
based on
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actual forfeitures, which was our historical policy under
SFAS No. 123. As a result, we applied an estimated
forfeiture rate of 3.0% for the year ended December 30,
2007 and between 3% and 6% for the year ended December 28,
2008 in determining the expense recorded in our consolidated
statements of income. These rates were derived by review of our
historical forfeitures since 2000.
For the years ended December 30, 2007 and December 28,
2008, we recorded expenses of $2,996 and $4,844, respectively,
in connection with share-based awards and related tax benefit of
approximately $165 and $704 for fiscal 2007 and 2008,
respectively. As of December 28, 2008, future expense for
non-vested stock options of $14,853 was expected to be
recognized over a weighted-average period of 2.73 years.
The adoption of SFAS No. 123(R) had no effect on cash
flow for any period presented.
We are subject to income taxes in both the United States and
foreign jurisdictions, and we use estimates in determining our
provision for income taxes. We account for income taxes under
the provisions of SFAS No. 109, Accounting for
Income Taxes, or SFAS No. 109, which requires the
recognition of deferred income tax assets and liabilities for
expected future tax consequences of events that have been
recognized in our financial statements or tax returns. Under
SFAS No. 109, we determine the deferred tax assets and
liabilities based upon the difference between the financial
statements and the tax basis of assets and liabilities using
enacted tax rates in effect for the year in which the
differences are expected to reverse. We must then periodically
assess the likelihood that our deferred tax assets will be
recovered from our future taxable income, and, to the extent we
believe that it is more likely than not our deferred tax assets
will not be recovered, we must establish a valuation allowance
against our deferred tax assets.
In July 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, or
FIN No. 48, which is an interpretation of
SFAS No. 109. FIN No. 48 creates a single
model to address uncertainty in tax positions and clarifies the
accounting for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with
SFAS No. 109 by prescribing the minimum threshold a
tax position is required to meet before being recognized in an
enterprise’s financial statements. We adopted the
provisions of FIN No. 48 on January 1, 2007. We
did not recognize any liability for unrecognized tax benefits as
a result of adopting FIN No. 48 as of January 1,
2007. Our FIN No. 48 liability was $4.7 million at
December 30, 2007 and $5.7 million, including interest
at December 28, 2008. We did not recognize any interest or
penalties in the years ended January 1, 2006,
December 31, 2006 and December 30, 2007. During the
year ended December 28, 2008, we recognized approximately
$184 of interest and $0 in penalties as a component of income
tax expense.
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The following table sets forth our results of operations for the
periods shown:
AIRVANA,
INC.
CONSOLIDATED
STATEMENTS OF INCOME
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Comparison
of Fiscal 2007 and Fiscal 2008
Revenue in fiscal 2008 was derived principally from the
recognition of $61.3 million of software license and
maintenance revenues related to the delivery in June 2008 of our
June 2007 software release version 6.0 specified upgrade to
Nortel Networks and $60.3 million of software license and
maintenance revenues related to the delivery in November 2008 of
our December 2007 software release version 7.0 specified upgrade
to Nortel Networks. The revenue related to our June 2007
specified upgrade consisted of billings from June 2007 through
November 2007 and the revenue related to our December 2007
specified upgrade consisted of billings from December 2007
through June 2008. Revenue in fiscal 2007 was derived
principally from product shipments and sales of software
licenses, maintenance and support related to our April 2005
specified upgrade and our September 2006 specified upgrade.
The revenue related to our April 2005 specified upgrade
consisted of billings from April 2005 through August 2006 and
the revenue related to our September 2006 specified upgrade
consisted of billings from September 2006 through May 2007. We
recognized this revenue as a result of the delivery of specified
upgrades in April 2007 and November 2007.
The decrease in product and service billings in fiscal 2008 was
due primarily to the exclusion of $21.8 million of
outstanding invoices to Nortel Networks that are subject to
Nortel Networks’ bankruptcy proceedings. These invoices are
being accounted for on a cash basis.
The decrease in cost of revenue in fiscal 2008 was due primarily
to the transition of manufacturing Rev A channel cards to Nortel
Networks in fiscal 2006 as cost of revenue in fiscal 2007
included hardware costs for channel cards shipped during 2006.
The increase in cost related to product and service billings was
due primarily to deferred costs associated with initial sales of
prototype units and development costs of our FMC products.
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The decrease in gross profit was due primarily to a decrease in
revenue of $167.6 million to $138.2 million in fiscal
2008, partially offset by a decrease in cost of revenue of
$30.4 million to $11.5 million in fiscal 2008. We
expect gross profit on our revenue to continue to fluctuate
significantly in the future based on the time period between
commitments for future software upgrades and the volume of sales
in those time intervals.
Gross profit on Billings decreased primarily due to a decrease
in product and service billings of $17.1 million to
$125.1 million in fiscal 2008 due primarily to the
exclusion of $21.8 million of outstanding invoices to
Nortel Networks that are subject to Nortel Networks’
bankruptcy proceedings and an increase in cost related to
product and service billings of $4.9 million to
$13.6 million in fiscal 2008.
Research and Development. The decrease in
research and development expense in fiscal 2008 was due
primarily to a decrease in outside service expense and
development tools expense related to non-recurring engineering
costs incurred in fiscal 2007 and less reliance on outside
services for the outsourcing of new product development in
fiscal 2008, partially offset by an increase in temporary
staffing related to the assistance of ongoing development
projects in fiscal 2008 and an increase in stock compensation
expense related to additional stock options granted in fiscal
2008. Outside service expense decreased by $2.6 million to
$3.1 million in fiscal 2008. Development tools expense
decreased by $1.5 million to $2.4 million in fiscal
2008. Temporary staffing expense increased by $0.8 million
to $3.6 million in fiscal 2008. Stock compensation expense
increased by $1.1 million to $3.0 million in fiscal
2008.
Sales and Marketing. The increase in sales and
marketing expense in fiscal 2008 was primarily due to an
increase in salary and benefit expense associated with an
increase in the number of sales, marketing and customer support
employees to support a larger installed base and expansion of
our international sales offices, and to a lesser extent an
increase in travel expense associated with our sales, marketing
and customer support activities. Salary and benefit expense
associated with the increase in headcount increased by
$2.6 million to $13.4 million in fiscal 2008.
General and Administrative. The increase in
general and administrative expense in fiscal 2008 was due to an
increase in professional service fees associated with legal,
audit and tax consulting services, additional incremental
expenses associated with being a public company such as higher
premiums for directors and officers insurance and costs of
Sarbanes-Oxley compliance initiatives and an increase in the
number of general and administrative employees to support our
growth. Legal, audit and tax consulting fees, including for our
Sarbanes-Oxley
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compliance initiatives, increased by $0.6 million to
$2.3 million in fiscal 2008. Directors and officers
insurance premiums increased by $0.4 million to
$1.1 million in fiscal 2008 as 2008 was the first full year
we were a public company. Salary and benefit expense increased
by $0.6 million to $5.0 million in fiscal 2008.
In-Process Research and Development. In April
2007, we acquired 3Way Networks, a
United Kingdom-based
provider of personal base stations and solutions for the UMTS
market. We accounted for this acquisition under the purchase
method of accounting as prescribed by SFAS 141, Business
Combinations. In connection with this acquisition, we
recorded $2.3 million of in-process research and
development expense in fiscal 2007.
The decrease in operating profit on billings in fiscal 2008 was
due primarily to the decrease in our gross profit on billings,
due primarily to the exclusion of $21.8 million of
outstanding invoices to Nortel Networks that are subject to
Nortel Networks’ bankruptcy proceedings coupled with
operating expenses in fiscal 2008 remaining relatively flat
compared to fiscal 2007.
Interest Income, Net. Interest income, net,
consists primarily of interest generated from the investment of
our cash balances. The decrease in interest income of
$2.6 million to $7.2 million in fiscal 2008 was due
primarily to lower interest rates, partially offset by higher
average cash and investment balances in fiscal 2008.
Income Tax Expense. Our effective tax rate for
fiscal 2008 was 39.5% of pre-tax income. For fiscal 2008, our
effective tax rate consisted primarily of profits in the United
States taxed at the federal statutory rate, losses from foreign
operations for which no tax benefits can be recognized, and
increases in FIN No. 48 unrecognized tax benefits. This tax
is reduced by the benefit from federal research credits and
manufacturing deductions. Our effective tax rate for fiscal 2007
was 12.5% of pre-tax income. For fiscal 2007, our effective tax
rate consisted primarily of profits in the United States taxed
at the federal statutory rate, losses from foreign operations
for which no tax benefits can be recognized, and FIN No. 48
unrecognized tax benefits. This tax was offset by federal
research credits and manufacturing deductions and the
recognition of deferred tax assets for which a valuation
allowance had previously been recorded.
When our FMC products begin to ship in the United States in
significant volumes, our effective state tax rate may increase
and we may realize benefits from our state tax credit
carryforwards.
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Comparison
of Fiscal 2006 and Fiscal 2007
Revenue in fiscal 2007 was derived principally from product
shipments and sales of software licenses, maintenance and
support related to our April 2005 specified upgrade and our
September 2006 specified upgrade. The revenue related to our
April 2005 specified upgrade consisted of billings from April
2005 through August 2006 and the revenue related to our
September 2006 specified upgrade consisted of billings from
September 2006 through May 2007. We recognized this revenue as a
result of the delivery of specified upgrades in April 2007 and
November 2007. The revenue recognized in fiscal 2006 was derived
principally from product shipments and sales of software
licenses, maintenance and support that were billed and deferred
from fiscal 2002 through the first quarter of fiscal 2005. We
recognized this revenue as a result of the delivery of a
specified upgrade in March 2006.
The slight increase in product and service billings in fiscal
2007 was due primarily to sales of Rev A software upgrades,
offset by decreased sales of Rev A OEM channel cards as
operators completed their initial rollouts.
Cost of product revenue decreased by $4.4 million to
$34.8 million in fiscal 2007. Cost of service revenue
increased by $1.0 million to $7.1 million in fiscal
2007. The decrease in cost of product revenue was due primarily
to the transition of manufacturing for Rev A channel cards to
Nortel Networks in fiscal 2006. The increase in cost of service
revenue was due primarily to an increase in customer service
headcount to support a larger installed base of product.
The decrease in cost related to product and service billings was
due primarily to the transition in fiscal 2006 to software-only
sales for Rev A capable OEM channel cards manufactured by Nortel
Networks from sales of Rev 0 channel cards, which included both
hardware we manufactured and software we developed.
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Gross profit from product revenue increased by
$137.8 million to a gross profit of $244.3 million in
fiscal 2007 and gross profit from service revenue increased by
$1.1 million to a gross profit of $19.5 million in
fiscal 2007.
The increase in gross profit was due primarily to a combination
of higher revenues in 2007 related to the completion and
delivery of two significant specified software release upgrades
in 2007 and lower costs of revenue due to the transition of
manufacturing for Rev A Channel cards to Nortel Networks. We
expect gross profit on our revenue to continue to fluctuate
significantly in the future based on the time period between
commitments for future software upgrades and the volume of sales
in those time intervals.
The increase in gross profit on Billings was due primarily to a
small increase in product and service billings from sales of Rev
A software upgrades offset by decreased sales of Rev A OEM
channel cards and a decrease in cost of product and service
billings from the transition in fiscal 2006 to software-only
sales for Rev A capable OEM channel cards manufactured by Nortel
Networks from sales of Rev 0 channel cards, which included both
hardware we manufactured and software we developed.
Research and Development. The increase in
research and development expense was due primarily to an
increase in the number of research and development employees,
and to a lesser extent an increase in spending on development
tools, lab supplies and equipment to support new product
development programs. Salary and benefit expense associated with
the increase in headcount increased by $12.5 million to
$53.0 million in fiscal 2007.
Sales and Marketing. The increase in sales and
marketing expense was primarily due to an increase in salary and
benefit expense associated with an increase in the number of
sales, marketing and customer support employees to support a
larger installed base and expansion of our international sales
offices, and to a lesser extent an increase in travel expense
associated with our sales, marketing and customer support
activities. Salary and benefit expense associated with the
increase in headcount increased by $3.5 million to
$10.8 million in fiscal 2007.
General and Administrative. The increase in
general and administrative expense was due to an increase in the
number of general and administrative employees and increased
professional service fees associated with legal, audit and tax
consulting services, an increase in the number of general and
administrative employees to support our growth, and additional
incremental expenses associated with being a public company such
as directors and officers
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insurance. Legal, audit and tax consulting fees increased by
$0.4 million to $1.7 million in fiscal 2007. Salary
and benefit expense increased by $1.2 million to
$4.3 million in fiscal 2007.
In-Process Research and Development. In April
2007, we acquired 3Way Networks Limited, a
United Kingdom-based provider of personal base stations and
solutions for the UMTS market. We accounted for this acquisition
under the purchase method of accounting as prescribed by
SFAS 141, Business Combinations. In connection with
this acquisition, we recorded $2.3 million of in-process
research and development expense.
The increase in operating profit was due primarily to a
combination of higher revenues in 2007 related to the completion
and delivery of two significant specified software release
upgrades in 2007 and lower costs of product revenue due to the
transition of manufacturing for Rev A Channel cards to Nortel
Networks offset by an increase in cost of service revenue due
primarily to an increase in customer service headcount to
support a larger installed base of product.
The decrease in operating profit on Billings was due primarily
to a small increase in gross profit on Billings of
$5.4 million offset by an increase in operating expenses of
$30.6 million to $98.5 million in fiscal 2007.
Interest Income, Net. Interest income, net,
consists of interest generated from the investment of our cash
balances, which was offset in fiscal 2007 by non-cash interest
expense relating to our preferred stock warrants, which
converted to common stock warrants upon the completion of our
IPO in July 2007. The increase in interest income from
$6.6 million in fiscal 2006 to $9.9 million in fiscal
2007 was due primarily to greater average cash and investment
balances and higher interest rates.
Income Tax Expense. Our effective tax rate for
fiscal 2007 was 12.5% of pre-tax income. For fiscal 2007, our
effective tax rate consisted primarily of profits in the United
States taxed at the federal statutory rate, losses from foreign
operations for which no tax benefits can be recognized, and FIN
No. 48 unrecognized tax benefits. This tax was offset by
federal research credits and manufacturing deductions and the
recognition of deferred tax assets for which a valuation
allowance had previously been recorded. For fiscal 2006, we
generated a net tax benefit of $10,742, consisting primarily of
profits in the United States taxed at the federal statutory rate
reduced by federal research credits and the recognition of
deferred tax assets for which a valuation allowance had
previously been recorded.
As of December 28, 2008, our principal sources of liquidity
were cash, cash equivalents and investments of
$228.4 million. Our existing cash and cash equivalents and
investments are invested primarily in money market funds, high
grade government sponsored enterprises (AAA/A1+), high-grade
commercial paper (A1+/P1) and high grade corporate notes
(A1/A+). We do not invest in any types of asset backed
securities such as those backed by mortgages or auto loans. None
of our investments have incurred defaults or have been
downgraded. We do not hold auction rate securities. We hold
unrestricted cash and cash equivalents for working capital
purposes. We do not enter into investments for trading or
speculative purposes. We have an investment policy that guides
our investing activities. Among other things, our investment
policy limits the concentration of our investments in any one
issuer
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(with the exception of investments in U.S. Treasury and
U.S. agency debt obligations and SEC-registered money
market funds) to no more than 10% of the book value of our
investment portfolio at the time of purchase. Currently, we have
investments in one issuer, the value of which equals
approximately 12% of our portfolio. We intend to reduce our
investment in this issuer as the securities mature to meet the
concentration limits of our investment policy. We are otherwise
in compliance with our investment policy. The primary objectives
of our investment activities are to preserve principal, maintain
proper liquidity to meet operating needs, maximize yields and
maintain proper fiduciary control over our investments.
As of December 28, 2008, we did not have any lines of
credit or other similar source of liquidity.
On January 14, 2009, Nortel Networks announced that it and
certain of its affiliates had filed for bankruptcy protection.
At the time of that filing, we had outstanding invoices to
Nortel Networks in the amount of $21.8 million and
approximately $12 million to $13 million of unbilled
amounts related to royalties earned through January 13,
2009. The collection of these amounts is subject to Nortel
Networks’ bankruptcy proceedings and it is likely that a
portion or all of these amounts will not be collected. Had
Nortel Networks not filed for bankruptcy protection, these
amounts would likely have been paid in due course in the first
quarter of 2009. We expect cash flows for the first quarter of
2009 to be negatively impacted by $34 million to
$35 million, representing the total amount of billed and
unbilled invoices due from Nortel Networks at the time of the
filing. In connection with the announcement, Nortel Networks
informed us that it will continue to purchase goods and services
from us and that we are a long term partner and a key supplier
to Nortel Networks. Purchases subsequent to the filing date will
be under the terms of Nortel Networks’ current agreement
with us. We intend to work with Nortel Networks to assume its
agreement with us. If Nortel Networks assumes its agreement with
us, Nortel Networks would be required to become current in all
of its outstanding obligations to us, including obligations
outstanding prior to the filing date. If the agreement is not
assumed, all outstanding obligations (billed and unbilled
invoices) will be subject to discharge and we likely will not be
able to collect these receivables in full.
During fiscal 2006, we funded our operations primarily with cash
flow from operating activities. During fiscal 2007, we funded
our operations primarily with cash flow from operating
activities as well as from proceeds from our initial public
offering of $51.0 million. In fiscal 2008, we funded our
operations primarily with cash flow from operating activities.
Cash flow from operating activities is generally derived from
net income, fluctuations of current assets and liabilities and
to a lesser extent non-cash expenses.
In fiscal 2006, our net income of $74.1 million exceeded
our cash flow from operating activities by $49.0 million
primarily as a result of a decrease in deferred revenue of
$29.7 million and increases in accounts receivable of
$38.5 million associated with a significant increase in
billings in the fourth quarter and prepaid taxes of
$13.6 million, partially offset by a reduction in deferred
charges of $32.8 million. In fiscal 2007, our net income of
$153.3 million exceeded our cash flow from operating
activities by $61.5 million primarily as a result of a
decrease in deferred revenue of $163.6 million, partially
offset by a decrease in deferred product cost of
$33.2 million, and a decrease in accounts receivable of
$31.9 million associated with the collection of billings
made in the fourth quarter of fiscal 2006, and an increase in
accrued income taxes of $19.7 million. In fiscal 2008, our
net income of $21.3 million exceeded our $12.6 million
in cash flow from operating activities by $8.7 million
primarily as a result of a decrease in accrued income taxes of
$10.0 million and a decrease in deferred revenue of
$13.1 million, partially offset by a decrease in accounts
receivable of $10.8 million associated with collection of
billings made in the fourth quarter of fiscal 2008 and
$4.8 million of stock compensation expense. Our ability to
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continue to generate cash from operations will depend in large
part on the volume of product and service billings, our ability
to collect accounts receivable, the level of our operating
expenses, and to some extent, our ability to collect on
approximately $34 million to $35 million of billed and
unbilled invoices due from Nortel Networks that are subject to
Nortel Networks’ bankruptcy proceedings.
The timing of tax payments also impacts cash flow from operating
activities from period to period. Tax payments do not
necessarily match pretax income or loss in a given period due to
permanent and temporary differences in taxable income including
deferred revenue and deferred charges. We paid $6.2 million
in fiscal 2006 in federal, state and foreign taxes. We received
tax refunds of $9.6 million in fiscal 2007. We paid
$24.7 million in fiscal 2008 in federal, state and foreign
taxes. We expect to make a tax payment of approximately
$1.8 million in the first quarter of fiscal 2009 relating
to fiscal 2008 profits.
Cash provided by investing activities was $40.2 million
during fiscal 2006. Cash used in investing activities was
$113.7 million during fiscal 2007 and $17.2 million
during fiscal 2008. During fiscal 2006, cash flow from investing
activities consisted primarily of $136.9 million of
purchases and $179.8 million of maturities of investments
and purchases of property and equipment of $2.6 million. In
fiscal 2007, cash flow used in investing activities consisted
primarily of $367.9 million of purchases and
$268.4 million of maturities of investments, purchases of
property and equipment of $3.2 million, as well as
$10.9 million related to the purchase of 3Way Networks, net
of cash acquired. During fiscal 2008, cash flow used in
investing activities consisted primarily of $341.6 million
of purchases and $309.6 million of maturities of
investments, sale of investments of $16.6 million and
purchases of property and equipment of $1.8 million.
Cash provided by financing activities was $1.6 million in
fiscal 2006. Cash used in financing activities was
$21.4 million during fiscal 2007 and $8.6 million
during fiscal 2008. Cash flow from financing activities in
fiscal 2006 consisted primarily of proceeds from exercise of
stock options, the sale of restricted common stock and preferred
stock and the receipt of leasehold improvement reimbursements
from our landlord. Cash used in financing activities in fiscal
2007 consisted primarily of payment of a cash dividend of
$72.7 million and repayment of $0.5 million of
long-term debt partially offset by net proceeds of
$51.4 million from our IPO and proceeds of
$0.6 million from the exercise of stock options. Cash used
in financing activities in fiscal 2008 consisted primarily of
repurchases of $13.3 million of our common stock, proceeds
of $2.6 million from the exercise of stock options and a
$2.3 million tax benefit related to the exercise of stock
options.
We believe our existing cash, cash equivalents and investments
and our cash flows from operating activities will be sufficient
to meet our anticipated cash needs for at least one operating
cycle (12 months). Our future working capital requirements
will depend on many factors, including the rate of our product
and service billings growth, the introduction and market
acceptance of new products, the expansion of our sales and
marketing and research and development activities, and the
timing of our revenue recognition and related income tax
payments. To the extent that our cash, cash equivalents and
investments and cash from operating activities are insufficient
to fund our future activities, we may be required to raise
additional funds through bank credit arrangements or public or
private equity or debt financings. We also may need to raise
additional funds in the event we determine in the future to
effect one or more acquisitions of businesses, technologies or
products. In the event we require additional cash resources, we
may not be able to obtain bank credit arrangements or effect any
equity or debt financing on terms acceptable to us or at all.
In April 2007, we paid a special cash dividend of $1.333 per
share of common stock from our existing cash balance. The
payment to holders of common stock and redeemable convertible
preferred stock, as converted, totaled $72.7 million. We
have not declared any other cash dividends on our capital stock
and do not expect to declare any cash dividends for the
foreseeable future. We intend to use future cash flow from
operating activities, if any, in the operation and expansion of
our business. Declaration of future cash dividends, if any, will
be at the discretion of our board of directors after taking into
account various factors, including our financial condition,
operating results, current and anticipated cash needs and plans
for expansion, and restrictions imposed by lenders, if any.
During fiscal 2008, we repurchased 2.7 million shares of
our common stock for approximately $13.3 million under our
$20 million share repurchase program approved by our Board
of Directors in July 2008. As of December 28, 2008, there
was $6.7 million remaining under the program. In February
2009, our Board of
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Directors approved a second stock repurchase program authorizing
us to purchase up to an additional $20 million of our
common stock following the completion of our initial program.
The following table discloses aggregate information about our
contractual obligations and the periods in which payments are
due as of December 28, 2008.
We may be required to make cash outlays related to our
unrecognized tax benefits. However, due to the uncertainty of
the timing of future cash flows associated with our unrecognized
tax benefits, we are unable to make reasonably reliable
estimates of the period of cash settlement, if any, with the
respective taxing authorities. Accordingly, unrecognized tax
benefits of $5.7 million, including interest, as of
December 28, 2008 have been excluded from the contractual
obligations table above. For further information on unrecognized
tax benefits, see Note 7 to the consolidated financial
statements included in this Report.
We do not engage in off-balance sheet financing arrangements. We
do not have any interest in entities referred to as variable
interest entities, which includes special purposes entities and
other structured finance entities.
Our operating expenses and cash flows are subject to
fluctuations due to changes in foreign currency exchange rates,
particularly changes in the British pound and Indian rupee, the
currencies in which our operating obligations in Cambridge,
United Kingdom and Bangalore, India, respectively, are paid.
Through 2008, we have not entered into any hedging contracts
although we may do so in the future. Fluctuations in currency
exchange rates could affect our business in the future. In the
event of a hypothetical ten percent adverse movement in foreign
currency exchange rates our losses of future earnings and assets
as well as our loss of cash flows would be immaterial; however,
actual effects might differ materially from this hypothetical
analysis.
We had unrestricted cash and cash equivalents and investments
totaling $222.0 million and $228.4 million at
December 30, 2007 and December 28, 2008, respectively.
Our existing cash and cash equivalents and investments are
invested primarily in money market funds, high grade government
sponsored enterprises (AAA/A1+), high-grade commercial paper
(A1+/P1) and high grade corporate notes (A1/A+). We do not
invest in any types of asset backed securities such as those
backed by mortgages or auto loans. None of our investments have
incurred defaults or have been downgraded. We do not hold
auction rate securities. We hold unrestricted cash and cash
equivalents for working capital purposes. We do not enter into
investments for trading or speculative purposes. We have an
investment policy that guides our investing activities. Among
other things, our investment policy limits the
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concentration of our investments in any one issuer (with the
exception of investments in U.S. Treasury and
U.S. agency debt obligations and SEC-registered money
market funds) to no more than 10% of the book value of our
investment portfolio at the time of purchase. Currently, we have
investments in one issuer, the value of which equals
approximately 12% of our portfolio. We intend to reduce our
investment in this issuer as the securities mature to meet the
concentration limits of our investment policy. We are otherwise
in compliance with our investment policy. The primary objectives
of our investment activities are to preserve principal, maintain
proper liquidity to meet operating needs, maximize yields and
maintain proper fiduciary control over our investments.
Although our investments are subject to credit risk, our
investment policy specifies credit quality standards for our
investments and limits the amount of credit exposure from any
single issue, issuer or type of investments. We do not own
derivative financial investment instruments in our investment
portfolio. In the event of a hypothetical ten percent adverse
movement in interest rates, our losses of future earnings and
assets, fair values of risk sensitive financial instruments, as
well as our loss of cash flows would be immaterial; however,
actual effects might differ materially from this hypothetical
analysis.
The following financial statements are filed as part of this
Annual Report
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To the Board of Directors and Stockholders of Airvana, Inc.:
We have audited the accompanying consolidated balance sheets of
Airvana, Inc. (the “Company”) as of December 30,
2007 and December 28, 2008 and the related consolidated
statements of income, cash flows and redeemable convertible
preferred stock and stockholders’ (deficit) equity for each
of the three years in the period ended December 28, 2008.
These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Airvana, Inc. at December 30, 2007 and December 28,
2008, and the results of its operations and its cash flows for
each of the three years in the period ended December 28,
2008, in conformity with U.S. generally accepted accounting
principles.
As discussed in Note 2 to the consolidated financial
statements, effective January 1, 2007, the Company adopted
Financial Accounting Standards Board Interpretation No. 48,
Accounting for Uncertainty in Income Taxes.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
Airvana Inc.’s internal control over financial reporting as
of December 28, 2008, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our
report dated February 20, 2009 expressed an unqualified
opinion thereon.
/s/ Ernst & Young LLP
Boston, Massachusetts
February 20, 2009
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AIRVANA,
INC.
CONSOLIDATED
BALANCE SHEETS
The accompanying notes are an integral part of these financial
statements
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AIRVANA,
INC.
The accompanying notes are an integral part of these financial
statements
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AIRVANA,
INC.
The accompanying notes are an integral part of these financial
statements
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AIRVANA,
INC.
STOCKHOLDERS’
(DEFICIT) EQUITY
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