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AIRVANA INC 10-Q 2008 Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended June 29, 2008
OR
For the transition period from to
Commission file number: 001-33576
Airvana, Inc.
(Exact name of registrant as specified in its charter)
19 Alpha Road
Chelmsford, Massachusetts 01824 (Address of Principal Executive Offices including Zip Code) (978) 250-3000
(Registrant’s Telephone Number, Including Area Code) 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 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):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
The number of shares of the registrant’s common stock, par value $0.001, outstanding as of July 31,
2008 was 65,116,048.
AIRVANA, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED June 29, 2008 Table of Contents
Table of Contents
PART I — Financial Information
Item 1 — Condensed Consolidated Financial Statements (unaudited)
AIRVANA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except share and per share amounts)
The accompanying notes are an integral part of these condensed consolidated financial statements.
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AIRVANA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)
The accompanying notes are an integral part of these condensed consolidated financial statements.
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AIRVANA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
The accompanying notes are an integral part of these condensed consolidated financial statements.
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AIRVANA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except share and per share amounts)
1. Operations
Business Description
Airvana, Inc. (the “Company”) is a leading provider of network infrastructure products used by
wireless operators to provide mobile broadband services. The Company’s software and hardware
products are based on Internet Protocol (“IP”) technology and enable wireless networks to deliver
broadband-quality multimedia services to mobile phones, laptop computers and other mobile devices.
These services include Internet access, e-mail, music downloads, video, IP-TV, gaming, push-to-talk
and voice-over-IP. The Company has offices in Chelmsford, Massachusetts; Dallas, Texas; Bangalore,
India; Cambridge, United Kingdom; Madrid, Spain; Darmstadt, Germany; Beijing, China; Seoul, Korea;
and Tokyo, Japan.
2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, after elimination of intercompany transactions and
balances. These condensed consolidated financial statements are unaudited and have been prepared in
accordance with accounting principles generally accepted in the United States applicable to interim
periods, and in the opinion of management, include all normal and recurring adjustments that are
necessary to present fairly the results of operations for the reported periods. These financial
statements and notes should be read in conjunction with the audited consolidated financial
statements and related notes, together with management’s discussion and analysis of financial
condition and results of operations, contained in the Company’s Annual Report on Form 10-K for the
year ended December 30, 2007, which was filed with the Securities and Exchange Commission (the
“SEC”) on March 7, 2008.
Unaudited Interim Financial Statements
The accompanying unaudited condensed consolidated financial statements have been prepared
pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures
normally included in financial statements have been condensed or omitted pursuant to such SEC rules
and regulations. In the opinion of management, the unaudited condensed consolidated financial
statements and notes have been prepared on the same basis as the audited consolidated financial
statements and include all adjustments (consisting of normal, recurring adjustments) necessary for
the fair presentation of the Company’s financial position at June 29, 2008, results of operations
for the three months ended July 1, 2007 and June 29, 2008 and six months ended July 1, 2007 and
June 29, 2008, and cash flows for the three months ended July 1, 2007 and June 29, 2008 and six
months ended July 1, 2007 and June 29, 2008. The interim results are not necessarily indicative of
the results that may be expected for any other interim period or the full year.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States 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 revenue and expense during the
reporting period. Actual results could differ from those estimates. Significant estimates and
judgments relied upon by management in preparing these financial statements include the timing of
revenue recognition, expensing or capitalizing research and development costs for software, the
determination of the fair value of stock awards issued, the recoverability of the Company’s
deferred tax assets, the amount of the Company’s income tax expenses, valuations and purchase price
allocations related to business combinations, expected future cash flows used to evaluate the
recoverability of long-lived assets, estimated fair
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values of intangible assets and goodwill, amortization periods, and the classification of
deferred product costs and deferred revenues.
Although the Company regularly assesses these estimates, actual results could differ
materially from these estimates. Changes in estimates are recorded in the period in which they
become known. The Company bases its estimates and judgments on historical experience and various
other factors that it believes to be reasonable under the circumstances. Actual results may differ
from management’s estimates if these results differ from historical experience or other assumptions
prove not to be substantially accurate, even if such assumptions are reasonable when made.
The Company is subject to a number of risks similar to those of other companies of similar
size in its industry, including, rapid technological changes, competition, limited number of
suppliers, customer concentration, integration of acquisitions, management of international
activities, protection of proprietary rights, patent and other litigation and dependence on key
individuals as well as a variety of other risks, including those
described in Part II, Item 1A of this quarterly Report on
Form 10-Q.
Fiscal Year
The Company’s fiscal year ends on the Sunday nearest to December 31. The Company’s fiscal
quarters end on the Sunday closest to the last day of the third calendar month of the quarter.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid instruments with original maturities of three months
or less at the date of purchase. Cash equivalents are carried at cost, which approximates their
fair market value.
Investments and Restricted Investments
The Company determines the appropriate categorization of investments in securities at the time
of purchase. As of December 30, 2007 and June 29, 2008, the Company’s investments were categorized
as held-to-maturity and are presented at their amortized cost, which approximates market value. The
Company classifies securities on its balance sheet as short-term or long-term based on the date it
reasonably expects the securities to mature or liquidate.
As of December 30, 2007 and June 29, 2008, the Company has $193 classified as long-term
restricted investments on its condensed consolidated balance sheets. Refer to footnote 11 for a
discussion of these restricted investments.
Revenue Recognition
The Company derives 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. The Company’s products incorporate software that is more than incidental to the
related hardware. Accordingly, the Company recognizes revenue in accordance with the American
Institute of Certified Public Accountants’ Statement of Position No. 97-2, Software Revenue
Recognition (“SOP No. 97-2”).
Under multiple-element arrangements where several different products or services are sold
together, the Company allocates revenue to each element based on vendor specific objective evidence
(“VSOE”) of fair value. It uses 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 Company
sells 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 after delivery of those elements occurs or when fair value can be
established. For example, in situations where the Company sells
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a product during a period when it has a commitment for the delivery or sale of a future
specified software upgrade, the Company defers revenue recognition until the specified software
upgrade is delivered.
Significant judgments in applying the accounting rules and regulations to the Company’s
business practices principally relate to the timing and amount of revenue recognition given its
current concentration of revenues with one customer and its inability to establish VSOE of fair
value for specified software upgrades.
The Company sells its products primarily through original equipment manufacturer (“OEM”)
arrangements with telecommunications infrastructure vendors such as Nortel Networks. The Company
has collaborated with its OEM customers on a best efforts basis to develop initial product features
and subsequent enhancements for the products that are sold by a particular OEM to its wireless
operator customers. For each OEM customer, the Company expects to continue to develop products
based on its 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 the Company’s infrastructure technology
therefore must be planned, implemented and integrated with the wireless operators’ plans for
deploying new applications and services and any equipment or technology provided by other vendors.
Given the nature of the Company’s business, the majority of its sales are generated through
multiple-element arrangements comprised of a combination of product, maintenance and support
services and, importantly, specified product upgrades. The Company has established a business
practice of negotiating with OEMs the pricing for future purchases of new product releases and
specified software upgrades. The Company expects that it will release one or more optional
specified upgrades annually. To determine whether these optional future purchases are elements of
current purchase transactions, the Company assesses 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 the Company sells uniquely configured products through each
OEM customer, it does not maintain a list price for its products and specified software upgrades.
Additionally, as it does not sell these products and upgrades to more than one customer, the
Company is unable to establish VSOE of fair value for these products and upgrades. Consequently,
the Company is unable to determine if the license fees it charges for the optional specified
upgrades include a significant and incremental discount. As such, the Company defers 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, the Company recognizes deferred revenue from sales to an OEM customer only
after it delivers a specified upgrade that it had previously committed. However, when it commits to
an additional upgrade before it has delivered a previously committed upgrade, the Company defers
all revenue from product sales after the date of such commitment until it delivers the additional
upgrade. Any revenue that the Company had deferred prior to the additional commitment is recognized
after the previously committed upgrade is delivered.
If there are no commitments outstanding for specified upgrades, the Company recognizes 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, the Company recognizes revenue and related cost of
revenue when those uncertainties are resolved. Any adjustments to software license fees are
recognized when reported to the Company by an OEM customer.
For its direct sales to end user customers, which have not been material to date, the Company
recognizes product revenue upon delivery, provided that all other revenue recognition criteria have
been met.
The Company’s 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 its software. The Company’s annual support and maintenance fees are based on a fixed dollar
amount associated with, or a percentage of the initial sales or list price for, the applicable
hardware and software products. Included in the price of the product, the
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Company provides maintenance and support during the product warranty period, which is
typically two years for base station channel cards and one year for all other products.
When VSOE of fair value for maintenance and support services exists, the Company allocates a
portion of the initial product revenue to the maintenance and support services provided during the
warranty period based on the fees the Company charges for annual support and maintenance when sold
separately. This revenue is also deferred with the associated product revenue until such time as
all outstanding specified software upgrades at the time of shipment are delivered, at which time
the earned support and maintenance revenue is recognized and the unearned support and maintenance
revenue is recognized over the remainder the applicable warranty period.
When VSOE of fair value or maintenance and support services does not exist, all revenue is deferred
and recognized ratably over the warranty period. If there are outstanding specified upgrades at the
time of shipment, revenue is deferred until such time as all such upgrades outstanding at the time
of shipment are delivered. At the time of the delivery of all such upgrades, the Company will
recognize a proportionate amount of revenue related to the amount of the warranty period that has
lapsed at the date of delivery, and the unearned revenue will be recognized over the remainder of
the applicable warranty period. In connection with an amendment to the Company’s OEM arrangement
with Nortel Networks dated September 28, 2007, the Company can no longer assert VSOE of fair value
for maintenance and support services to Nortel Networks. Although unable to establish VSOE of fair
value of maintenance and support services under SOP No. 97-2 for
revenue recognition purposes, the Company
presents product and service revenue separately on its consolidated
statements of operations by applying
the maintenance and support services renewal rates in effect at the time of sale.
For maintenance and service renewals, the Company recognizes revenue for such services ratably
over the service period as services are delivered.
The Company provides professional services for deployment optimization, network engineering
and radio frequency deployment planning, and provides training for network planners and engineers.
The Company generally recognizes revenue for these services as the services are performed as it has
deemed such services not essential to the functionality of its products. The Company has not issued
any refunds on products sold. As such, no provisions have been recorded against revenue or related
receivables for potential refunds.
Segment and Geographic Information
Statement of Financial Accounting Standards (“SFAS”) No. 131, Disclosures About Segments of an
Enterprise and Related Information (“SFAS No. 131”), establishes standards for reporting
information about operating segments in annual financial statements and requires selected
information of these segments be presented in interim financial reports to stockholders. Operating
segments are defined as components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker, or decision making
group, in making decisions on how to allocate resources and assess performance. The Company’s chief
operating decision making group, as defined under SFAS No. 131, consists of the Company’s chief
executive officer, chief financial officer and executive vice presidents. The Company views its
operations and manages its business as one operating segment.
Stock-Based Compensation
In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123
(revised 2004), Share-Based Payment (“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), the Company recognizes 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 the Company has 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
Accounting Principles Board (“APB”) Opinion No. 25 to stock compensation awards. The Company
adopted the provisions of SFAS No. 123(R) on the first day of fiscal 2006 using the
prospective-transition method. As such, the Company will continue to apply APB Opinion No. 25 in
future periods to equity awards granted prior to the adoption of SFAS No. 123(R).
Comprehensive Income
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SFAS No. 130, Reporting Comprehensive Income, establishes standards for reporting and
displaying comprehensive income and its components in financial statements. Comprehensive income is
defined as the change in stockholders’ equity of a business enterprise during a period from
transactions and other events and circumstances from nonowner sources. Comprehensive income for all
periods presented is equal to the reported net income.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income
Taxes (“SFAS No. 109”), which is the asset and liability method for accounting and reporting income
taxes. Under SFAS No. 109, deferred tax assets and liabilities are recognized based on temporary
differences between the financial reporting and income tax bases of assets and liabilities using
statutory rates. In addition, SFAS No. 109 requires a valuation allowance against net deferred tax
assets if, based upon the available evidence, it is more likely than not that some or all of the
deferred tax assets will not be realized.
The Company adopted the provisions of Financial Standards Accounting Board Interpretation No.
48, Accounting for Uncertainty in Income Taxes (“FIN 48”) on January 1, 2007. FIN 48 is an
interpretation of SFAS No. 109, which provides criteria for the recognition, measurement,
presentation and disclosures of uncertain tax positions. A tax benefit from an uncertain tax
position may be recognized if it is “more likely than not” that the position is sustainable based
solely on its technical merits. There was no effect to the Company’s financial statements at the
implementation date. As of December 30, 2007 and June 29, 2008, the Company had approximately
$4,700 of unrecognized tax benefits.
New Pronouncements
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (“SFAS No.141(R)”),
which replaces SFAS No. 141, which was issued in 2001. SFAS 141(R) applies to all transactions in
which an entity obtains control of one or more businesses and establishes principles and
requirements for how the acquirer:
While SFAS No. 141 permitted deferred recognition of pre-acquisition contingencies until the
contingency was resolved and consideration was issued or issuable, SFAS No. 141(R) requires an
acquirer to recognize assets acquired and liabilities assumed arising from contractual
contingencies as of the acquisition date, measured at their acquisition-date fair values.
Acquisition costs, such as legal, accounting and other professional and consulting fees, are to be
expensed in the periods in which the costs are incurred and the services are received, except for
costs to issue debt or equity securities. SFAS No. 141(R) will be effective for the Company for
business combinations for which the acquisition date is on or after January 1, 2009. The Company
does not expect the adoption of SFAS No. 141(R) to have a material impact on the Company’s
consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”).
SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands
disclosure requirements about fair value measurements. SFAS No. 157 was effective on January 1,
2008. However, in February 2008, the FASB released FASB Staff Position FAS 157-2 — Effective Date
of FASB Statement No. 157 (“FSP FAS 157-2”), which delayed the effective date of SFAS No. 157 for
all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed
at fair value in the financial statements on a recurring basis (at least annually). The adoption of
SFAS No. 157 for the Company’s financial assets and liabilities did not have a material impact on
its consolidated financial statements. The Company has not yet adopted the provisions of SFAS No.
157 for the Company’s non-financial assets and liabilities. The Company is currently evaluating
the impact that the adoption of
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SFAS No. 157 for the Company’s non-financial assets and liabilities will have on its
consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements (“SFAS No. 160”). SFAS No. 160 amends Accounting Research Bulletin No. 51 to
establish accounting and reporting standards for the noncontrolling (i.e. minority) interest in a
subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 will require, among other
things, that a minority interest shall be clearly identified and presented within the equity
section of a consolidated balance sheet and that the amount of consolidated net income attributable
to the parent and to the noncontrolling interest be clearly identified and presented on the face of
a consolidated statement of income. SFAS No. 160 will be effective for fiscal years beginning after
December 15, 2008. The adoption of SFAS No. 160 is not expected to have a material effect on the
Company’s consolidated financial statements.
In April 2008, the FASB issued FASB Staff Position 142-3, Determination of the Useful Life of
Intangible Assets (“FSP 142-3”), which amends the factors that must be considered in developing
renewal or extension assumptions used to determine the useful life over which to amortize the cost
of a recognized intangible asset under SFAS No. 142. FSP 142-3 amends paragraph 11(d) of SFAS No.
142 to require an entity to consider its own assumptions about renewal or extension of the term of
the arrangement, consistent with its expected use of the asset.
FSP 142-3 also requires the following incremental disclosures for renewable intangible assets:
FSP 142-3 is effective for financial statements for fiscal years beginning after December 15,
2008. The guidance for determining the useful life of a recognized intangible asset must be applied
prospectively to intangible assets acquired after the effective date. Early adoption is prohibited.
Accordingly, FSP 142-3 would not serve as a basis to change the useful life of an intangible asset
that was acquired prior to the effective date (January 1, 2009 for a calendar year company).
However, the incremental disclosure requirements described above would apply to all intangible
assets, including those recognized in periods prior to the effective date of FSP 142-3. The Company
is currently evaluating the impact that the adoption of FSP 142-3 will have on its consolidated
financial statements.
3. Investments
In accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity
Securities, the Company has classified its investment securities as held-to-maturity. These
securities are reported at amortized cost, which approximates fair market value.
The amortized cost and estimated fair value of the Company’s investment securities are as
follows:
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All held-to-maturity investment securities mature in less than one year as of December 30,
2007. Held-to-maturity investment securities of $189,111 are expected to mature in less than one
year as of June 29, 2008. Investments of $3,068 are expected to mature between one to two years as
of June 29, 2008.
During the quarter ended March 30, 2008, the Company sold certain credit card asset backed
securities which were classified as held-to-maturity due to a deterioration of creditworthiness of
the underlying trusts that issued the securities. The Company routinely monitors all of its
investments, and for the securities that were sold, certain liquidity and cash flow metrics tracked
by the Company had recently deteriorated. The Company believed that it was prudent to liquidate
these investments prior to any potential downgrades by credit analysts. The Company sold a total of
eight securities having a total amortized cost of $16,631 and realized a gain on sale of these
investments of $83.
The Company intends to hold all of the securities it held as of June 29, 2008 to maturity, but
will continue to monitor the creditworthiness of all securities.
As of June 29, 2008, the Company had 19 securities in an unrealized loss position totaling
less than $95 and 0.05% of amortized cost. As a result, the Company has concluded there is no
other-than-temporary impairment.
4. Goodwill and Intangible Assets
As of December 31, 2007, goodwill and intangible assets, net, consist of goodwill of $7,998
and acquired intangible assets of $4,167; and as of June 29, 2008, goodwill and intangible assets,
net, consist of goodwill of $7,998 and acquired intangible assets of $3,633, which consist of the
following:
Amortization expense on intangible assets for the three months ended July 1, 2007 was $178,
for the three months ended June 29, 2008 was $267, for the six months ended July 1, 2007 was $178
and for the six months ended June 29, 2008 was $534. Expected future amortization of intangible
assets for fiscal years indicated is as follows:
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5. Fair Value Measurements
Effective January 1, 2008, the Company adopted SFAS No. 157, which defines fair value as the
exchange price that would be received for an asset or paid to transfer a liability (an exit price)
in the principal or most advantageous market for the asset or liability in an orderly transaction
between market participants at the measurement date. SFAS
No. 157 establishes a three-level fair value hierarchy that prioritizes the inputs used to measure
fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize
the use of unobservable inputs. The three levels of inputs used to measure fair value are as
follows:
The Company’s adoption of SFAS No. 157 did not have a material impact on its consolidated
financial statements. As of June 29, 2008, the Company had investments
disclosed in footnote 3 that were valued using Level 2 inputs
(significant and observable assumptions) as follows:
In
addition, as of June 29, 2008, the Company had cash equivalents
in money market mutual funds that were valued using Level 1
inputs (quoted market prices for identical assets) as follows:
The
Company had $3,050 in other cash equivalents that are not included in the
tables above as they are reported at fair value.
6. Income Taxes
The Company’s effective tax rate for the three and six months ended June 29, 2008, inclusive
of discrete items, was 38.2% and 46.6%, respectively. The tax expense for these periods relate
principally to profits in the United States taxed at the federal and state statutory tax rate and
the effect of losses from foreign operations for which no tax benefit can be recognized. The
effect of discrete items on the effective tax rate for the three and six months ended June 29, 2008
was 0.1% and 0.4% respectively.
For the three and six months ended July 1, 2007 the Company’s effective tax rate, inclusive of
discrete items, was 10.8% and 13.4%, respectively. The tax expense for these periods relate
principally to profits in the United States taxed at the federal and state statutory rate offset by
benefits recognized from net operating loss and tax credit carryforwards. The effect of discrete
items on the effective tax rate for the three and six months ended July 1, 2007 was 2.1% and 2.6%,
respectively.
The Company reviews all available evidence to evaluate the recovery of deferred tax assets,
including the recent history of accumulated losses in all tax jurisdictions over the last three
years as well as its ability to generate income in future periods. The Company has $11,070 in gross
deferred tax assets against which $7,588 in valuation allowances have been recorded related to
state tax credits and foreign losses as it is more likely than not that these assets will not be
realized given the nature of the assets and the likelihood of future realization.
The Company adopted the provisions of FIN 48, an interpretation of SFAS No. 109, on January 1,
2007. The Company recognized no material adjustment in the liability for unrecognized income tax
benefits as a result of the implementation of FIN 48. At June 29, 2008, the Company had
approximately $4,700 of unrecognized tax benefits, the benefit of which, if recognized, would
reduce the Company’s effective tax rate. The Company does not anticipate a material change to the
amount of unrecognized tax benefits over the next twelve months.
The Company recognizes interest and penalties related to uncertain tax positions in income tax
expense. At June 29, 2008, the Company had $94 of interest accrued on its unrecognized tax
benefits.
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The Company and its subsidiaries file income tax returns in the U.S. federal tax jurisdiction
as well as in various state and foreign jurisdictions. The statute of limitations for federal and
state authorities is closed for years prior to the year ended January 2, 2005, although, net
operating loss and tax credit carryforwards that were generated prior to 2004 may still be subject
to examination if they either have been or will be utilized in tax years 2004 and forward. The
statute of limitations for foreign tax jurisdictions is closed for tax years prior to December 31,
2002.
7. Property and Equipment
Property and equipment are recorded at cost. The Company provides for depreciation by charges
to operations on a straight-line basis in amounts estimated to allocate the cost of the assets over
their estimated useful lives. Depreciation expense was $782 and $814 for the three months ended
July 1, 2007 and June 29, 2008, respectively, and $1,504 and $1,621 for the six months ended July
1, 2007 and June 29, 2008, respectively. Expenditures for repairs and maintenance are expensed as
incurred. Property and equipment consist of the following:
In connection with a lease incentive arrangement entered into as part of the Company’s
headquarters lease, the Company received reimbursements of approximately $2,800 and $790 for
leasehold improvements capitalized in the years ended January 1, 2006 and December 31, 2006,
respectively. As a result of this arrangement, the Company recorded a lease incentive obligation
for the reimbursed amount, and is amortizing that obligation as a reduction to rent expense over
the term of the lease. As of December 30, 2007 and June 29, 2008, the unamortized amount was $2,218
and $1,957, respectively. During the three months ended July 1, 2007 and June 29, 2008, the Company
amortized the lease incentive obligation by approximately $130 and $131, respectively. During the
six months ended July 1, 2007 and June 29, 2008, the Company amortized the lease incentive
obligation by approximately $260 and $261, respectively. The remaining lease incentive amounts are
classified either as components of other accrued expenses or other long-term liabilities based on
the future timing of amortization against rent expense.
8. Concentrations of Credit Risk and Significant Customers
Financial instruments that subject the Company to credit risk consist of cash and cash
equivalents, short-term and long-term investments, restricted investments and accounts receivable.
The Company maintains its cash and cash equivalents and investment accounts with two major
financial institutions. The Company’s cash equivalents and investments are invested in securities
with high credit ratings.
At December 30, 2007, the Company had one customer that accounted for 80% of accounts
receivable. At June 29, 2008, the Company had one customer that accounted for 78% of accounts
receivable. No other customers accounted for more than 10% of the Company’s total accounts
receivable at either December 30, 2007 or June 29, 2008. The Company had one customer that
accounted for 100% of revenues for the three months ended July 1, 2007 and one customer that
accounted for 98% of revenues for the three months ended June 29, 2008. The Company had one
customer that accounted for 100% of revenues for the six months ended July 1, 2007 and one customer
that accounted for 98% of revenues for the six months ended June 29, 2008. The Company believes
that all of its accounts receivable are collectible and therefore has not provided any reserve for
doubtful accounts as of December 30, 2007 and June 29, 2008.
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9. Common Stock
Stock Option Plans
As of December 31, 2006, the Company had one stock-based employee compensation plan, the
Company’s 2000 Stock Incentive Plan (the “2000 Plan”), under which the Company could issue up to
21,005,251 shares of common stock. Under the 2000 Plan, the Company’s Board of Directors (the
“Board”) could grant incentive stock options (“ISOs”) to employees of the Company and nonstatutory
stock options (“NSOs”) to officers, employees, directors, consultants and advisors of the Company.
Under the 2000 Plan, the Board determined the option price for all stock options, which generally
expire ten years from the date of grant.
In June 2007, the Company’s stockholders approved the 2007 Stock Incentive Plan (the “2007
Plan”). The 2007 Plan permits the Company to grant ISOs, NSOs, restricted stock awards and other
stock-based awards. The number of shares of common stock that may be issued under the 2007 Plan
equals the sum of 11,252,813 shares of common stock, any shares of common stock reserved for
issuance under the 2000 Plan that remained available for issuance under the 2000 Plan immediately
prior to the closing of the Company’s initial public offering (“IPO”) on July 19, 2007, any shares
of common stock subject to awards under the 2000 Plan, which awards expire, terminate, or are
otherwise surrendered, canceled, forfeited or repurchased without having been fully exercised, and
an annual increase in the number of shares as described in the 2007 Plan.
As there was no public market for the Company’s common stock prior to the Company’s IPO, the
Company 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 six months ended July 1, 2007 was 78%
and in the six months ended June 29, 2008 was 57%. The expected life of options has been 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 six months
ended July 1, 2007 was 6.5 years and during the six months ended June 29, 2008 was 6.25 years. For
the six months ended July 1, 2007, the weighted-average risk free interest rate used was 4.65%. For
the six months ended June 29, 2008, the weighted-average risk free interest rate used was 3.20%.
The risk-free interest rate is based on a 7-year treasury instrument whose term is consistent with
the expected life of the stock options. Although the Company paid a one-time special cash dividend
in April 2007, the expected dividend yield is assumed to be zero as it does not currently
anticipate paying cash dividends on its shares of common stock in the future. 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 actual
forfeitures, which was the Company’s historical policy under SFAS No. 123. As a result, the Company
applied an estimated forfeiture rate of 3.0% for the six months ended July 1, 2007 and 4% for the
six months ended June 29, 2008 in determining the expense recorded in its consolidated statement of
operations. This rate was derived by review of the Company’s historical forfeitures since 2000.
Stock option activity under the 2007 Plan for the six months ended June 29, 2008 is summarized
as follows:
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As of June 29, 2008, the Company has 11,251 shares of restricted stock which will vest over
the next 7 months. These shares of restricted stock were granted prior the Company’s adoption of
SFAS No. 123R under the prospective method at fair value on the date of grant and as a result,
there is no future stock-based compensation expense to be recorded for these awards.
For the three months ended July 1, 2007 and June 29, 2008, the Company recorded expense of
$739 and $1,179, respectively, in connection with share-based awards. For the six months ended July
1, 2007 and June 29, 2008, the Company recorded expense of $1,253 and $2,264, respectively, in
connection with share-based awards. As of June 29, 2008, future expense for non-vested stock
options of $17,151 was expected to be recognized over a weighted-average period of 2.98 years. The
adoption of SFAS No. 123(R) had no effect on cash flow for any period presented.
The following table summarizes stock-based compensation expense related to employee and
director stock options, employee stock purchases, and restricted stock grants for the three and six
months ended July 1, 2007 and June 29, 2008, which were allocated as follows:
10. Net Income Per Share
The Company calculates net income per share in accordance with SFAS No. 128, Earnings Per
Share, as clarified by Emerging Issues Task Force (“EITF”) Issue No. 03-6, which clarifies the use
of the “two-class” method of calculating earnings per share as originally prescribed in SFAS No.
128. Effective for periods beginning after March 31, 2004, EITF Issue No. 03-6 provides guidance on
how to determine whether a security should be considered a “participating security” for purposes of
computing earnings per share and how earnings per share should be allocated to a participating
security when using the two-class method for computing basic earnings per share. The Company has
determined that its convertible preferred stock represented a participating security.
Under the two-class method, basic net income per share is computed by dividing the net income
applicable to common stockholders by the weighted-average number of common shares outstanding for
the fiscal period. Diluted net income per share is computed using the more dilutive of (a) the
two-class method or (b) the if-converted method. Diluted net income per share gives effect to all
potentially dilutive securities, including stock options and unvested restricted common stock using
the treasury stock method. Prior to the Company’s IPO, the Company allocated net income first to
preferred stockholders based on dividend rights under the Company’s charter and then to common and
preferred stockholders based on ownership interests. Net losses are not allocated to preferred
stockholders. Effective with the Company’s IPO, all of the then outstanding preferred stock was
converted into common stock and thus subsequent to the IPO, diluted net income per share is
computed using the weighted average number of common shares and, if dilutive, potential common
shares outstanding during the period. Potential common shares consist of the incremental common
shares issuable upon the exercise of stock options, warrants and unvested common shares subject to
repurchase or cancellation. The dilutive effect of outstanding stock options, restricted shares and
warrants is reflected in diluted earnings per share by application of the treasury stock method. A
reconciliation of the numerator and denominator used in the calculation of basic and diluted net
income per share is as follows:
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Diluted weighted average shares
outstanding do not include options outstanding to purchase
1,482,249 and 3,883,005 shares of common stock for the three months ended July 1, 2007 and
June 29, 2008, respectively, as their effect would have been anti-dilutive. Diluted weighted
average shares outstanding do not include options outstanding to purchase 936,012 and
3,697,708 shares of common stock for the six months ended July 1, 2007 and June 29, 2008, respectively, as
their effect would have been anti-dilutive.
11. Lease Commitments
The Company conducts its operations in leased facilities, and rent expense charged to
operations for the three months ended July 1, 2007 and June 29, 2008 was $324 and $364,
respectively. Rent expense charged to operations for the six months ended July 1, 2007 and June
29, 2008 was $514 and $707, respectively.
In October 2004, the Company entered into a seven-year lease agreement for its headquarters
facility. The Company is obligated to pay monthly rent through 2012. The Company has the option to
renew this lease for an additional 5 year term at a fair value rate to be determined at such time
the Company exercises its renewal right. As part of this agreement, the Company obtained a standby
letter of credit for the landlord totaling $142. The letter of credit is fully collateralized by a
certificate of deposit maintained at the major financial institution that issued the letter of
credit and is classified as a restricted investment in the accompanying condensed consolidated
balance sheets.
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In August 2005, the Company leased additional space adjacent to its headquarters, and
increased the letter of credit and certificate of deposit by $51.
Future minimum commitments as of June 29, 2008, under all of the Company’s operating leases,
are as follows:
12. Deferred Revenue and Deferred Product Cost
Under the Company’s revenue recognition policy, as described above in Note 2, “Summary of
Significant Accounting Policies,” the Company recognizes revenue from sales to an OEM customer only
when it delivers a specified upgrade to which it has previously committed. When the Company commits
to an additional upgrade before it has delivered a previously committed upgrade, it defers all
revenue from product sales after the date of such commitment until it delivers the additional
upgrade.
The Company made a commitment for a specified future software upgrade in April 2005, which the
Company refers to as its April 2005 specified upgrade. The Company delivered the April 2005
specified upgrade in April 2007. The Company committed to a subsequent specified upgrade in
September 2006, which the Company refers to as its September 2006 specified upgrade. The Company
delivered the September 2006 specified upgrade in November 2007. The Company committed to an
additional subsequent specified upgrade in June 2007, which the Company refers as its June 2007
specified upgrade. The Company delivered the June 2007 specified upgrade in June 2008. The Company
committed to additional subsequent specified upgrades in December 2007 and July 2008, which the
Company refers to as its December 2007 specified upgrade and July 2008 specified upgrade,
respectively. The Company expects to deliver the December 2007 specified upgrade in the fourth
quarter of 2008.
Deferred revenue and deferred product cost at June 29, 2008 consist of the following:
Deferred revenue and deferred product cost at December 30, 2007 consist of the following:
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13. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following:
14. Acquisition
On April 30, 2007, the Company acquired 3Way Networks Limited (“3Way Networks”), a United
Kingdom-based provider of personal base stations and solutions for the Universal Mobile
Telecommunications System (“UMTS”) market, for an aggregate purchase price of approximately $11,000
in cash and 441,845 shares of the Company’s common stock. This acquisition furthered the Company’s
strategy to address the UMTS market and to deliver fixed-mobile convergence and in-building mobile
broadband solutions.
The Company accounted for this acquisition under the purchase method of accounting as
prescribed by SFAS 141, Business Combinations. In connection with this acquisition, the Company
recorded $7,998 of goodwill, $2,340 of in-process research and development (“IPR&D”) expense and
$4,880 of intangible assets related to developed technology, customer relationships, and
non-compete agreements with estimated useful lives ranging from 36 to 60 months and a
weighted-average amortization period of 56 months. The estimated fair value of acquired intangible
assets is assigned as follows:
Management used various valuation methods to determine the fair value of the acquired assets
of 3Way Networks. To value the developed technology and customer relationship intangible assets, an
income approach was used, specifically the relief-from-royalty method and the excess earning
method, respectively. For the developed technology intangible asset, expenses and income taxes were
deducted from estimated revenues attributable to the developed technologies. For the customer
relationship intangible asset, expenses and income taxes were deducted from estimated revenues
attributable to the existing customers. The projected net cash flows for each were then tax
affected using an effective rate of 40%, and then discounted using a discount rate of 34% for the
developed technology intangible asset and 39% for the customer relationship intangible asset, to
determine the respective values of the intangible assets. To value the non-compete agreements an
income approach was used, specifically the “with or without” model. Management then projected net
cash flows for the Company with and without the non-compete agreements in place. The present value
of the sum of the difference between the net cash flows with and without the non-compete agreements
in place was calculated, based on a discount rate of 39%. IPR&D was determined by discounting
forecasted cash flows directly related to the products expecting to result from the research and
development, net of returns on contributory assets including fixed assets, and the acquired
workforce and applying a discount rate of 42%.
The Company allocated $2,340 to IPR&D expense for projects associated with femtocell based
technology, which was expensed at the respective date of acquisition because it had no alternative
use and had not yet reached technological feasibility. The value assigned to IPR&D at the
acquisition date was determined by discounting forecasted cash flows directly related to the
products expecting to result from the research and development, net of returns on contributory
assets less cost of goods sold, general and administrative expenses, and selling and marketing
expenses. The Company also deducted the cost to complete the IPR&D projects, which was estimated to
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be $9,600 over the next two years. Based upon the risk associated with this IPR&D relative to
developed product technologies and the fact that the femtocell market has not yet developed, the
Company applied a discount rate of 42%. The successful completion of these projects was a
significant risk at the date of acquisition due to the remaining efforts to achieve technical
viability, development of a femtocell market and competitive threats. If these projects are not
successfully completed, there is no alternative use for the projects and the expected future income
will not be realized.
The following table summarizes the fair values of the assets acquired and liabilities assumed
in connection with this acquisition.
Results of operations for 3Way Networks have been included in the Company’s results of
operations since the acquisition date of April 30, 2007. As part of the acquisition of 3Way
Networks, the Company assumed long-term debt of $543, which it repaid in full during fiscal 2007,
and capital leases of $161, which it partially repaid in June 2008. As of June 29, 2008, the
remaining principal amount owed under capital leases was $9.
Pro Forma Results of Operations
The following pro forma results of operations for the three and six months ended July 1, 2007
have been prepared as though the acquisitions of 3Way Networks had occurred as of January 1, 2007.
This pro forma financial information is not indicative of the results of operations that the
Company would have attained had the acquisition of 3Way Networks occurred at the beginning of the
periods presented. nor is the proforma financial information indicative of the results of
operations that may occur in the future.
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15. Special Cash Dividend
On March 8, 2007, the Company declared a special cash dividend of $1.333 per common stock
equivalent payable on April 5, 2007 to stockholders of record on March 28, 2007. The payment to
holders of common stock and redeemable convertible preferred stock in April 2007 was $72,771. In
conjunction with this dividend and as required by the Company’s stock incentive plan, all vested
and unvested options outstanding were adjusted by multiplying the exercise price by 0.8113 and the
number of shares of common stock issuable upon exercise of the option by 1.2326. As the fair value
of the modified stock option grants was the same as the fair value of the original option grants
immediately before the modification, no incremental compensation cost was recognized as a result of
this special cash dividend. The option information in Note 9 reflects these adjustments to the
outstanding awards. The Company has not declared or paid any other cash dividends on its capital
stock.
16. Related Party Transactions
In 2000, the Company entered into an agreement with Qualcomm Incorporated under which it
licenses software for use in the development of infrastructure equipment. The Company also entered
into a supply and distribution agreement with Qualcomm relating to the Company’s ipBTS products.
The Company paid Qualcomm approximately $924 during the six months ended June 29, 2008 in upfront
license payments, royalties and component purchases under its license and supply agreements with
Qualcomm. During the six months ended June 29, 2008, Qualcomm paid the Company $406 for prototype
purchases. Amounts due to Qualcomm of $372 and $300 were included in accrued expenses and other
current liabilities as of December 30, 2007 and June 29, 2008, respectively. As of June 29, 2008,
Qualcomm owned approximately 9.0% of the Company’s outstanding common stock.
Some of the technology that the Company incorporates into its EV-DO products and sells to
Nortel Networks is licensed from Qualcomm. Historically, the Company utilized this technology
under a license agreement between the Company and Qualcomm and
between Nortel Networks and Qualcomm. Some of the royalties for this
technology were paid to Qualcomm by Nortel Networks. Qualcomm recently undertook an audit of the
royalties that were paid in respect of the EV-DO products that the Company sold between 2003 and
2007. In connection with the audit, Qualcomm indicated that, due to a change in its licensing
arrangement with Nortel Networks, the Company may owe additional royalties of up to approximately
$8,000 to Qualcomm for products that the Company sold to Nortel beginning in 2007. The Company
believes that the Company should not be responsible for any such royalties to Qualcomm because,
among other things, the Company had established a course of dealing with Qualcomm in which Nortel
Networks paid the royalties for such licensed technology and the Company had not been notified of
the modifications to Qualcomm’s licensing arrangement with Nortel Networks. As such, the Company
has not provided for any potential liability in regard to this matter.
17. Subsequent Events
In July 2008, the Board approved a share repurchase program authorizing the Company to
purchase up to $20,000 of its common stock over the next 12 months. The share repurchase program
terminates on July 29, 2009 or earlier if the Company so elects. The purchases of common stock
will be executed periodically on the open market under a Rule 10b5-1 plan as market and business
conditions warrant, which permits shares to be repurchased when the Company might otherwise have
been precluded from doing so under insider trading laws. The Company
plans to enter into the Rule
10b5-1 plan in August 2008. As of August 5, 2008, the Company
has not repurchased any shares under this program.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q 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; 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 Part II, Item 1A “Risk Factors” included
elsewhere in this Quarterly Report on Form 10-Q 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.
Overview
We specialize in helping operators transform the mobile experience of users worldwide. Our
high-performance technology and products, from our newly introduced comprehensive femtocell
solutions to our core mobile network infrastructure, enable operators to deliver broadband services
to mobile devices, independent of physical location.
Most of our current products are based on a wireless communications standard known as 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, voice-over-IP and faster Internet services. We delivered our 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. 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 have been
driven by capacity growth as operators look to expand their capacity. Over the longer term, we
expect our EV-DO sales to continue to be driven by capacity growth as operators acquire more
broadband subscribers, and as these users consume more broadband data.
We have developed a unique business model to serve mobile operators and our OEM customers with
embedded software products. This 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 continuously 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, support for push-to-talk
services, and add new proprietary “clustering” features that are designed to dramatically improve
network scalability. In June 2008 we delivered our latest EV-DO software release which enables
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, DSL, or 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 WiFi 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
are developing our universal access gateway, or UAG, product to manage security and hand-offs when
connecting a WiFi phone or a femtocell product to an operators’ network. Currently, there is
significant operator interest in our FMC products, especially in femtocells, as
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they work with existing handsets. Our FMC products will include versions to support CDMA, UMTS
and WiMAX networks. Our FMC products are an important component of our growth and diversification
strategy. We also utilize our mobile broadband technology and products in specialized market
segments that need their own 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 50,000 channel card licenses for use by over 70
operators worldwide.
In April 2007, we acquired 3Way Networks Limited, 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 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 during the first half of 2008.
In September 2007, we entered into an agreement with Nokia Siemens Networks to certify
interoperability of our UMTS femtocell product with Nokia Siemens Network’s 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 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 Thompson 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 March 2008, we entered into a global OEM agreement with Motorola to provide them with 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 (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 Airvana’s femtocell solution with Hitachi’s core radio access network
infrastructure for the Japanese market.
Our OEM Business Model
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,
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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 and that revenue from these specified
upgrades will increase as a percentage of our product revenue over time.
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.
Impact of 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 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.
The following diagram presents a hypothetical example of how software product releases and
commitments to specified upgrades affect the relationship between
billings, product revenue and deferred
product revenue under a business model similar to ours. The diagram is not intended to reflect the actual
timing of any of our software releases or the actual level of our product and service billings,
revenue or deferred revenue in any period.
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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
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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
Revenue
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, or RNCs; 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 buys the hardware from another vendor. 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.
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 for OEM base station channel cards, RNCs and
network management systems, as well as Rev A software 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. In April 2007, we delivered our April
2005 specified upgrade. 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 made another commitment for a specified future
software upgrade. We refer to that software upgrade as our September 2006 specified upgrade. In the
fourth quarter of fiscal 2007, we delivered our September 2006 specified upgrade. 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, which we refer to as the June
2007 specified upgrade. In June 2008, we delivered our June 2007 specified upgrade. As a result,
we recognized product revenue of $53.5 million that consisted primarily of billings from software
license fees to our primary OEM customer from June 2007 through December 2007, which is when we
made another commitment for a specified future software upgrade, which we refer to as the December
2007 specified upgrade. As of June 29, 2008, there was one specified software upgrade that
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we had not yet delivered, the December 2007 specified upgrade that we expect to deliver
in the fourth quarter of 2008. Subsequent to the end of the second quarter of fiscal 2008, in July 2008, the
Company made an additional commitment for a specified future software upgrade, which we refer to as
the July 2008 specified upgrade.
Service Revenue. Our service revenue is derived from support and maintenance services 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. When VSOE of fair value
for maintenance and support services exists, we allocate a portion of the initial product revenue
to the maintenance and support services provided during the warranty period based on the fees we
charge for annual support and maintenance and the length of the warranty period. This revenue is
also deferred with the associated product revenue until such time as all outstanding specified
future software upgrades at the time of shipment or sale are delivered, at which time a pro rata
portion of the revenue is recognized over the remainder the applicable warranty period.
When VSOE of fair value or maintenance and support services does not exist, all revenue is deferred
and recognized ratably over the warranty period. If there are outstanding specified upgrades at the
time of shipment, revenue is deferred until such time as all such upgrades outstanding at the time
of shipment are delivered. At the time of the delivery of all such
upgrades, we will
recognize a proportionate amount of revenue related to the amount of the warranty period that has
lapsed at the date of delivery, and the unearned revenue will be recognized over the remainder of
the applicable warranty period. In connection with an amendment to
the our OEM arrangement
with Nortel Networks dated September 28, 2007, we can no longer assert VSOE of fair value
for maintenance and support services to Nortel Networks. Although unable to establish VSOE of fair
value of maintenance and support services under SOP No. 97-2 for revenue recognition purposes, we
present product and service revenue separately on our consolidated statements of operations by applying
the maintenance and support services renewal rates in effect 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.
Product and Service Billings
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.
Our product and service billings were $26.3 million and $64.1 million in the three and six
month periods ended June 29, 2008, respectively. Product and service billings to Nortel Networks
were 92% of billings and 96% of billings in the three and six month periods ended June 29, 2008.
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The following table reconciles revenue to product and service billings:
Deferred Revenue
Product and service billings for invoiced shipments and software license fees, and related
maintenance 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 June 29, 2008, $76.4 million of deferred revenue is included in current liabilities
and $1.0 million of deferred revenue is included in long-term liabilities.
Cost of Revenue
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. We expense
all service-related costs as they are incurred.
Qualcomm has recently indicated
to us that we may owe them royalties of up to approximately $8
million for EV-DO products that we sold to Nortel Networks beginning
in 2007. See Note 16 to the financial statements contained in
Part 1, Item 1 above, “Related Party
Transactions.” Although we believe we
should not have to pay these royalties, if we are required to pay these royalties on past or future
sales, our cost of product revenue will increase.
Cost Related to Product and Service Billings
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 cost until such time as the related
deferred revenue is recognized as revenue upon the delivery of specified software upgrades. At the
time of revenue recognition, we expense the related deferred product cost in our income statement
as cost of revenue.
Deferred Product Cost
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.
Deferred product cost increases each fiscal period by the amount of product cost associated with
product billings that are deferred in the period and decreases
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by the amount of product cost
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 cost on
our balance sheet and the remainder as long term deferred product cost. All $1.4 million of
deferred product cost at June 29, 2008 is included in current assets.
Gross Profit
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.
Gross Profit on Billings
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 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.
Operating Expenses
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 for the remaining quarters of fiscal 2008.
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:
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We expect general and administrative expense to increase in amount and as a percentage of
product and service billings during the remainder of 2008 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.
Stock-Based Compensation Expense
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. We currently expect that our adoption of SFAS No.
123(R) will continue to adversely affect our operating results to some extent in future periods.
Based on current stock option grants, we expect to recognize a future expense for non-vested
options of $17.2 million over a weighted-average period of 3.0 years as of June 29, 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
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
Interest income, net, primarily relates to interest earned on our cash, cash equivalents and
investments. In the second quarter of fiscal 2008, interest income was partially offset by interest
expense from our outstanding debt.
Income Taxes
We recorded tax expense of approximately 38% in the second quarter of 2008. We expect our tax
rate to be volatile from quarter to quarter, depending on the timing of revenue recognition and the
mix of profits and losses in the U.S. and foreign tax jurisdictions. Our current forecasted tax
rate for the full year is approximately 46% to 48%, which excludes any benefit from any research
and development (“R&D”) tax credit, as the R&D tax credit has not yet been renewed for 2008 by
Congress. If the R&D tax credit is renewed in 2008 on a retroactive basis to the beginning of the
year, we would expect our full year tax rate to be between 38% and 40% for fiscal year 2008.
Cash Flow from Operating Activities
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.
Cash and Investments
We had unrestricted cash and cash equivalents and investments totaling $222.0 million as of
December 30, 2007 and $227.5 million as of June 29, 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
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commercial paper (A1+/P1), and high grade corporate notes (A1/A+). We also hold investments in
AAA rated credit card asset backed securities, which have expected maturities of less than two
years, actively traded and highly liquid. However, we do not invest in any other 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 maintain investments in accordance 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.
Revenue Recognition
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 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 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 after 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 product features and subsequent enhancements for the products that are
sold by a particular OEM to its wireless operator
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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 operators’ 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
after 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 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 fixed dollar amount associated
with, or a percentage of the initial sales price for, the applicable hardware and software
products. Included in the price of the product, we provide maintenance and support during the
product warranty period, which is two years for base station channel cards and one year for
software products.
When VSOE of fair value for maintenance and support services exists, we allocate a portion of
the initial product revenue to the maintenance and support services provided during the warranty
period based on the fees we charge for annual support and maintenance when sold separately. This
revenue is also deferred with the associated product revenue until such time as all outstanding
specified software upgrades at the time of shipment are delivered, at which time the earned support
and maintenance revenue is recognized and the unearned support and maintenance revenue is
recognized over the remainder the applicable warranty period.
When VSOE of fair value or maintenance and support services does not exist, all revenue is deferred
and recognized ratably over the warranty period. If there are outstanding specified upgrades at the
time of shipment, revenue is deferred until such time as all such upgrades outstanding at the time
of shipment are delivered. At the time of the delivery of all such
upgrades, we will
recognize a proportionate amount of revenue related to the amount of the warranty period that has
lapsed at the date of delivery, and the unearned revenue will be recognized over the remainder of
the applicable warranty period. In connection with an amendment to
the our OEM arrangement
with Nortel Networks dated September 28, 2007, we can no longer assert VSOE of fair value
for maintenance and support services to Nortel Networks. Although unable to establish VSOE of fair
value of maintenance and support services under SOP No. 97-2 for revenue recognition purposes, we
present product and service revenue separately on our consolidated statements of operations by applying
the maintenance and support services renewal rates in effect at the time of sale.
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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.
Stock-Based Compensation
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 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 we
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 weighted-average expected volatility
percentage used in determining the fair value of stock options granted in the six months ended July
1, 2007 was 78% and for the six months ended June 29, 2008 was 57%. The expected life of options
has been 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 six months ended July 1, 2007 was 6.5 years and for the six months ended June 29, 2008 was 6.25
years. The weighted-average risk free interest rate used for the six months ended July 1, 2007, was
4.65% and for the six months ended March 30, 2008 was 3.20%. The risk-free interest rate is based
on a 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 shares
of common stock in the future. 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 actual forfeitures, which was our historical
policy under SFAS No. 123. As a result, we applied estimated forfeiture rates of 3.0% for the six
months ended June 29, 2007 and 4.0% for the six months ended July 1, 2008 in
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determining the expense recorded in our consolidated statement of operations. These rates were
derived by review of our historical forfeitures since 2000.
Income Taxes
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, 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. FIN No. 48 is effective for fiscal years beginning after
December 15, 2006 but earlier application is encouraged. Differences between the amounts recognized
in the statement of financial position prior to adoption of FIN No. 48 and the amounts reported
after adoption should be accounted for as a cumulative-effect adjustment recorded to the beginning
balance of retained earnings. We adopted the provisions of FIN No. 48 effective 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 and for the six months ended July 1, 2007. We recognized $37 thousand in
unrecognized tax benefits during the six months ended June 29, 2008 and had a balance of $4.7
million at June 29, 2008. We recognized $94 thousand of interest related to unrecognized tax
benefits in the six months ended June 29, 2008.
Results of Operations
Comparison of Three Months Ended July 1, 2007 and June 29, 2008
Revenue and Product and Service Billings
Our revenue for the second quarter of fiscal 2008 was derived principally from the ratable
recognition of $55.5 million of software license and maintenance revenues deferred from June 2007
through December 2007 based on the delivery of our June 2007 specified upgrade to Nortel Networks
in the second quarter of 2008. As we are no longer able to assert VSOE of fair value on our
maintenance services provided to Nortel, we recognize Nortel-related software license and
maintenance revenues ratably over the warranty period beginning upon
delivery of the specified upgrade outstanding at time of shipment. Our
revenue for the second quarter of fiscal 2008 also consists of maintenance and support renewal
services performed during the quarter as well as other product and service revenue. The revenue
recognized in the second quarter of fiscal 2007 principally consisted of product shipments and
sales of software licenses, maintenance and support that was billed and deferred from April 2005
through August 2006. We recognized this revenue as a result of the delivery of a specified upgrade
in April 2007.
The decline in our product and service billings for the second quarter of fiscal 2008, as
compared to the second quarter of fiscal 2007 was due primarily to higher billings in 2007 related
to initial operator rollouts of Rev A
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upgradeable channel cards. We expect billings to increase
sequentially and year-over-year in both the third and fourth quarters of 2008 as operators deploy
additional capacity in their networks.
Cost of Revenue and Cost Related to Product and Service Billings
The decrease in cost of revenue was primarily due to the transition of manufacturing for Rev A
channel cards to Nortel Networks in fiscal 2006 as cost of revenue in 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 of our FMC products.
Gross Profit and Gross Profit on Billings
The decrease in gross profit was due primarily to a decrease in revenue of $97.2 million from
$156.3 million in the first quarter of fiscal 2007 to $59.1 million in the second quarter of fiscal
2008, offset by a decrease in cost of revenue of $32.4 million from $35.8 million in the second
quarter of fiscal 2007 to $3.3 million in the second quarter of 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,
and the mix of business between hardware products, software products and services.
Gross profit on Billings decreased primarily due to a decrease in product and service billings
of $10.3 million from $36.5 million in the second quarter of fiscal 2007 to $26.3 million in the
second quarter of fiscal 2008 as well as an increase in cost related to product billings of $0.9
million from $2.1 million in the second quarter of fiscal 2007 to $3.0 million in the second
quarter of fiscal 2008.
Operating Expenses
Research and Development. The decrease in research and development expense was due primarily
to a decrease in outside services expense resulting from non-recurring costs incurred in the second
quarter of fiscal 2007
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associated with our research and development activities partially offset by
an increase in salary and benefit expense associated with annual pay rate increases. Outside
services expense decreased by $1.0 million to $0.3 million in the second quarter of fiscal 2008
from $1.3 million in the second quarter of fiscal 2007. Salary and benefit expense increased by
$0.4 million to $13.1 million in the second quarter of fiscal 2008 from $12.7 million in the second
quarter of 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 service employees to expand our international presence and support our new
FMC product lines, which we plan to sell to a larger base of OEMs and operators than our EV-DO
products. Salary and benefit expense associated with the increase in headcount increased by $0.5
million to $3.0 million in the second quarter of fiscal 2008 from $2.5 million in the second
quarter of 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 to support our growth as well as an
increase in corporate insurance, outside services expense and other costs associated with being a
public company. Salary and benefit expense associated with the increase in headcount increased by
$0.1 million to $1.1 million in the second quarter of fiscal 2008 from $1.0 million in the second
quarter of fiscal 2007. Corporate insurance increased $0.2 million to $0.3 million in the second
quarter of fiscal 2008 from $0.1 million in the second quarter of fiscal 2007. Outside services
expense increased $0.2 million to $0.3 million in the second quarter of fiscal 2008 from $0.1
million in the second quarter of fiscal 2007.
Operating Profit and Operating Profit (Loss) on Billings
The decrease in operating profit was due primarily to the decrease in our gross profit,
described above, partially offset by the decrease in our operating expenses, described above.
The decrease in operating profit on Billings was due to the decrease in our Gross Profit on
Billings, described above, partially offset by the decrease in our operating expenses, described
above.
Interest Income, Net. Interest income, net, consists of interest generated from the
investment of our cash balances. The decrease in interest income from $1.9 million in the second
quarter of fiscal 2007 to $1.8 million in the second quarter of fiscal 2008 was due primarily to
lower interest rates and returns on investments partially offset by higher average cash balances.
Income Taxes. We recognized a tax expense of $12.7 million in the second quarter of fiscal
2008 primarily related to profits in the United States taxed at the federal and state statutory tax
rate and the effect of losses from foreign operations for which no tax benefit can currently be
recognized.
Comparison of Six Months Ended July 1, 2007 and June 29, 2008
Revenue and Product and Service Billings
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Our revenue for the first half of fiscal 2008 was derived principally from the ratable
recognition of $55.5 million of software license and maintenance revenues related to the delivery
of our June 2007 specified upgrade to Nortel Networks in the second quarter of 2008. As we are no
longer able to assert VSOE of fair value on our maintenance services provided to Nortel, we
recognize Nortel-related software license and maintenance revenues ratably over the warranty period
beginning upon delivery of the specified upgrade outstanding at time
of shipment. Our revenue for the first half of fiscal 2008 also consists
of the ratable recognition of $6.2 million of software license and maintenance revenues related to
the delivery of our September 2006 specified upgrade to Nortel Networks in the fourth quarter of
2007 over the warranty period. Our revenue for the first half of fiscal 2008 also consists of
maintenance and support renewal services performed during the first half of fiscal 2008 as well as
other product and service revenue. The revenue recognized in the first half of fiscal 2007
principally consisted of product shipments and sales of software licenses, maintenance and support
that was billed and deferred from April 2005 through August 2006. We recognized this revenue as a
result of the delivery of a specified upgrade in April 2007.
The decline in our product and service billings for the first half of fiscal 2008, as compared
to the first half of fiscal 2007 was due primarily to higher billings in 2007 related to initial
operator rollouts of Rev A upgradeable channel cards. We expect billings to increase sequentially
and year-over-year in both the third and fourth quarters of 2008 as operators deploy additional
capacity in their networks.
Cost of Revenue and Cost Related to Product and Service Billings
The decrease in cost revenue was primarily due to the transition of manufacturing for Rev A
channel cards to Nortel Networks in fiscal 2006 as cost of revenue in 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 of our FMC products.
Gross Profit and Gross Profit on Billings
The decrease in gross profit was due primarily to a decrease in revenue of $89.9 million to
$66.7 million in the first half of fiscal 2008 from $156.5 million in the first half of fiscal
2007, offset by a decrease in cost of revenue of $32.2 million to $5.2 million in the first half of
fiscal 2008 from $37.4 million in the first half of fiscal 2007. We expect gross profit on our
revenue to continue to fluctuate significantly in the future based on the time period
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between
commitments for future software upgrades and the volume of sales in those time intervals, and the
mix of business between hardware products, software products and services.
Gross profit on Billings decreased primarily due to a decrease in product and service billings
of $13.9 million to $64.1 million in the second quarter of fiscal 2008 from $78.0 million in the
second quarter of fiscal 2007 as well as an increase in cost related to product billings of $1.6
million to $5.5 million in the second quarter of fiscal 2008 from $3.9 million in the second
quarter of fiscal 2007.
Operating Expenses
Research and Development. The increase in research and development expense was due primarily
to an increase in the average number of research and development employees in our Chelmsford,
Massachusetts, Bangalore, India and Cambridge, United Kingdom facilities to support the development
of our new FMC product lines and to expand our EV-DO business as well as annual pay rate increases.
Salary and benefit expense associated with the increase in average headcount and annual pay rate
increases increased by $2.6 million to $26.7 million in the first half of fiscal 2008 from $24.1
million in the first half of 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 service employees to expand our international presence and support our new
FMC product lines, which we expect to sell to a larger base of OEMs and operators than our EV-DO
products. Salary and benefit expense associated with the increase in headcount increased by $1.1
million to $5.9 million in the first half of fiscal 2008 from $4.8 million in the first half of
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 to support our growth as well as an
increase in corporate insurance and other costs associated with being a public company. Salary and
benefit expense associated with the increase in headcount increased by $0.3 million to $2.1 million
in the first half of fiscal 2008 from $1.8 million in the first half of fiscal 2007. Corporate
insurance increased $0.4 million to $0.5 million in the first half of fiscal 2008 from $0.1 million
in the first half of fiscal 2007.
Operating Profit and Operating Profit on Billings
The decrease in operating profit was due primarily to the decrease in our gross profit,
described above, coupled with the increase in our operating expenses, described above.
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The decrease in operating profit on Billings was due to the decrease in our Gross Profit on
Billings, described above, coupled with the increase in our operating expenses, described above.
Interest Income, Net. Interest income, net, consists of interest generated from the
investment of our cash balances. The decrease in interest income of $0.2 million from $4.6 million
in the first half of fiscal 2007 to $4.4 million in the first half of fiscal 2008 was due primarily
to lower interest rates and returns on investments partially offset by higher average cash
balances.
Income Taxes. We recognized a tax expense of $7.8 million in the first half of fiscal 2008
primarily related to profits in the United States taxed at the federal and state statutory tax rate
and the effect of losses from foreign operations for which no tax benefit can be recognized.
Liquidity and Capital Resources
As of June 29, 2008, our principal sources of liquidity were cash, cash equivalents and
investments of $227.5 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
(A1+/P1) commercial paper and high grade (A1/A+) corporate notes. We also hold investments in AAA
rated credit card asset backed securities, which have expected maturities of less than two years,
actively traded and highly liquid. However, we do not invest in any other 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 maintain investments in accordance 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.
In July 2008, our board of directors approved a share repurchase program authorizing us to
purchase up to $20 million of our common stock over the next 12 months. The share repurchase
program terminates on July 29, 2009 or earlier if the Company so elects. The purchases of common
stock will be executed periodically on the open market under a Rule 10b5-1 plan as market and
business conditions warrant. The Company plans to enter into the
Rule 10b5-1 plan in
August 2008. As of August 5, 2008, the Company has not
repurchased any shares under this program.
As of June 29, 2008, we did not have any lines of credit or other similar source of liquidity,
other than capital leases of approximately $9,000.
During the first half of fiscal 2007 and 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.
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In the first half of fiscal 2007, our net income of $67.3 million exceeded our $63.9 million
in cash flow from operating activities by $3.4 million primarily as a result of a decrease in
deferred revenue of $78.5 million associated with the delivery of a specified upgrade offset by
billings in the first half of fiscal 2007, substantially offset by the net decrease in accounts
receivable of $29.3 million associated with collection of billings made in the fourth quarter of
fiscal 2006 and the net decrease in deferred cost of $33.5 million associated with the delivery of
a specified upgrade, and an increase in accrued taxes of $8.4 million.
In the first half of fiscal 2008, our net income of $8.9 million exceeded our $1.2 million in
cash flow from operating activities by $7.7 million primarily as a result of accrued income tax
payments of $15.6 million and an increase in our deferred tax benefit of $7.8 million. Our ability
to generate cash flow from operations depends in large part on the volume of our product and
service billings, our ability to collect accounts receivable, timing of tax payments, and the
growth of our operating expenses.
Cash flow from investing activities resulted primarily from the timing of purchases,
maturities and sales of investments and purchases of property and equipment.
Cash used in financing activities in the first half of fiscal 2007 consisted primarily of a
dividend payment of $72.7 million in cash to holders of common stock and redeemable convertible
preferred stock and costs associated with our IPO, which were partially offset by proceeds from
exercise of stock options. Cash flow from financing activities in the first half of fiscal 2008
consisted primarily of proceeds from the exercise of stock options as well as the tax benefit
associated with the exercise of stock options during the year.
We believe our existing cash, cash equivalents and investments, together with 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 October 2004, the Company entered into a seven-year lease agreement for its headquarters
facility. The Company is obligated to pay monthly rent through 2012.
Future minimum commitments as of June 29, 2008, under all of the Company’s operating leases, are as
follows:
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
Foreign Currency Exchange Risk
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. To date, 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.
Interest Rate Sensitivity
We had unrestricted cash and cash equivalents and investments totaling $222.0 million and
$227.5 million at December 30, 2007 and June 29, 2008, respectively. Our existing cash and cash
equivalents and investments are invested primarily in money market funds, high grade government
sponsored entities, high grade (A1+/P1) commercial paper and high grade (A1/A+) corporate notes. We
also hold investments in AAA rated credit card asset backed securities, which have expected
maturities of less than two years, are actively traded and highly liquid. However, we do not invest
in any other 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 maintain investments in accordance
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 value’s of risk sensitive financial
instruments, as well as our loss of cash flows would be immaterial; however, actual effects might
differ materially from the hypothetical analysis.
Item 4. Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial
officer, evaluated the effectiveness of our disclosure controls and procedures as of June 29, 2008.
The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under
the Exchange Act, means controls and other procedures of a company that are designed to ensure that
information required to be disclosed by a company in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported, within the time periods specified in
the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to be disclosed by a company in the
reports that it files or submits under the Exchange Act is accumulated and communicated to the
company’s management, including its principal executive and principal financial officers, as
appropriate to allow timely decisions regarding required disclosure. Management recognizes that any
controls and procedures, no matter how well designed and operated, can provide only reasonable
assurance of achieving their objectives and management necessarily applies its judgment in
evaluating the cost-benefit relationship of possible controls and procedures. Based on the
evaluation of our disclosure controls and procedures as of June 29, 2008, our chief executive
officer and chief financial officer concluded that, as of such date, our disclosure controls and
procedures were effective at the reasonable assurance level.
No change in our internal control over financial reporting occurred during the fiscal quarter
ended June 29, 2008 that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1A. Risk Factors
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 Quarterly Report on Form 10-Q 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 depend on a single OEM customer, Nortel Networks, for almost all of our revenue and billings,
and a significant shortfall in sales to Nortel Networks would significantly harm our business and
operating results.
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 98% of our revenue and 96%
of our billings in the first half of fiscal 2008, 99% of our revenue and 98% of our billings in
fiscal 2007, 95% of our revenue and 94% of our billings in fiscal 2006 and 16% of our revenue and
98% of our billings in fiscal 2005. Our contract with Nortel Networks can be terminated by Nortel
Networks at any time and, in any event, 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 and billings in fiscal 2008 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 sales until we deliver specified upgrades, 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 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 delivered and invoiced to customers several quarters earlier. For these products, 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. 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 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.
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Our revenue and billings growth may be constrained by our product concentration and lack of
revenue diversification.
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.
A majority of our current products are based exclusively on the CDMA2000 air interface standard
for wireless communications, and therefore any movement by existing or prospective operator
customers to a different standard could impair 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 introduction of fourth generation wireless technology could reduce spending on our EV-DO
products and therefore harm our operating results.
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 has announced its intent to build a 4G network
using the Long Term Evolution, or LTE, standard and Sprint Nextel has announced its intent to build
a 4G network using WiMAX technology. 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 and WiMAX 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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Qualcomm recently indicated to us that we may owe royalties on EV-DO products that we sold
beginning in 2007. If we are required to pay these royalties, our business and operating results
would be harmed.
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. Qualcomm recently 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 $8 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 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 variable sales and deployment cycles for our EV-DO products are likely to cause our quarterly
billings to fluctuate materially.
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 was less than our product and service
billings for the first half of fiscal 2007. 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 do not expect significant additional deployments by
these operators until subscriber use creates a need for additional capacity. 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.
If demand for mobile broadband services does not develop as quickly as we anticipate, or develops
in a manner that we do not anticipate, our revenue and billings may decline or fail to grow,
which would adversely affect our 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 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 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
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. 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
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slowly than expected, the need for our EV-DO products would be diminished and our operating
results would be significantly harmed.
Deployments of our EV-DO products by two large wireless operators account for a substantial
majority of our revenue and billings, and a decision by these operators to reduce their use of
our products would harm our business and operating results.
A substantial portion of our cumulative billings for fiscal 2006,, fiscal 2007 and the first
half of fiscal 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.
If the market for our FMC products does not develop as we expect, or our FMC products do not
achieve sufficient market acceptance, our business will suffer.
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 the second half of 2008 or early 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 and market acceptance. 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.
Our future sales will depend on our success in generating sales to a limited number of OEM
customers, and any failure to do so would have a significant detrimental effect on our business.
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 market for the products that we are
developing for this customer is still developing. The market for our FMC products is still
developing. We currently have two 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.
The unpredictability of our future results may adversely affect the trading price of our common
stock.
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:
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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 may not be able to achieve profitability for any period in the future or sustain cash flow
from operating activities.
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 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
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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.
Claims by other parties that we infringe their proprietary technology could force us to redesign
our products or to incur significant costs.
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 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.
If we are not successful in obtaining from third parties licenses to intellectual property that
are required for GSM/UMTS products that we are developing, we may not be able to expand our
business as expected and our business may suffer.
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, it would increase our costs for these products and our operating
results would suffer. If we failed to obtain a required license, our ability to develop
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GSM/UMTS products would be impaired, we may not be able to expand our business as expected and
our business may suffer.
If we do not timely deliver new and enhanced products that respond to customer requirements and
technological changes, operators may not buy our products and our revenue and product and service
billings may decline significantly.
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 revenue and product and service billings growth will be limited if our OEM customers are
unable to continue to sell our products to large wireless operators or if we have to discount our
products to support the selling efforts of our OEM customers.
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.
We depend on sole sources for certain components of our products and our business would be harmed
if the supply from our sole sources were disrupted.
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 continually evolving,
and if we are not able to compete effectively, we may not be able to continue to expand our
business as expected and our business may suffer.
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.
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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. In the air-to-ground markets, the competitive
environment is less developed but, as the market grows, we believe the competitive pressures in
this market may increase.
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.
Our agreement with our largest OEM customer, Nortel Networks, provides Nortel Networks with an
option to license some of our intellectual property to develop internally products competitive
with the products it currently purchases from us.
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 specifications 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 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.
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.
The success of our business could be jeopardized if we are unable to protect our intellectual
property adequately.
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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, 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 may engage in future acquisitions that could disrupt our business, cause dilution to our
stockholders and harm our financial condition and operating results.
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.
Future interpretations of existing accounting standards could adversely affect our 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 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. As a result, we may be required
to change
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the timing of revenue recognition in future periods, which could adversely affect our
operating results in current or future periods.
The loss of key personnel or an inability to attract and retain additional personnel may impair
our ability to grow our business.
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 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 need 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.
In addition, the Sarbanes-Oxley Act requires, among other things, that we maintain effective
internal controls for financial reporting and disclosure controls and procedures. In particular,
commencing with respect to our fiscal year ending December 28, 2008, we must perform system and
process evaluation and testing of our internal controls over financial reporting to allow
management and our independent registered public accounting firm to report on the effectiveness of
our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley
Act, or Section 404. Our testing, or the subsequent testing by our independent registered public
accounting firm, may reveal deficiencies in our internal controls over financial reporting that are
deemed to be material weaknesses. Our compliance with Section 404 will require that we incur
substantial accounting expense and expend significant management efforts. We currently do not have
an internal audit group, and may need to continue to hire additional accounting and financial staff
with appropriate public company experience and technical accounting knowledge. Moreover, if we are
not able to comply with the requirements of Section 404 in a timely manner, or if we or our
independent registered public accounting firm identifies deficiencies in our internal controls over
financial reporting that are deemed to be material weaknesses, the market price of our stock could
decline and we could be subject to sanctions or investigations by NASDAQ, the SEC or other
regulatory authorities, which would require additional financial and management resources.
The increased costs associated with operating as a public company may decrease our net income
or increase our net loss, and may require us to reduce costs in other areas of our business or
increase the prices of our products or
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services. Additionally, if these requirements divert our management’s attention from other
business concerns, they could have a material adverse effect on our business, financial condition
and results of operations.
If we are unable to manage our growth and expand our operations successfully, our business and
operating results will be harmed and our reputation may be damaged.
We anticipate that further expansion of our infrastructure and headcount will 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 additional capital in the future, which may not be available to us, and if it is
available, may dilute our existing stockholders’ ownership of our common stock.
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. A failure to obtain additional funding could prevent us from making expenditures that may
be required to grow or maintain our operations.
Our ability to sell our products depends in part on the quality of our support and services
offerings, and our failure to offer high quality support and services would have a material
adverse effect on our sales and operating results.
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 may contain undetected software or hardware errors, which
could cause harm to our reputation and adversely affect our business.
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 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
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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.
Our international operations subject us to additional risks that can adversely affect our
operating results.
We have sales personnel in seven countries worldwide, approximately 135 engineers in
Bangalore, India and approximately 40 engineers 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. 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. 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.
If wireless devices pose safety risks, we may be subject to new regulations, and demand for our
products and those of our licensees and customers may decrease.
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
The market price of our common stock may be volatile.
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.
If equity research analysts do not publish research or reports about our business or if they
issue unfavorable commentary or downgrade our common stock, the price of our common stock could
decline.
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.
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A significant portion of our total outstanding shares may be sold into the public market in the
near future, which could cause the market price of our common stock to drop significantly, even
if our business is doing well.
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.
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 management will exercise significant control over our company.
Our directors and executive officers and their affiliates beneficially owned a majority of our
outstanding common stock as of June 29, 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 in our certificate of incorporation, our by-laws or Delaware law might discourage,
delay or prevent a change in control of our company or changes in our management and, therefore,
depress the trading 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.
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We do not currently intend to pay dividends on our common stock and, consequently, the ability to
achieve a return on an investment in our common stock will depend on appreciation in the price of
our common stock.
Although we paid a special cash dividend on our capital stock in April 2007, we do not
currently 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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Item 4. Submission of Matters to a Vote of Security Holders.
We held our annual meeting of stockholders on May 22, 2008. At the meeting, our stockholders:
The
terms of office of the following directors continued after the annual
meeting of stockholders: Hassan Ahmed, Robert P. Badavas, Randell S.
Battat, Gururay Deshpade, Paul J. Ferri and Anthony S. Thornley.
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Item 6. Exhibits.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
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