|
NEUTRAL TANDEM INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge)
This Quarterly Report on Form 10-Q contains "forward-looking statements" that
involve substantial risks and uncertainties. All statements, other than
statements of historical fact, included in this Quarterly Report on Form 10-Q
are forward-looking statements. The words "anticipates," "believes," "efforts,"
"expects," "estimates," "projects," "proposed," "plans," "intends," "may,"
"will," "would," and similar expressions are intended to identify
forward-looking statements, although not all forward-looking statements contain
these identifying words. Actual results or events could differ materially from
the plans, intentions and expectations disclosed in the forward-looking
statements we make. Factors that might cause such differences include, but are
not limited to: the effects of competition, including direct connects, and
downward pricing pressure resulting from such competition; our regular review of
strategic alternatives; the impact of current and future regulation, including
intercarrier compensation reform enacted by the Federal Communications
Commission; the risks associated with our ability to successfully develop and
market new services, many of which are beyond our control and all of which could
delay or negatively affect our ability to offer or market new services; the risk
that our business and the Tinet S.p.A. business will not be integrated
successfully; technological developments; the ability to obtain and protect
intellectual property rights; the impact of current or future litigation; the
potential impact of any future acquisitions, mergers or divestitures; natural or
man-made disasters, including the effects of Hurricane Sandy and its aftermath
on our business; the ability to attract, develop and retain executives and other
qualified employees; changes in general economic or market conditions, including
currency fluctuations; financing facilities and related availability and terms;
changes in our capital structure, including but not limited to the reduction of
our cash balance that occurred in connection with the payment of the special
cash dividend transaction discussed below under "Liquidity and Capital
Resources-Special cash dividend", and other important factors included in our
reports filed with the Securities and Exchange Commission, particularly in the
"Risk Factors" section of our Annual Report on Form 10-K for the fiscal year
ended December 31, 2011 and included elsewhere in this report. 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 provide voice, IP Transit, and Ethernet telecommunications services primarily
on a wholesale basis. We offer these services using an all-IP network, which
enables us to deliver global connectivity for a variety of media, including
voice, data and video. Our solutions enable carriers and other providers to
deliver telecommunications traffic or other services where they do not have
their own network or elect not to use their own network. These solutions are
sometimes called "off-net" services. We also provide our solutions to customers,
such as content providers, who also typically do not have their own network. We
were incorporated in Delaware on April 19, 2001 and commenced operations in
2004.
Voice Services
We provide voice interconnection services primarily to competitive carriers,
including wireless, wireline, cable and broadband telephony companies.
Competitive carriers use our tandem switches to interconnect and exchange local
and long distance traffic between their networks without the need to establish
direct switch-to-switch connections. Competitive carriers are carriers that are
not Incumbent Local Exchange Carriers, or ILECs, such as AT&T, Verizon and
CenturyLink.
13
--------------------------------------------------------------------------------
Table of Contents
Prior to the introduction of our local voice service, competitive carriers
generally had two alternatives for exchanging traffic between their networks.
The two alternatives were interconnecting to the ILEC tandems or directly
connecting individual switches, commonly referred to as "direct connects". Given
the cost and complexity of establishing direct connects, competitive carriers
often elected to utilize the ILEC tandem as the method of exchanging traffic.
The ILECs typically required competitive carriers to interconnect to multiple
ILEC tandems with each tandem serving a restricted geographic area. In addition,
as the competitive telecommunications market grew, the process of establishing
interconnections at multiple ILEC tandems became increasingly difficult to
manage and maintain, causing delays and inhibiting competitive carrier growth,
and the purchase of ILEC tandem services became an increasingly significant
component of a competitive carrier's costs.
The tandem switching services offered by ILECs consist of local transit
services, which are provided in connection with local calls, and switched access
services, which are provided in connection with long distance calls. Under
certain interpretations of the Telecommunications Act of 1996 and implementing
regulations, ILECs are required to provide local transit services to competitive
carriers. ILECs generally set per minute rates and other charges for tandem
transit services according to rate schedules approved by state public utility
commissions, although the methodology used to review these rate schedules varies
from state to state. ILECs are also required to offer switched access services
to competing telecommunications carriers under the Telecommunications Act of
1996 and implementing regulations. ILECs generally set per minute rates and
other charges for switched access services according to mandated rate schedules
set by the Federal Communications Commission for interstate calls and by state
public utility commissions for intrastate calls. Our solution enables
competitive carriers to exchange traffic between their networks without using an
ILEC tandem for both local and long distance calls.
A loss of ILEC market share to competitive carriers escalated competitive
tensions and resulted in an increased demand for tandem switching. Growth in
intercarrier traffic switched through ILEC tandems created switch capacity
shortages known in the industry as ILEC "tandem exhaust," where overloaded ILEC
tandems became a bottleneck for competitive carriers. This increased call
blocking and gave rise to service quality issues for competitive carriers.
We founded our company to solve these interconnection problems and better
facilitate the exchange of traffic among competitive carriers and non-carriers.
With the introduction of our services, we believe we became the first carrier to
provide alternative tandem services capable of alleviating the ILEC tandem
exhaust problem. By utilizing our managed tandem service, our customers benefit
from a simplified interconnection network solution that reduces costs, increases
network reliability, decreases competitive tension and adds network diversity
and redundancy. We have signed agreements with major competitive carriers and
non-carriers and we operated in 189 markets as of September 30, 2012.
Our business originally connected only local traffic among carriers within a
single metropolitan market. In 2006, we installed a national IP backbone network
connecting our major local markets. In 2008, we began offering terminating
switched access services and originating switched access services. Switched
access services are provided in connection with long distance calls. Our
terminating switched access services allows interexchange carriers to send calls
to us and we then terminate those calls to the appropriate terminating carrier
or end user in the local market in which we operate. Our originating switched
access service allows the originating end user or carrier in the local market in
which we operate to send calls to us that we then deliver to the appropriate
interexchange carrier that has been selected to carry that call. In both
instances, the interexchange carrier is our customer, which means that it is
financially responsible for the call. On October 1, 2010, we acquired Tinet
S.p.A., an Italian corporation that operates a global IP backbone network. As a
result of the foregoing, our service offerings now include the capability of
switching and carrying local, long distance and international voice traffic.
Data Services
As part of our long-term growth strategy, we acquired Tinet S.p.A., an Italian
corporation. Tinet S.p.A. provides IP Transit and Ethernet services primarily to
carriers, service providers and content providers worldwide.
With this acquisition, we evolved from a primarily U.S. voice interconnection
company into a global IP-based network services company focused on delivering
global connectivity for a variety of media, including voice, data and video. The
acquisition expanded our IP-based network internationally, enabling global
end-to-end delivery of wholesale voice, IP Transit and Ethernet solutions.
We have IP Transit and Ethernet service agreements with over 1,000 customers in
over 80 countries. We have over 120 points of presence (POPs) where we operate
our equipment in carrier neutral facilities. Our core IP Transit network uses
all Juniper equipment, which reduces complexity and allows for faster service
deployment and easier customer support. We also deploy Cisco routers at the edge
of our network where we connect with certain of our customers.
Hosted Services
In 2011 we began to offer hosted services. A hosted service is an application
(such as software) that we "host" on our network enabling our customer to avoid
the capital expenses associated with purchasing the equipment and associated
software licenses that they would need to provide the service to themselves.
During the third quarter of 2012, we ceased offering hosted services and put a
plan in place to sell the related equipment. As a result, the Company recorded a
charge of approximately $1.3 million related to the asset impairment on the
equipment. As of September 30, 2012, the fair value of the equipment available
for sale was $1.7 million and is included in "Other current assets" on the
condensed consolidated balance sheet.
14--------------------------------------------------------------------------------
Table of Contents
Revenue
We generate revenue from sales of our voice, IP Transit and Ethernet services.
Revenue is recorded each month based upon documented minutes of traffic switched
or data traffic carried for which service is provided, when collection is
probable. Voice revenue is recorded each month on an accrual basis based upon
minutes of traffic switched by our network by each customer, which we refer to
as minutes of use. The rates charged per minute are determined by contracts
between us and our customers or by filed and effective tariffs.
Minutes of use of voice traffic increase as we increase our number of customers,
increase the penetration of existing markets, either with new customers or with
existing customers, and increase our service offerings. The minutes of use
decrease due to direct connection between existing customers, consolidation
between customers, a customer using a different interconnection provider or a
customer experiencing a decrease in the volume of traffic it carries.
The average fee per minute of voice traffic varies depending on market forces
and type of service, such as switched access or local transit. The market rate
in each market is based upon competitive conditions along with the switched
access or local transit rates offered by the ILECs. Depending on the markets we
enter, we may enter into contracts with our customers with either a higher or
lower fee per minute than our current average.
Our service solution incorporates other components beyond switching. In addition
to switching voice calls, we generally provision trunk circuits between our
customers' switches and our network locations at our own expense and at no
direct cost to our customers. We also provide quality of service monitoring,
call records and traffic reporting and other services to our customers as part
of our voice service solution. Our per-minute fees are intended to incorporate
all of these services.
IP Transit revenue and Ethernet services revenue are recorded each month on an
accrual basis based upon bandwidth used by each customer. The rates charged are
the total of a monthly fee for bandwidth (the Committed Traffic Rate) plus
additional charges for the sustained peak bandwidth used monthly in excess of
the Committed Traffic Rate.
While generally not seasonal in nature, our voice revenues are affected by
certain events such as holidays, the unpredictable timing of direct connects
between our customers, and installation and implementation delays. These factors
can cause our revenue to both increase or decrease unexpectedly.
Operating Expense. Operating expenses include network and facilities expense,
operations expenses, sales and marketing expenses, general and administrative
expenses, depreciation and amortization and the gain or loss on the disposal of
fixed assets.
Network and Facilities Expense. Our network and facilities expense includes
transport capacity, or circuits, signaling network costs for voice services,
transport capacity for our data services, and facility rents and utilities,
together with other costs that directly support our POPs. We do not defer or
capitalize any costs associated with the start-up of new POPs. The start-up of
an additional POP can take between three months to six months. During this time
we typically incur facility rent, utilities, payroll and related benefit costs
along with initial non-recurring installation costs. Revenues generally follow
approximately six months after POP installation.
Network transport costs typically occur on a repeating monthly basis, which we
refer to as recurring transport costs, or on a one-time basis, which we refer to
as non-recurring transport costs. Recurring transport costs primarily include
monthly usage and other charges from telecommunication carriers and are related
to the circuits utilized by us to connect to our customers. As our traffic
increases, we must utilize additional circuits. Non-recurring transport costs
primarily include the initial installation of such circuits. Facility rents
include the leases on our POPs, which expire through February 2025.
Additionally, we pay the cost of all the utilities for all of our POP locations.
Operations Expenses. Operations expenses include payroll and benefits for our
POP location personnel as well as individuals located at our offices who are
directly responsible for maintaining and expanding our network. Other primary
components of operations expenses include repair and maintenance, property
taxes, property insurance and supplies.
Sales and Marketing Expense. Sales and marketing expenses represent the smallest
component of our operating expenses and primarily include personnel costs, sales
bonuses, marketing programs and other costs related to travel and customer
meetings.
General and Administrative Expense. General and administrative expenses consist
primarily of compensation and related costs for personnel and facilities
associated with our executive, finance, human resource and legal departments and
fees for professional services. Professional services principally consist of
outside legal, audit, tax and transaction costs.
Depreciation and Amortization Expense. Depreciation and amortization expense for
fixed assets is applied using the straight-line method over the estimated useful
lives of the assets after they are placed in service, which are five years for
network equipment and test equipment, three years for computer equipment,
computer software and furniture and fixtures. Leasehold improvements are
amortized on a straight-line basis over an estimated useful life of five years
or the life of the respective leases, whichever is shorter. Intangible assets,
which consist of customer relationships, have a definite life and are amortized
on an accelerated basis based on the discounted cash flows recognized over their
estimated useful lives of 15 years.
Impairment of Fixed Assets. The carrying value of long-lived assets, primarily
property and equipment, is evaluated whenever events or changes in circumstances
indicate that a potential impairment has occurred. A potential impairment has
occurred if projected undiscounted cash flows are less than the carrying value
of the assets. The estimated cash flows include management's assumptions of cash
inflows and outflows directly resulting from the use of that asset in operation.
The impairment test is a two-step process. If the carrying value of the asset
exceeds the expected future cash flows from the asset, impairment is indicated.
The impairment loss recognized is the excess of the carrying value of the asset
over its fair value. Typically, the fair value of the asset is determined by
estimating future cash flows associated with the asset.
15--------------------------------------------------------------------------------
Table of Contents
Gain on Disposal of Fixed Assets. We dispose of network equipment in connection
with converting to new technology and computer equipment to replace old or
damaged units. When there is a carrying value of these assets, we record the
write-off of these amounts to loss on disposal. In some cases, this equipment is
sold to a third party. When the proceeds from the sale of equipment identified
for disposal exceeds the asset's carrying value, we record a gain on disposal.
Other Income. Other income includes interest income and foreign exchange gains
and losses resulting from changes in exchange rates between the functional
currency and the foreign currency in which the transaction was denominated.
Income Taxes. Income tax provision includes U.S. federal, state and local, and
foreign income taxes and is based on pre-tax income or loss. In determining the
estimated annual effective income tax rate, we analyze various factors,
including projections of our annual earnings and taxing jurisdictions in which
earnings will be generated, the impact of state and local income taxes and our
ability to use tax credits and net operating loss carryforwards.
Critical Accounting Policies and Estimates
The preparation of our financial statements requires us to make estimates,
judgments and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses during the periods presented. Our Annual
Report on Form 10-K for the fiscal year ended December 31, 2011, which we filed
with the Securities and Exchange Commission on March 15, 2012, includes a
summary of the critical accounting policies we believe are the most important to
aid in understanding our financial results. There have been no changes to those
critical accounting policies that have had a material impact on our reported
amounts of assets, liabilities, revenues or expenses during the first nine
months of 2012.
Results of Operations
The following table sets forth our results of operations for the three and nine
months ended September 30, 2012 and 2011:
Three Months Ended Nine Months Ended
September 30, September 30,
(Dollars in thousands) 2012 2011 2012 2011
Revenue $ 68,820 $ 67,310 $ 207,788 $ 198,818
Operating expense:
Network and facilities expense (excluding
depreciation and amortization) 32,377 28,724 92,936 80,797
Operations 13,496 10,334 36,475 29,107
Sales and marketing 3,989 3,383 12,001 9,851
General and administrative 5,960 6,352 19,364 22,771
Depreciation and amortization 7,703 7,520 22,798 22,040
Carrier dispute 9,000 - 9,000 -
Impairment of fixed assets 1,257 - 1,257 -
(Gain) loss on disposal of fixed assets (55 ) 159 (164 ) 147
Total operating expense 73,727 56,472 193,667 164,713
(Loss) income from operations (4,907 ) 10,838 14,121 34,105
Total other (income) expense (213 ) 2,126 116 71
(Loss) income before income taxes (4,694 ) 8,712 14,005 34,034
(Benefit) provision for income taxes (1,959 ) 2,864 6,379 12,950
Net (loss) income $ (2,735 ) $ 5,848 $ 7,626 $ 21,084
Three Months Ended September 30, 2012 Compared to Three Months Ended
September 30, 2011
Revenue. Revenue increased to $68.8 million in the three months ended
September 30, 2012 from $67.3 million in the three months ended September 30,
2011, an increase of 2.2%. The increase in revenue of $1.5 million was due
primarily to a $1.3 million increase in revenue generated from our voice
business, with the remaining increase of $0.2 million related to an increase in
data revenue.
The increase in voice revenue was primarily due to the increase in the average
fee per voice minute and an increase in minutes of use billed. The average fee
per voice minute for the three months ended September 30, 2012 of $.00158
increased from $0.00154 for the three months ended September 30, 2011. We
processed 33.1 billion minutes in the three months September 30, 2012 compared
to 32.9 billion minutes processed in the three months ended September 30, 2011,
an increase of 0.5%.
The increase in data revenue was primarily due to the increase in traffic,
measured in terabits. Traffic increased to 8.2 terabits processed in the three
months ended September 30, 2012 from 5.8 terabits processed in the three months
ended September 30, 2011. Offsetting the increase in terabits was a decrease in
the average fee from $2.86 per megabit for the three months ended September 30,
2011 to $2.01 per megabit for the three months ended September 30, 2012.
16--------------------------------------------------------------------------------
Table of Contents
Operating Expense. Operating expenses for the three months ended September 30,
2012 of $73.7 million increased $17.2 million, or 30.6%, from $56.5 million for
the three months ended September 30, 2011. The components making up operating
expenses are discussed further below.
Network and Facilities Expenses. Network and facilities expenses increased to
$32.4 million in the three months ended September 30, 2012, or 47.0% of revenue,
from $28.7 million in the three months ended September 30, 2011, or 42.7% of
revenue. The increase in network and facilities expense was due to changes in
the mix of the voice services we provide and an increase in our IP Transit and
Ethernet services. Due to the change in the mix of services provided, higher
network and facilities expenses were incurred.
Operations Expenses. Operations expenses increased to $13.5 million in the three
months ended September 30, 2012, or 19.6% of revenue, from $10.3 million in the
three months ended September 30, 2011, or 15.4% of revenue. The increase of $3.2
million in our operations expenses primarily resulted from a $1.4 million
increase in repairs and maintenance, $0.9 million of which was due to our hosted
service offering which was ceased during third quarter of 2012, $1.2 million in
amounts due to the federal universal service fund, state governments and value
added taxes in various countries as we increased the provision of our data
services, an increase of $0.9 million in payroll and benefits, primarily
attributable to increases in headcount, and $0.5 million in non-cash
compensation, contract labor and rent expenses. Expenses of $0.8 million were
included in the third quarter of 2011, resulting from the settlement of a
dispute with a landlord.
Sales and Marketing Expense. Sales and marketing expense increased to $4.0
million in the three months ended September 30, 2012, or 5.8% of revenue,
compared to $3.4 million in the three months ended September 30, 2011, or 5.0%
of revenue. The increase of $0.6 million in sales and marketing expenses for the
three months ended September 30, 2012 was primarily due to an increase of $0.5
million in payroll and benefits related to increased headcount as we expand our
data services.
General and Administrative Expense. General and administrative expense decreased
to $6.0 million in the three months ended September 30, 2012, or 8.7% of
revenue, compared with $6.4 million in the three months ended September 30,
2011, or 9.4% of revenue. The decrease of $0.4 million in our general and
administrative expense was primarily due to a decrease of $0.5 million decrease
in payroll, benefits and non-cash compensation.
Depreciation and Amortization Expense. Depreciation and amortization expense
increased to $7.7 million in the three months ended September 30, 2012, or 11.2%
of revenue, compared to $7.5 million in the three months ended September 30,
2011, or 11.2% of revenue. The increase of $0.2 million in our depreciation and
amortization expense resulted from capital expenditures primarily related to the
expansion of POP capacity in existing markets and the installation of POP
capacity in new markets, as we expand our data services.
Carrier Dispute. We reached a preliminary verbal agreement to settle a dispute
with one of our largest customers regarding the termination of traffic. We
expect that the pending settlement will include a $9.0 million one-time payment
to the customer prior to December 31, 2012, and accordingly, we recorded a $9.0
million expense in the three month period ended September 30, 2012. There can be
no assurance that the Company and the carrier will reach a definitive final
settlement.
Impairment of Fixed Assets. During the three months ended September 30, 2012, we
ceased operations related to our hosted services business offering. The
equipment related to this business has no further use in our network and is
being held for sale. As a result, the Company recorded an asset impairment
charge of approximately $1.3 million. During the same period in 2011, no
impairments were recognized.
Other Expense (Income). Other income increased to $0.2 million for the three
months ended September 30, 2012, compared to other expense of $2.1 million for
the three months ended September 30, 2011. Other income of $0.2 million
consisted primarily of a net foreign exchange gain resulting from the
remeasurement of our receivable and payable balances between the functional
currency and currency in which the transactions are denominated. In the three
months ended September 30, 2011, we recognized $1.9 million related to foreign
exchange loss recognized on the remeasurement of an intercompany loan
denominated in Euros.
(Benefit) Provision for Income Taxes. In the three months ended September 30,
2012, we had a (benefit) for income taxes of $2.0 million as compared to a
provision for income taxes of $2.9 million for the three months ended
September 30, 2011. The effective tax rate for the three months ended
September 30, 2012 and 2011 was 41.7% and 32.9%, respectively. The difference in
the effective income tax rate was primarily due to the loss as a result of
operations for the quarter and our change in estimated valuation allowance
recorded against our Illinois EDGE Credit tax carryforward.
Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30,
2011
Revenue. Revenue increased to $207.8 million in the nine months ended
September 30, 2012 from $198.8 million in the nine months ended September 30,
2011, an increase of 4.5%. The increase in revenue of $9.0 million was due
primarily to a $5.1 million increase in revenue generated from our voice
business, with the remaining increase of $3.9 million related to an increase in
data revenue.
The increase in data revenue is primarily due to an increase of traffic to
23.3 terabits processed in the nine months ended September 30, 2012 from
15.7 terabits processed in the nine months ended September 30, 2011. Offsetting
the increase in terabits was a decrease in the average fee from $3.03 per
megabit for the nine months ended September 30, 2011 to $2.20 per megabit for
the nine months ended September 30, 2012. The increase in voice revenue is
primarily due to the increase in minutes of use to 100.1 billion minutes
processed in the nine months ended September 30, 2012 from 97.2 billion minutes
processed in the nine months ended September 30, 2011, an increase of 3.0%.
17--------------------------------------------------------------------------------
Table of Contents
Operating Expenses. Operating expenses for the nine months ended September 30,
2012 of $193.7 million increased $29.0 million, or 17.6% from $164.7 million for
the nine months ended September 30, 2011. The components making up operating
expenses are discussed further below.
Network and Facilities Expenses. Network and facilities expenses increased to
$92.9 million in the nine months ended September 30, 2012, or 44.7% of revenue,
from $80.8 million in the nine months ended September 30, 2011, or 40.6% of
revenue. The increase in network and facilities expense was due to changes in
the mix of the voice services we provide and an increase in our IP Transit and
Ethernet services. Due to the change in the mix of services provided, higher
network and facilities expenses were incurred.
Operations Expenses. Operations expenses increased to $36.5 million in the nine
months ended September 30, 2012, or 17.6% of revenue, from $29.1 million in the
nine months ended September 30, 2011, or 14.6% of revenue. The increase of $7.4
million in our operations expenses primarily resulted from an increase of $3.0
million in payroll and benefits, primarily attributable to increases in
headcount, $2.5 million increase in repairs and maintenance, $1.7 million of
which was due to our hosted service offering which was ceased during third
quarter of 2012, $1.6 million in amounts due to the federal universal service
fund, state governments and value added taxes in various countries as we
increase the provision of our data services and $0.8 million in non-cash
compensation, contract labor, rent expenses. Expenses of $0.8 million were
included in the third quarter of 2011, resulting from the settlement of a
dispute with a landlord.
Sales and Marketing Expense. Sales and marketing expense increased to $12.0
million in the nine months ended September 30, 2012, or 5.8% of revenue,
compared to $9.9 million in the nine months ended September 30, 2011, or 5.0% of
revenue. The increase of $2.1 million in sales and marketing expenses for the
nine months ended September 30, 2012 was primarily due to an increase of $1.8
million in payroll, benefits and travel costs, as well as $0.6 million of
marketing fees related to the company re-branding.
General and Administrative Expense. General and administrative expense decreased
to $19.4 million in the nine months ended September 30, 2012, or 9.3% of
revenue, compared with $22.8 million in the nine months ended September 30,
2011, or 11.5% of revenue. The decrease of $3.4 million in our general and
administrative expense was primarily due to a decrease of $3.6 million in
non-cash share-based compensation. The decrease in non-cash share-based
compensation was primarily due to the accelerated vesting of options and
non-vested shares related to the retirement of Rian J. Wren during the first
quarter of 2011, as further discussed in footnote 5 to the condensed
consolidated financial statements - "Stock Options and Non-vested Shares"
Depreciation and Amortization Expense. Depreciation and amortization expense
increased to $22.8 million in the nine months ended September 30, 2012, or 11.0%
of revenue, compared to $22.0 million in the nine months ended September 30,
2011, or 11.1% of revenue. The increase of $0.8 million in our depreciation and
amortization expense resulted from capital expenditures primarily related to the
expansion of POP capacity in existing markets and the installation of POP
capacity in new markets, as we expand our data services.
Carrier Dispute.We reached a preliminary verbal agreement to settle a dispute
with one of our largest customers regarding the termination of traffic. We
expect that the pending settlement will include a $9.0 million one-time payment
to the customer prior to December 31, 2012, and accordingly, we recorded a $9.0
million expense in the three month period ended September 30, 2012. There can be
no assurance that the Company and the carrier will reach a definitive final
settlement.
Impairment of Fixed Assets. During the nine months ended September 30, 2012, we
ceased operations related to our hosted services business offering. The
equipment related to this business has no further use in our network and is
being held for sale. As a result, the Company recorded a charge of approximately
$1.3 million related to the combined asset impairment and accelerated the
depreciation on the equipment. During the same period in 2011, no impairments
were recognized.
Other Expense (Income). Other expense of $0.1 million for the nine months ended
September 30, 2012, was consistent with other expense of $0.1 million for the
nine months ended September 30, 2011. Other expense of $0.1 million consists
primarily of a net unrealized foreign exchange loss resulting from the
remeasurement of our receivable and payable balances between the functional
currency and the currency in which the transactions are denominated. In the nine
months ended September 30, 2011, we recognized $0.8 million related to foreign
exchange gain recognized on the remeasurement of an intercompany loan
denominated in Euros during 2011. This gain was offset by $0.3 million of
expenses incurred related to the modified "Dutch auction" tender offer to
repurchase common shares during the second quarter of 2011 and a $0.5 million
net unrealized foreign exchange loss resulting from the remeasurement of our
receivable and payable balances between the functional currency and the currency
in which the transactions are denominated.
Provision for Income Taxes. Provision for income taxes of $6.4 million for the
nine months ended September 30, 2012 decreased by $6.6 million compared to $13.0
million for the nine months ended September 30, 2011. The effective tax rate for
the nine months ended September 30, 2012 and 2011 was 45.5% and 38.1%,
respectively. The difference in the effective income tax rate was primarily due
to our foreign entities' transaction tax which is not deductible in the foreign
jurisdictions of our foreign operations. In addition, the rate increased due to
changes in the Company's estimated valuation allowance recorded against the
Company's Illinois EDGE Credit tax carryforward, which was recorded during the
second quarter of 2012.
18
--------------------------------------------------------------------------------
Table of Contents
Liquidity and Capital Resources
At December 31, 2011, we had $90.3 million in cash and cash equivalents, and
$1.0 million in restricted cash. In comparison, at September 30, 2012, we had
$113.8 million in cash and cash equivalents and $1.0 million in restricted cash.
Cash and cash equivalents consist of highly liquid money market mutual funds.
The restricted cash balance is pledged as collateral for certain commercial
letters of credit.
[ Back To SIP Trunking Home's Homepage ]
|
NEW Bring Your Own Device
(BYOD): HTML5 and Google's WebRTC are
transforming our industry: The disaggregation of the telecom industry has long
been talked about, while available solutions remain
vertically integrated in spite of a growing industry of
standards-based individual components...
NEW SSOA - SIP Service Oriented Architecture™:
Cloud and large enterprise communications
and collaboration infrastructure: This eBook introduces eZuce's SIP Service Oriented
Architecture (SSOA). SSOA is a 'carrier-class'
system that offers the demanding global enterprise
a modern built-for-the-cloud and highly
scalable...
NEW Benefits of Broadvox VAR Partner Program: We built our Partner Program to work for you. We understand that different
types of partners have different needs, and we don't play favorites. When
you partner with Broadvox, every member of our team stands behind you
and your customers 100%... 
What's New?
