TMCNet:  SOUNDBITE COMMUNICATIONS INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

[November 09, 2012]

SOUNDBITE COMMUNICATIONS INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) Investors should read the following discussion in conjunction with our financial statements and related notes appearing elsewhere in this report. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause our actual results to differ materially from our expectations. Factors that could cause differences from our expectations include those described in Part II, Item 1A. "Risk Factors" below and elsewhere in this report.


Overview We provide cloud-based, multi-channel services that enable businesses to design, execute and measure customer communication campaigns for a variety of marketing, customer care, payment and collection processes. Clients use our platforms, including SoundBite Engage and SoundBite Insight, to communicate proactively with their customers through automated voice messaging, predictive dialing, emails, text messaging and web communications that are relevant, timely, personalized and engaging.

Our services are provided using a multi-tenant, cloud-based architecture that enables us to serve all of our clients cost-effectively. "Cloud-based" refers to the delivery of technology services through the Internet, which includes delivery of software as a service or SaaS. Because our services are cloud-based, businesses using our services do not need to invest in or maintain new hardware or to hire and manage additional dedicated information technology staff. In addition, we are able to implement new features on our platforms that become part of our services automatically and can benefit all clients immediately. Our secure platforms are designed to serve increasing numbers of clients and growing demand from existing clients, enabling the platforms to scale reliably and cost-effectively.

We serve two global markets: hosted contact centers and mobile marketing. Our hosted contact center services are used primarily by companies in the accounts receivable management (or collections), energy and utilities, financial services, retail, and telecommunications and media industries. Our mobile marketing client base consists principally of companies in the consumer package goods, retail, and telecommunications and media industries.

We derive, and expect to continue to derive for the foreseeable future, a substantial majority of our revenues from the hosted contact center market. Our strategy for achieving long-term, sustained growth in our revenues and net income is focused on building upon our leadership position in the hosted contact center market and executing on our key initiatives. For example, one of our strategic initiatives is targeted on the high growth area of mobile marketing, which leverages our text capabilities. In line with this strategy, in February 2012, we acquired 2ergo Americas, the U.S. operations of 2ergo Group plc. 2ergo Americas is a mobile business and marketing solutions company located in Arlington, Virginia.

Key Components of Results of Operations Revenues We currently derive a substantial portion of our revenues by providing our services for use by clients in communicating with their customers through voice, text and email messages. These revenues are seasonal in nature and typically are stronger during the second half of the year due to the increased demand from clients in the retail industry. We provide our services under a combination of usage and subscription-based models. Under our usage-based model, prices are calculated on a per-message or per-minute basis in accordance with the terms of pricing agreements with clients. We primarily invoice our clients on a monthly basis.

Our pricing agreements with a substantial majority of our clients either do not require any minimum usage or payments, or require only an immaterial level of usage or payments. Each executed message represents a transaction from which we derive revenues, and we therefore recognize revenue based on actual usage within a calendar month. We do not recognize revenue until we can determine that persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and we deem collection to be probable.

Cost of Revenues Cost of revenues consist primarily of telephony and text message charges, compensation expense for our operations personnel, depreciation and maintenance expense for our platforms, amortization of acquired technology and lease costs for our data center facilities. As we continue to grow our business and add features to our platforms, we expect cost of revenues will continue to increase on an absolute dollar basis. Our annual gross margin was 59.1% in 2011, 59.6% in 2010 and 60.4% in 2009. We currently are targeting a gross margin of 59% to 61% for the foreseeable future. Our gross margin may vary significantly from our target range for a number of reasons, including revenue levels, the mix of types of messaging campaigns executed, as well as the extent to which we build our infrastructure through, for example, significant acquisitions of hardware or material increases in leased data center facilities.

13-------------------------------------------------------------------------------- Table of Contents Operating Expenses Research and Development. Research and development expenses consist primarily of compensation expenses and depreciation expense of certain equipment related to the development of our services. We have historically focused our research and development efforts on improving and enhancing our platforms, as well as developing new features and offerings.

Sales and Marketing. Sales and marketing expenses consist primarily of compensation for our sales and marketing personnel, including sales commissions, as well as the costs of our marketing programs. We expect to further invest in developing our marketing strategy and activities to extend brand awareness and generate additional leads for our sales staff.

General and Administrative. General and administrative expenses consist of compensation expenses for executive, finance, accounting, administrative and management information systems personnel, accounting and legal professional fees and other corporate expenses.

Recent Developments 2ergo Americas Acquisition. In February 2012, we acquired 2ergo Americas, the U.S. operations of 2ergo Group plc, for a cash purchase price of $3.8 million (subject to post closing adjustment). 2ergo Americas is a mobile business and marketing solutions company located in Arlington, Virginia and has a current annualized revenue run rate of approximately $3.5 million. Revenues generated from clients acquired as part of the 2ergo Americas acquisition during the three and nine months ended September 30, 2012 were $816,000 and $1.9 million, respectively. Operating loss for the three and nine months ended September 30, 2012 was $449,000 and $1.0 million, respectively.

SmartReply Asset Acquisition. In June 2011 we acquired key assets of SmartReply.

During the three and nine months ended September 30, 2012, revenues generated from clients acquired as part of the acquisition were $1.4 million and $3.9 million, respectively.

Additional Key Measures of Financial Performance We present information below with respect to free cash flow and certain revenue metrics. None of these metrics should be considered as an alternative to any measure of financial performance calculated in accordance with U.S. generally accepted accounting principles, or GAAP. Management believes the following financial measures are useful to investors because they permit investors to view our performance using the same tools that management uses to gauge progress in achieving our goals.

Free Cash Flow Free cash flow is a measure of financial performance calculated as cash flow from operating activities less payments of contingent purchase price and purchases of property and equipment. Management uses this metric to track business performance. Due to the current economic environment, management decisions are based in part on a goal of maintaining positive cash flow from operating activities and free cash flow. We believe this metric is a useful measure of the performance of our business because, in contrast to statement of operations metrics that rely principally on revenue and profitability, cash flow from operating activities and free cash flow capture the changes in operating assets and liabilities during the year and the effect of noncash items such as depreciation and stock-based compensation. We believe that, for similar reasons, this metric is often used by security analysts, investors and other interested parties in the evaluation of companies offering cloud-based or other software solutions.

The term "free cash flow" is not defined under GAAP and is not a measure of operating income, operating performance or liquidity presented in accordance with GAAP. All or a portion of free cash flow may be unavailable for discretionary expenditures. Free cash flow has limitations as an analytical tool and when assessing our operating performance, you should not consider free cash flow in isolation from or as a substitute for data, such as net income (loss), derived from financial statements prepared in accordance with GAAP.

Nine Months Ended September 30, 2012 2011 (in thousands)Cash generated from (used in) operating activities $ 1,255 $ (2,192 ) Contingent purchase price payments to Mobile Collect (498 ) (476 ) Contingent purchase price payments to SmartReply (211 ) - Purchases of property and equipment (1,014 ) (695 ) Free cash flow (non-GAAP) $ (468 ) $ (3,363 ) Our operating activities provided net cash in the amount of $1.3 million for the nine months ended September 30, 2012 reflecting a net loss of $2.3 million, which was offset by non-cash charges and changes in working capital of $3.6 million consisting primarily of (a) depreciation and amortization expense of $2.4 million, (b) an increase in account payable and accrued expenses of $1.5 million, and (c) stock-based compensation expense of $746,000. These increases were partially offset by a deferred income tax benefit (non-cash) of $927,000.

14 -------------------------------------------------------------------------------- Table of Contents Free cash flow in each of the periods presented reflects, in addition to the factors driving cash flows from operating activities, our purchases of property and equipment, which consists primarily of computer equipment and software, and our payments of contingent purchase price in connection with our acquisition of SmartReply in 2011 and our acquisition of the assets of Mobile Collect in 2008.

Revenue Metrics Management tracks revenues by mobile, voice and other in order to review and evaluate our delivery channels. Mobile revenues are generated from any form of consumer interaction through a mobile device, excluding any of the voice channels. Voice revenues are generated from automated voice messaging and our hosted dialer. Other revenues include revenue attributable to email, professional services and access fees. For the three months ended September 30, 2012, voice revenues were $7.6 million, mobile revenues were $4.0 million and other revenues were $600,000, or 63%, 32% and 5% of total revenues, respectively. For the three months ended September 30, 2011, voice revenues were $7.9 million, mobile revenues were $2.2 million and other revenues were $900,000, or 72%, 20% and 8% of total revenues, respectively. Total mobile revenues increased 83% over the comparable quarter of 2011. The dollar and percentage increases in mobile revenues reflected both (a) growth in our existing business, which increased by 46% on a dollar basis, and (b) additional revenue from our acquisition of 2ergo Americas in February 2012. We expect mobile revenues to continue to increase, both in dollars and as a percentage of total revenues, for the foreseeable future.

Management also tracks revenues by certain quarterly client metrics: • Management evaluates client concentration in part by monitoring the aggregate percentage of total revenue generated in a quarter from our 20 largest clients (by revenue) in that quarter. Our 20 largest clients for the three months ended September 30, 2012 accounted for 68% of total revenues, compared to 70% in the three months ended September 30, 2011.

• Management evaluates client retention in part by reviewing the aggregate percentage of total revenue generated in a quarter from the 50 largest clients in the previous quarter. Our 50 largest clients in the three months ended June 30, 2012 generated 90% of our total revenues in the three months ended September 30, 2012. In comparison, our 50 largest clients in the three months ended June 30, 2011 generated 86% of our total revenues in the three months ended September 30, 2011.

• Management evaluates client momentum in part by tracking the number of clients that generated greater than $250,000 of revenue in a quarter.

Fifteen clients, four of which were legacy clients of SmartReply and 2ergo Americas, generated more than $250,000 in revenue for the three months ended September 30, 2012, as compared to eleven in the comparable period of 2011.

15 -------------------------------------------------------------------------------- Table of Contents Results of Operations The following table sets forth selected statements of operations data for the three and nine months ended September 30, 2012 and 2011 indicated as percentages of revenues.

Three Months Ended September 30, Nine Months Ended September 30, 2012 2011 2012 2011 Statement of Operations Data: Revenues 100.0 % 100.0 % 100.0 % 100.0 % Cost of revenues 39.0 41.4 40.5 41.7 Gross margin 61.0 58.6 59.5 58.3 Operating expenses: Research and development 15.5 14.1 15.6 15.3 Sales and marketing 35.2 31.9 35.8 34.7 General and administrative 15.0 14.3 17.7 17.7 Total operating expenses 65.7 60.3 69.1 67.7 Operating loss (4.7 ) (1.7 ) (9.6 ) (9.4 ) Interest and other income (expense), net 0.2 (0.1 ) 0.2 (0.0 ) Loss before income tax benefit (4.5 ) (1.8 ) (9.4 ) (9.4 ) Income tax benefit 0.3 - 2.7 3.0 Net loss (4.2 )% (1.8 )% (6.7 )% (6.4 )% Comparison of Three Months Ended September 30, 2012 and 2011 Revenues Three Months Ended September 30, Quarter-to- 2012 2011 Quarter Change Percentage of Percentage of Percentage Amount Revenues Amount Revenues Amount Change (dollars in thousands) Revenues $ 12,160 100.0 % $ 10,956 100.0 % $ 1,204 11.0 % The $1.2 million increase in revenues for the three months ended September 30, 2012 as compared to the same period in 2011 was mainly due to the acquisition of 2ergo Americas in February 2012. Revenues from legacy clients of 2ergo Americas accounted for $816,000 of the increase, in addition to an increase of $388,000 in organic revenue. Overall, mobile revenues increased $1.8 million, voice revenues decreased $375,000, and other revenues decreased $203,000 for the three months ended September 30, 2012 as compared to the same period in 2011. Voice, mobile and other revenues as a percentage of total revenues were 63%, 32% and 5% in the third quarter of 2012, respectively, compared to 72%, 20% and 8% in the same period in 2011, respectively. We expect mobile revenues to continue to increase, both in dollars and as a percentage of total revenues, for the foreseeable future.

Cost of Revenues and Gross Profit Three Months Ended September 30, Quarter-to- 2012 2011 Quarter Change Percentage of Percentage of Percentage Amount Revenues Amount Revenues Amount Change (dollars in thousands) Cost of revenues $ 4,747 39.0 % $4,532 41.4 % $ 215 4.7 % Gross profit 7,413 61.0 6,424 58.6 989 15.4 The $215,000 increase in cost of revenues for the three months ended September 30, 2012 as compared to the same period in 2011 reflected a $195,000 increase in text message costs due to higher client usage, a $69,000 increase in co-location costs due to the 16 -------------------------------------------------------------------------------- Table of Contents additional data center from the acquisition of 2ergo Americas, and a $49,000 increase in amortization expense for acquired technology, partially offset by a decrease in client management allocation costs of $93,000 as a result of lower billable projects. The increase in gross margin for the three months ended September 30, 2012 as compared to the same period in 2011 reflected increased revenue levels and changes in our client and service mix.

Operating Expenses Three Months Ended September 30, Quarter-to- 2012 2011 Quarter Change Percentage of Percentage of Percentage Amount Revenues Amount Revenues Amount Change (dollars in thousands) Research and development $ 1,881 15.5 % $ 1,547 14.1 % $ 334 21.6 % Sales and marketing 4,284 35.2 3,501 31.9 783 22.4 General and administrative 1,828 15.0 1,562 14.3 266 17.0 Total operating expenses $ 7,993 65.7 % $ 6,610 60.3 % $ 1,383 20.9 % Research and Development. The $334,000 increase in research and development expenses for the three months ended September 30, 2012 as compared to the same period in 2011 was primarily attributable to a $357,000 increase in personnel related costs due to an increase in headcount. Of the $357,000 increase in personnel related costs, $155,000 consisted of expenses attributable to the recent acquisition of 2ergo Americas.

Sales and Marketing. The $783,000 increase in sales and marketing expenses for the three months ended September 30, 2012 as compared to the same period in 2011 resulted primarily from a $713,000 increase in personnel related costs due to an increase in headcount, a $37,000 increase in facility overhead costs, and a $28,000 net increase in amortization expense related to acquisitions. Of the $713,000 increase in personnel related costs, $492,000 consisted of expenses attributable to the recent acquisition of 2ergo Americas.

General and Administrative. The $266,000 increase in general and administrative expenses for the three months ended September 30, 2012 as compared to the same period in 2011 resulted primarily from a $175,000 increase in personnel related costs, a $155,000 increase in costs related to the litigation described in Note 5 to our consolidated financial statements, a $137,000 increase in legal fees, a $51,000 increase in accounting service fees, a $48,000 increase in consulting fees for various administrative projects, and a $37,000 increase in professional service fees. These increases were partially offset by a $365,000 reimbursement from the insurer under our existing liability insurance policy, as well as from escrow funds, for certain legal fees related to ongoing litigation.

Operating Loss and Interest and Other Income (Expense) Three Months Ended September 30, Quarter-to- 2012 2011 Quarter Change Percentage of Percentage of Percentage Amount Revenues Amount Revenues Amount Change (dollars in thousands) Operating loss $ (580 ) (4.7 )% $ (186 ) (1.7 )% $ (394 ) (211.8 )% Interest and other income (expense), net 27 0.2 (10 ) (0.1 ) 37 370.0 Loss before income tax benefit $ (553 ) (4.5 )% $ (196 ) (1.8 )% $ (357 ) (182.1 )% The $37,000 increase in interest and other income (expense), net for the three months ended September 30, 2012 as compared to the same period in 2011 resulted from higher interest income earned on our investments, as well as a foreign currency gain resulting from the revaluation of accounts receivable and accounts payable balances denominated in foreign currencies.

Income Tax Benefit and Net Loss We recognized a net loss of $513,000 for the three months ended September 30, 2012 as compared to a net loss of $196,000 for the same period in 2011. This difference principally reflects an increase in our operating loss for the three months ended September 30, 2012 and an income tax benefit of $40,000 recorded during the period ended September 30, 2012 related to the deferred tax impact of the acquisition of intangibles from 2ergo Americas in February 2012.

17-------------------------------------------------------------------------------- Table of Contents Comparison of Nine Months Ended September 30, 2012 and 2011 Revenues Nine Months Ended September 30, Nine Month 2012 2011 Period Change Percentage of Percentage of Percentage Amount Revenues Amount Revenues Amount Change (dollars in thousands) Revenues $ 34,218 100.0 % $ 29,671 100.0 % $ 4,547 15.3 % The $4.5 million increase in revenues for the nine months ended September 30, 2012 as compared to the same period in 2011 was due principally to the acquisitions of SmartReply in June 2011 and 2ergo Americas in February 2012.

Revenues from legacy clients of SmartReply and 2ergo Americas accounted for $2.4 million and $1.9 million of the increase, respectively. Overall, mobile revenues increased $4.5 million, voice revenues increased $73,000, and other revenues decreased $73,000 for the nine months ended September 30, 2012 as compared to the same period in 2011. Voice, mobile and other revenues as a percentage of total revenues were 66%, 29% and 5% for the nine months ended September 30, 2012, respectively, compared to 76%, 18% and 6% in the same period in 2011, respectively.

Cost of Revenues and Gross Profit Nine Months Ended September 30, Nine Month 2012 2011 Period Change Percentage of Percentage of Percentage Amount Revenues Amount Revenues Amount Change (dollars in thousands) Cost of revenues $ 13,849 40.5 % $ 12,364 41.7 % $ 1,485 12.0 % Gross profit 20,369 59.5 17,307 58.3 3,062 17.7 The $1.5 million increase in cost of revenues for the nine months ended September 30, 2012 as compared to the same period in 2011 reflected a $904,000 increase in text message costs due to higher client usage, a $513,000 increase in telephony expense due to higher delivery charges and client usage, a $115,000 increase in amortization expense for acquired technology, an $86,000 increase in co-location costs due to the additional data center from the acquisition of 2ergo Americas, and an $85,000 increase in personnel costs due to an increase in headcount. These increases were partially offset by a by a decrease in client management allocation costs of $114,000 as a result of lower billable projects.

The increase in gross margin for the nine months ended September 30, 2012 as compared to the same period in 2011 reflected increased revenue levels and changes in our client and service mix, partially offset by higher telephony delivery charges.

Operating Expenses Nine Months Ended September 30, Nine Month- 2012 2011 Period Change Percentage of Percentage of Percentage Amount Revenues Amount Revenues Amount Change (dollars in thousands) Research and development $ 5,337 15.6 % $ 4,541 15.3 % $ 796 17.5 % Sales and marketing 12,262 35.8 10,282 34.7 1,980 19.3 General and administrative 6,051 17.7 5,279 17.7 772 14.6 Total operating expenses $ 23,650 69.1 % $ 20,102 67.7 % $ 3,548 17.6 % Research and Development. The $796,000 increase in research and development expenses for the nine months ended September 30, 2012 as compared to the same period in 2011 was primarily attributable to an $847,000 increase in personnel related costs due to an increase in headcount, and a $59,000 increase in facility overhead costs, partially offset by a $172,000 decrease in consulting fees. Of the $847,000 increase in personnel related costs, $344,000 consisted of expenses attributable to the recent acquisitions of SmartReply and 2ergo Americas.

Sales and Marketing. The $2.0 million increase in sales and marketing expenses for the nine months ended September 30, 2012 as compared to the same period in 2011 resulted primarily from a $1.1 million increase in personnel related costs due to a net increase in headcount from recent acquisitions, a $697,000 increase in amortization expense for customer lists and other intangibles related to recent acquisitions, a $151,000 increase in facility overhead costs, and a $66,000 increase in travel related costs.

18-------------------------------------------------------------------------------- Table of Contents General and Administrative. The $772,000 increase in general and administrative expenses for the nine months ended September 30, 2012 as compared to the same period in 2011 resulted primarily from a $665,000 increase in costs related to the litigation described in Note 5 to our consolidated financial statements, a $323,000 increase in temporary help and consulting fees for various administrative projects, a $167,000 increase in legal fees, a $137,000 increase in accounting service fees, a $137,000 increase in personnel related costs, and a $121,000 increase in public company costs. These increases were partially offset by a $365,000 reimbursement from the insurer under our existing liability insurance policy, as well as from escrow funds, for certain legal fees related to ongoing litigation, a $351,000 decrease in merger and acquisition related costs, and a $178,000 fair value adjustment to the liability for contingent consideration related to the acquisition of SmartReply.

Operating Loss and Other Income (Expense) Nine Months Ended September 30, Nine Month 2012 2011 Period Change Percentage of Percentage of Percentage Amount Revenues Amount Revenues Amount Change (dollars in thousands) Operating loss $ (3,281 ) (9.6 )% $ (2,795 ) (9.4 )% $ (486 ) (17.4 )% Interest and other income (expense), net 62 0.2 (8 ) (0.0 ) 70 875.0 Loss before income tax benefit $ (3,219 ) (9.4 )% $ (2,803 ) (9.4 )% $ (416 ) (14.8 )% The $70,000 increase in interest and other income (expense), net for the nine months ended September 30, 2012, as compared to the same period in 2011 resulted from higher interest income earned on our investments along with a foreign currency gain resulting from the revaluation of accounts receivable and accounts payable balances denominated in foreign currencies Income Tax Benefit and Net Loss We recognized a net loss of $2.3 million for the nine months ended September 30, 2012 as compared to a net loss of $1.9 million for the same period in 2011. This difference principally reflects an increase in our operating loss for the nine months ended September 30, 2012 and a $22,000 increase in income tax benefit for the nine months ended September 30, 2012 as compared to the same period in 2011.

We recorded an income tax benefit of $927,000 during the nine months ended September 30, 2012 related to the deferred tax impact of the acquisition of intangibles from 2ergo Americas in February 2012 and an income tax benefit of $905,000 during the nine months ended September 30, 2011 related to the acquisition of intangibles from SmartReply in June 2011.

Liquidity and Capital Resources Resources Since our inception, we have funded our operations primarily with proceeds from private placements of preferred stock and our initial public offering of common stock, borrowings under credit facilities and, more recently, cash flow from operations.

We believe our existing cash and cash equivalents, our projected cash flow from operating activities, and our borrowings available under our existing credit facility will be sufficient to meet our anticipated cash needs for at least the next twelve months. Our future working capital requirements will depend on many factors, including the rates of our revenue growth, our introduction of new features for our on-demand service, and our expansion of research and development and sales and marketing activities. To the extent our cash and cash equivalents and cash flow from operating activities are insufficient to fund our future activities, we may need 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 and products. If additional funding is required, we may not be able to obtain bank credit arrangements or to effect an equity or debt financing on terms acceptable to us or at all.

Credit Facility Borrowings On February 18, 2011 we renewed a credit facility with Silicon Valley Bank that provides a working capital line of credit at an interest rate of 4.5% per annum for up to the lesser of (a) $1.5 million or (b) 80% of eligible accounts receivable, subject to specified adjustments. Accounts receivable serve as collateral for any borrowings under the credit facility. There are certain financial covenant requirements as part of the facility, including an adjusted quick ratio and certain minimum quarterly revenue requirements, none of which are restrictive to our overall operations. The credit facility will expire by its terms on February 18, 2013 and any amounts outstanding must be repaid on that date.

As of September 30, 2012, no amounts were outstanding under the existing credit agreement. As of September 30, 2012, letters of credit totaling $426,000 had been issued in connection with our facility leases.

19-------------------------------------------------------------------------------- Table of Contents Operating Cash Flow For a discussion of our cash flow from operating activities, see "- Additional Key Measures of Financial Performance." Working Capital The following table sets forth selected working capital information: September 30, December 31, 2012 2011 (in thousands) Cash and cash equivalents $ 16,270 $ 17,706 Short-term investments 7,790 10,976 Accounts receivable, net of allowance for doubtful accounts 8,489 8,163 Working capital $ 27,574 $ 33,491 Our cash and cash equivalents at September 30, 2012 were unrestricted and held for working capital purposes. These funds were invested primarily in money market funds. We do not enter into investments for trading or speculative purposes.

Our short-term investments are comprised of commercial paper, certificate of deposits and U.S. government agency bonds with average term to maturity of less than six months.

Our accounts receivable balance fluctuates from period to period, which affects our cash flow from operating activities. Fluctuations vary depending on cash collections, client mix and the volume of monthly usage of our services.

Requirements Capital Expenditures In recent years, we have made capital expenditures primarily to acquire computer hardware and software and, to a lesser extent, furniture and leasehold improvements to support the growth of our business. Our capital expenditures totaled $1.0 million for the nine months ended September 30, 2012. We intend to continue to invest in our infrastructure in an effort to ensure our continued ability to enhance our platforms, introduce new features and maintain the reliability of our network. We also intend to continue to make investments in our computer equipment and systems. We expect our capital expenditures for these purposes will approximate $400,000 for the last three months of 2012.

Stock Repurchase Program On March 26, 2010, we announced that the board of directors had authorized the repurchase of up to $2.5 million of common stock from time to time on the open market or in privately negotiated transactions. We will determine the timing and amount of any shares repurchased based on an evaluation of market conditions and other factors. Repurchases may be made under a Rule 10b5-1 plan, which would permit shares to be repurchased when we might otherwise be precluded from doing so under insider trading laws. The repurchase program may be suspended or discontinued at any time.

As of September 30, 2012, we had repurchased 265,047 shares of our common stock at a cost of $678,000 under the program.

See "Item 2. Unregistered Sales of Equity Securities and Use of Proceeds" for additional information regarding share repurchases under the program in the three month period ended September 30, 2012.

Contractual Obligations and Requirements In February 2008, we acquired substantially all of the assets of Mobile Collect, a privately held company that provided text messaging and mobile communications solutions. The acquisition price included cash payments of $500,000 upon closing and requires contingent cash payments of up to $2.0 million payable quarterly through 2013 in the event that certain established financial targets are satisfied through the operation of the acquired assets. The final contingent cash payment related to the acquisition of Mobile Collect was made in the second quarter of 2012.

In June 2011, we acquired key assets and assumed certain liabilities of SmartReply, a mobile marketing company located in Irvine, California. The acquisition price included cash payments of $3.2 million upon closing and requires contingent cash payments currently estimated at $1.4 million, but up to a maximum of $8.9 million, in the form of an earn-out over a three year period.

The first earn-out period was completed as of June 30, 2012 and a payment of $211,000 was made in the third quarter of 2012. Subsequent annual payments will be determined over the next two years based upon year-over-year revenue growth in our mobile marketing business.

20-------------------------------------------------------------------------------- Table of Contents In February 2012, we assumed an equipment lease from the acquisition of 2ergo Americas. This 36 month operating lease commenced in September 2011 and requires quarterly cash payments of approximately $30,000 through August 2014.

Except for the contingent cash payments and equipment lease payments noted above, our contractual obligations have remained substantially unchanged from those reported in our Annual Report on Form 10-K for the year ended December 31, 2011.

Off-Balance-Sheet Arrangements As of September 30, 2012, we did not have any significant off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K of the SEC.

Critical Accounting Policies We prepare our unaudited condensed consolidated financial statements in conformity with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions. We reaffirm the critical accounting policies and estimates as reported in our Annual Report on Form 10-K for the year ended December 31, 2011.

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