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

[November 14, 2012]

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

(Edgar Glimpses Via Acquire Media NewsEdge) You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes and other financial information included elsewhere in this quarterly report. Some of the information contained in this discussion and analysis or set forth elsewhere in this quarterly report, including information with respect to our plans and strategy for our business and related financing, include forward-looking statements that involve risks and uncertainties. You should review the "Risk Factors" and "Forward-Looking Statements" sections of this quarterly report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.


Overview Tangoe is a leading global provider of communications lifecycle management, or CLM, software and services to a wide range of enterprises, including large and medium-sized businesses and other organizations. CLM encompasses the entire lifecycle of an enterprise's communications assets and services, including planning and sourcing, procurement and provisioning, inventory and usage management, mobile device management, real-time expense management, invoice processing, expense allocation and accounting, and asset decommissioning and disposal. Our on-demand Communications Management Platform is a suite of software designed to manage and optimize the complex processes and expenses associated with this lifecycle for both fixed and mobile communications assets and services. Our customers can engage us through our client services group to manage their communications assets and services using our Communications Management Platform.

Our solution can provide a significant return on investment by enabling an enterprise to identify and resolve billing errors, to optimize communications service plans for its usage patterns and needs, and to manage used and unused communications assets and services. Our solution allows enterprises to improve the productivity of their employees by automating the provisioning of communications assets and services, and to reduce costs by controlling and allocating communications expenses. It also allows enterprises to enforce regulatory requirements and internal policies governing the use of communications assets and services.

We designed our business model to sell recurring technology and services leveraging our Communications Management Platform. We review four key business metrics to help us monitor the performance of our business model and to identify trends affecting our business. The measures that we believe are the primary indicators of our quarterly and annual performance are as follows: Adjusted EBITDA. We define Adjusted EBITDA as net income (loss) plus interest expense, income tax provision, depreciation and amortization, amortization of marketing agreement intangible assets, stock-based compensation expense and decrease (increase) in fair value of warrants for redeemable convertible preferred stock; less amortization of leasehold interest and interest income and also include in Adjusted EBITDA adjustments for other non-cash and non-recurring items applicable for the periods presented. Our management uses Adjusted EBITDA to measure our operating performance because it does not include the impact of items not directly resulting from our core business and certain non-cash expenses such as depreciation and amortization and stock-based compensation. We believe that this measure provides us with additional useful information to measure and understand our performance on a consistent basis, particularly with respect to changes in performance from period to period. We use Adjusted EBITDA in the preparation of our annual operating budgets and to measure and evaluate the effectiveness of our business strategies. Adjusted EBITDA is not calculated in accordance with generally accepted accounting principles in the United States of America, or GAAP, and is not a substitute for or superior to financial measures determined in accordance with GAAP. Other companies in our industry may calculate Adjusted EBITDA in a manner differently from us, which reduces its usefulness as a comparative measure. Our Adjusted EBITDA has increased annually for each fiscal year since 2007 and we expect it to continue to increase in our fiscal year ending December 31, 2012.

Recurring technology and services revenue growth. In 2006, we began a strategic initiative to transition our business model from selling transactional software licenses to providing recurring technology-enabled services leveraging both our technology and communications industry experience. We further implemented this initiative with the acquisition of Traq Wireless, Inc., or Traq, as discussed below. Traq's revenue base was primarily recurring, which substantially increased our 2007 recurring revenue. We regularly review our recurring revenue growth to measure our success.

31 -------------------------------------------------------------------------------- Table of Contents We intend to continue to focus our sales and marketing efforts on increasing our recurring technology and services-related customer base, and we expect that our recurring technology and services revenue will increase in absolute dollars and as a percentage of total revenue over the next 12 months due to our expectation that we will be able to: † retain a high percentage of the revenue we currently derive from our existing customers; † sell additional product and service offerings to our existing customers; and † add a significant number of new customers.

We believe that we will be able to retain a high percentage of our existing recurring technology and services revenue due to our revenue retention rates, and the current levels of customer usage of our products and services, which we review on a monthly basis to provide an indication of impending increases or decreases in billed revenue for future periods.

We believe that we will be able to sell additional product and service offerings to our existing customers in the next year based on our analysis of revenue on a per-customer basis for the last 12 months, which indicates that our customers on an aggregate basis have generally increased their usage of our solution on a quarterly basis.

We believe that we will be able to add a significant number of new customers over the next 12 months as we continue to expand internationally and increase our share of the domestic market.

Deferred revenue. Our deferred revenue consists of the amounts that have been invoiced but that have not yet been recognized as revenue, including advanced billed and undelivered portions of our Communication Management Platform subscriptions and related services, maintenance on our software licenses and implementation fees. We invoice our services to many of our customers in advance, with the intervals ranging from 1 to 12 months. We monitor our deferred revenue balance as this balance represents revenue to be recognized over the next 12 months except for a portion of implementation and subscription fees.

Implementation fees are recognized ratably over twice the term of the contract, which we estimate to be the expected life of the customer relationship.

Subscription fees are recognized ratably over the term of the contract. As of September 30, 2012, implementation fees represented $1.9 million of the $11.3 million deferred revenue balance.

Revenue retention rates. In addition, we consider our revenue retention rates.

Since we began to fully realize the benefits of our recurring revenue model in 2009, our revenue retention rates have been higher than 90%. We measure revenue retention rates by assessing on a dollar basis the recurring technology and services revenue we retain for the same customer and product set in a given period versus the prior year period. We cannot predict our revenue retention rates in future periods. Our use of a revenue retention rate has limitations as an analytical tool, and you should not consider it in isolation. Other companies in our industry may calculate revenue retention rates differently, which reduces its usefulness as a comparative measure.

We also review a number of other quantitative and qualitative trends in monitoring our performance, including our share of the CLM market, our customer satisfaction rates, our ability to attract, hire and retain a sufficient number of talented employees to staff our growing business and the development and performance of our solutions. Our review of these factors can affect aspects of our business and operations on an on-going basis, including potential acquisition strategies and investment in specific areas of product development or service support.

Certain Trends and Uncertainties The following represents a summary of certain trends and uncertainties, which could have a significant impact on our financial condition and results of operations. This summary is not intended to be a complete list of potential trends and uncertainties that could impact our business in the long or short term. This summary, however, should be considered along with the factors identified in the "Risk Factors" section of this Quarterly Report on Form 10-Q.

† The CLM market is characterized by rapid technological change and frequent new product and service introductions, including frequent introductions of new technologies and devices. To achieve and maintain market acceptance for our solution, we must effectively anticipate these changes and offer software products and services that respond to them in a timely manner. If we fail to develop software products and services that satisfy customer preferences in a timely and cost-effective manner, our ability to renew our agreements with existing customers and our ability to create or increase demand for our solution will be harmed.

† We believe that competition will continue to increase. Increased competition could result from existing competitors or new competitors that enter the market because of the potential opportunity. We will continue to closely monitor competitive activity and respond accordingly. Increased competition could have an adverse effect on our financial condition and results of operations.

32 -------------------------------------------------------------------------------- Table of Contents † We continue to closely monitor current economic conditions, as any decline in the general economic environment that negatively affects the financial condition of our customers could have an adverse effect on our financial condition and results of operations. For example, during the most recent economic downturn, our customer cancellation rate during the first quarter of 2009 increased to a quarterly rate of over three times the average of the prior four quarters, partly as a result of customer bankruptcies. Although economic conditions have generally improved, there has not been a full recovery to the levels that generally existed prior to the downturn. If economic conditions in the United States and other countries do not continue to improve, we may face greater risks in operating our business.

Acquisitions On January 25, 2011, we acquired substantially all of the assets of HCL Expense Management Services Inc., or HCL-EMS, a provider of telecommunications expense management, invoice processing and mobility management solutions, for $3.0 million in cash plus potential earn-out payments, which we currently estimate will amount to approximately $3.4 million, based on revenues derived from providing selected services to former HCL-EMS customers over the two years following the acquisition as well as transaction costs of approximately $140,000. These transaction costs were expensed as incurred. The earn-out payments are subject to set-off rights of ours with respect to indemnities given by HCL-EMS under our Asset Purchase Agreement for HCL-EMS. In May 2012, we agreed with HCL-EMS on the amount of the first year earn-out. Pursuant to our Asset Purchase Agreement with HCL-EMS, we withheld a portion of the first year earn-out amount, as a result of and pending resolution of various indemnity matters.

On March 16, 2011, we acquired substantially all of the assets of the telecommunications expense management division of Telwares, Inc. and its subsidiary Vercuity Solutions, Inc., or Telwares, for $4.5 million in cash (excluding working capital adjustments) plus deferred cash of up to an additional $2.5 million payable in installments of $1.25 million each on March 16, 2012 and March 16, 2013. The deferred cash is subject to set-off rights that we hold with respect to indemnities given by Telwares under the purchase agreement for the acquisition. Among other things, these indemnity obligations relate to representations and warranties given by Telwares under the purchase agreement. Certain of these indemnities are subject to limitations, including certain caps and limited survival periods. In addition, the installment payable on March 16, 2013 is subject to a potential reduction of up to $500,000 relating to the achievement of certain recurring revenue goals during the three months ending June 30, 2012. We have provided to Telwares notice setting forth a calculation of a potential reduction, and we are engaged in discussions with them concerning that calculation. In addition, we incurred transaction costs of approximately $200,000 in connection with the transaction.

These transaction costs were expensed as incurred.

On December 19, 2011, we acquired ProfitLine, Inc., or ProfitLine, a provider of telecommunications expense management, invoice processing and mobility management solutions, through a merger with one of our subsidiaries for $14.5 million in cash paid at the closing plus deferred cash of an additional $9.0 million payable in cash installments of $4.5 million on each of December 19, 2012 and June 19, 2013, subject to set-off rights that we and ProfitLine, as our wholly owned subsidiary following the acquisition, hold with respect to indemnities given by the former stockholders of ProfitLine under the merger agreement for the acquisition. Among other things, these indemnity obligations relate to representations and warranties given by ProfitLine under the merger agreement. Certain of these indemnities are subject to limitations, including a threshold, certain caps and a limited survival period. Under the merger agreement, we are required to make an advance deposit into escrow of the deferred consideration under certain circumstances, including in the event that our cash and cash equivalents, less bank and equivalent debt (which excludes capital lease obligations and deferred consideration payable in connection with acquisitions) is below $20.0 million at any time prior to payment of the first $4.5 million installment of deferred consideration, or $15.0 million at any time after payment of the first and before the payment of the second $4.5 million installment of deferred consideration. The transaction costs were immaterial and were expensed as incurred.

On January 10, 2012, we acquired all of the outstanding equity of Anomalous Networks Inc., or Anomalous, a provider of real-time telecommunications expense management solutions. The aggregate purchase price was approximately $9.0 million, which consisted of approximately $3.5 million in cash paid at the closing, approximately $1.0 million in cash payable on the first anniversary of the closing, 165,775 unregistered shares of our common stock and 132,617 unvested and unregistered shares of our common stock with vesting based on achievement of revenue targets relating to sales of Anomalous products and services for periods through January 31, 2013. With the exception of the cash paid at the closing, substantially all of the consideration paid and payable by us remains subject to set-off rights that we hold with respect to indemnities given by the former shareholders of Anomalous under the purchase agreement for the acquisition. Among other things, these indemnity obligations relate to representations and warranties given by Anomalous under the purchase agreement.

The indemnities are subject to limitations, including a threshold, certain caps and limited survival periods. The vested shares that we issued at closing are subject to a one-year lock-up period, the unvested shares are also subject to a lock-up unless and until they become vested following January 31, 2013 and substantially all of the shares are subject to the set-off rights described above. Under the Anomalous purchase agreement, we are required to make an advance deposit into escrow of $1.0 million of deferred consideration in the event that our cash and cash equivalents is below $15.0 million at any time before payment of the $1.0 million of deferred consideration. The transaction costs were immaterial and were expensed as incurred.

33 -------------------------------------------------------------------------------- Table of Contents On February 21, 2012, we acquired all of the issued share capital of ttMobiles Limited, or ttMobiles, a provider of mobile communications management solutions and services based in the United Kingdom. The purchase price was 5.5 million pounds sterling, which consisted of 4.0 million pounds sterling in cash paid at the closing and 1.5 million pounds sterling in cash payable on the first anniversary of the closing. The purchase price is subject to a net asset adjustment pursuant to which the purchase price will be increased or decreased to the extent that the net asset position of ttMobiles is more or less than a specified target by an amount that exceeds 5% of the target. The deferred consideration in the transaction remains subject to set-off rights that we hold with respect to claims for breach of warranties and certain indemnities given under the purchase agreement for the transaction by the former holders of the issued share capital of ttMobiles. The breach claims and indemnities are subject to limitations, including a threshold, certain baskets, caps and limited survival periods. The transaction costs were immaterial and were expensed as incurred.

On August 8, 2012, we acquired substantially all of the assets of the telecommunications expense management division of Symphony Teleca Services, Inc., or Symphony, pursuant to an asset purchase agreement, or the Symphony Purchase Agreement. On the same date, a newly formed subsidiary of ours, Tangoe India Softek Services Private Limited, an Indian private limited company, or Tangoe India, entered into a business purchase agreement, or the Indian Purchase Agreement, with Symphony Services Corporation (India) Private Limited, or Symphony India, with respect to the purchase of certain assets and employees of the acquired business located in India. The net purchase price was $40.2 million, which consisted of $29.2 million in cash paid at the closing, approximately $4.4 million in cash payable on the six-month anniversary of the closing, and approximately $6.4 million in cash payable on the one-year anniversary of the closing. Approximately $1.9 million of the installment due on February 8, 2013, the full installment due on August 8, 2013 of approximately $6.4 million, and amounts that potentially become payable under the earn-out are subject to set-off rights that we have with respect to indemnities given by Symphony under the Symphony Purchase Agreement. Among other things, these indemnity obligations relate to representations and warranties given by Symphony under the Symphony Purchase Agreement and by Symphony India under the Indian Purchase Agreement. Certain of the indemnities are subject to limitations, including a threshold and deductible, certain caps and limited survival periods. During a post-closing transition period expected to last for 2 to 6 months, Symphony and Symphony India will provide to us certain transition services, including making available to us on a continuing basis the services previously provided by Symphony India to Symphony, pending completion of the opening of certain Tangoe India facilities, the procurement of certain Indian tax registrations and the subsequent transfer to Tangoe India of the Indian assets and employees being hired. The transaction costs were immaterial and were expensed as incurred.

We are currently integrating the operations of the six businesses that we acquired during 2011 and 2012. With respect to one of these businesses, we have completed the migration of the acquired customers to our platforms, and with respect to two of these businesses, we continue to migrate the acquired customers to our platforms. While to date we have successfully migrated a number of these customers, there can be no assurance that we will complete this integration and migration in a timely manner or at all and the cost of such integration and migration may be more significant than we have estimated. In addition, we plan to migrate the recently acquired customers of the Symphony TEM Business to our platform over the next 12 to 18 months.

We may pursue additional acquisitions of, or investments in, businesses, services and technologies that will expand the functionality of our solution, provide access to new markets or customers, or otherwise complement our existing operations.

Sources of Revenue Recurring technology and services revenue. We derive our recurring technology and services revenue primarily from subscriptions and services related to our Communications Management Platform. We recognize revenue for software and related services when all of the following conditions are met: (a) there is persuasive evidence of an arrangement; (b) the service has been provided to the customer; (c) the collection of the contracted fee is probable; and (d) the amount of the fees to be paid by the customer is fixed and determinable. These services include help desk, asset procurement and provisioning, and carrier dispute resolution. The recurring technology and services revenue is recognized ratably over the contract term.

In 2006, we began a strategic initiative to transition our business model from selling non-recurring transactional software licenses to providing recurring technology and services leveraging both our technology and communications industry experience.

We license our on-demand software and sell related services primarily on a subscription basis under agreements that typically have terms ranging from 24 to 60 months. Our recurring technology and services revenue is driven primarily by the amount of communications spend that we manage for fixed line contracts and by the number of mobile devices that we manage for mobile device contracts. Our customers are typically subject to a minimum charge for up to a specified threshold amount of communications spend or number of mobile devices under management and additional charges to the extent those specified thresholds are exceeded. Prior to 2010, as a result of limited history regarding customer renewals, implementation fees related to subscription agreements for our Communications Management Platform with terms equal to or less than 36 months were recognized over 36 months and implementation fees related to subscription agreements with terms exceeding 36 months were recognized over the life of the agreement. In 2010, due to having greater evidence regarding customer renewals, we believed it was appropriate to extend the estimated expected life of the customer relationship to be equal to twice the contract life calculated on a per-customer basis and to recognize implementation fees ratably over this period. This change did not have a material impact on our consolidated financial 34 -------------------------------------------------------------------------------- Table of Contents statements. Many of our subscription contracts are non-cancelable, although customers have the right to terminate for cause if we materially fail to perform.

In 2010, we began to amortize the value of a warrant to purchase common stock issued to IBM as part of a strategic relationship agreement. This related charge will be recorded as contra-revenue in proportion to total expected revenue from the agreement. We recorded $15,881 and $46,323 of amortization as a contra-revenue charge during the three months ended September 30, 2011 and 2012, respectively and $65,209 and $119,259 of amortization as a contra-revenue charge during the nine months ended September 30, 2011 and 2012, respectively.

Strategic consulting, software licenses and other revenue. In addition to our subscription fees, revenue is generated to a lesser extent by strategic consulting, software licenses, mobile device activation fees and sales of telecommunication accessories. Strategic consulting consists primarily of fees charged for contract negotiations and bill audits. Contract negotiation fees include both fixed project fees and incentive fees driven by the amount of savings that we are able to generate over the customer's existing communications rates. These fees are recognized when fixed and determinable, usually when the customer and carrier execute the contract. Bill audit fees are driven by the amount of savings that we are able to generate by reviewing current and prior communications invoices against the customer's existing contracts. These fees are recognized when fixed and determinable, usually when the carrier agrees to issue a credit or refund to our customer.

On occasion, we license our Communications Management Platform to our customers on a perpetual basis. If we are able to derive vendor-specific objective evidence on the undelivered elements, the software portion is recognized when the revenue recognition criteria is met; otherwise the contract is recognized ratably over the contract life. Other professional services are recognized as the services are performed. We have an agreement with a carrier whereby we receive an activation fee for procuring a mobile device. The activation revenue is recognized upon confirmation from the carrier that the device has been procured.

We expect our strategic consulting, software licenses and other revenue to remain relatively constant in absolute dollars, but to decrease as a percentage of total revenue, as we continue to focus our sales and marketing efforts on our recurring technology and services revenue model.

We historically have derived substantially all of our revenue from United States-based customers. We intend to build our international sales operations by increasing our direct sales force abroad. We expect our international revenue to increase in absolute dollars and as a percentage of total revenue.

Cost of Revenue and Gross Profit Cost of recurring technology and services revenue. Cost of recurring technology and services revenue consists primarily of costs associated with our data center operations, customer product support centers and client services group. This includes personnel-related costs such as salary, stock-based compensation and other compensation-related costs, subcontractor fees, hosting fees, communications costs and royalties related to third-party software included in our solution when our solution is licensed on a non-perpetual basis.

Cost of strategic consulting, software licenses and other revenue. Cost of strategic consulting, software licenses and other revenue consists primarily of personnel-related costs, including salary, stock-based compensation and other compensation-related costs and subcontractor fees directly related to delivering the service and to a lesser extent, the cost of the telecommunications accessories sold.

As our customer base continues to grow, we expect our cost of revenue to increase in absolute dollars as we expand our data center and customer support operations to support our continued growth. Our cost of revenue could fluctuate as a percentage of revenue on a quarterly basis but remain relatively stable on an annual basis based on the mix of software and services sold and average contractual selling price.

Gross profit. Gross profit as a percentage of revenue is affected by two main factors-the mix of software and services sold and the average contractual selling price. We expect our gross profit in absolute dollars to increase, but that our gross profit as a percentage of revenue will be affected as we integrate the businesses of our recent acquisitions, which have historically operated with lower margins than our business. We believe that over time we will achieve improvements in those margins as we integrate the acquired operations and capture the operating efficiencies of the overall business.

Operating Expense Operating expense consists of sales and marketing, general and administrative, research and development and depreciation and amortization. Other than for depreciation and amortization expense, personnel-related costs are the most significant component of all of these operating expenses. We expect to continue to hire a significant number of new employees in order to support our overall growth. In any particular period, the timing of additional hires could materially affect our operating results, both in absolute dollars and as a percentage of revenue.

35 -------------------------------------------------------------------------------- Table of Contents Sales and marketing. Sales and marketing expense consists primarily of personnel-related costs, including salary, stock-based compensation and other compensation-related costs for our sales, marketing and business development employees, the cost of marketing programs such as on-line lead generation, promotional events, such as trade shows, seminars and webinars, the cost of business development programs and sales commissions. Sales commission rates are calculated at the time a contract is signed. The sales commission rate is applied to the contract's first year of revenue to calculate sales commission expense. Sales commission expense is accrued and expensed at the time we invoice the customer and is paid to the salesperson when the invoice is collected.

Generally, new sales personnel require time to become familiar with our software and services and do not begin to generate sales immediately, which can result in increased sales and marketing expense without any immediate increase in revenue.

We expect sales and marketing expense to increase in absolute dollars, but remain relatively constant as a percentage of revenue in the near term, as we continue to hire sales and marketing personnel in the United States and internationally to expand our solution globally.

General and administrative. General and administrative expense consists of personnel-related costs, including salary, stock-based compensation and other compensation-related costs for finance and accounting, executive, human resources and information technology personnel, rent and facility costs, legal and other professional fees, and other corporate expenses. We are incurring and will continue to incur additional costs associated with being a public company, including higher personnel costs, corporate insurance and professional fees, including legal and accounting as it relates to financial reporting and achieving and maintaining compliance with Section 404 of the Sarbanes-Oxley Act.

Research and development. Research and development expense primarily consists of personnel-related costs, including salary, stock-based compensation and other compensation-related costs for development personnel, and fees to our outside contract development vendors. We anticipate that our research and development team will continue to focus on expanding our software and services and increasing the functionality of our current offerings. We expect research and development expense to increase in absolute dollars, but that the investment will likely be lower than the rate of growth in our revenue in the near term.

Depreciation and amortization. Depreciation and amortization expense primarily consists of the non-cash write-down of tangible and intangible assets over their expected economic lives. We expect this expense to continue to grow in absolute dollars and potentially as a percentage of revenue as we continue to grow and incur capital expenditures to improve our technological infrastructure and acquire assets through potential future acquisitions.

Other Income (Expense), Net Other income (expense), net consists primarily of interest expense on our short and long-term debt, interest income on our cash and cash equivalents balance and changes in fair value of warrant to purchase redeemable convertible preferred stock. We have historically invested our cash in money market investments. We expect our interest income to vary in each reporting period depending on our average cash balances and interest rates.

Income Tax Provision Income tax provision consists of federal, state and foreign corporate income taxes resulting from our global operations. We expect income tax expense to vary each reporting period depending upon taxable income fluctuations and our availability of tax benefits from net loss carryforwards.

As of December 31, 2011, we had U.S. federal net operating loss carryforwards of approximately $81.0 million, which, if unused, expire from 2020 to 2031, and U.S. federal research and development tax credit carryforwards of approximately $3.0 million, which expire through 2029. We have engaged in several transactions since our inception that have resulted in a change in control as defined by Section 382 of the Internal Revenue Code, which limits our ability to utilize these net operating loss and tax credit carryforwards in the future. As of December 31, 2011, $38.0 million of our net operating loss and tax credit carryforwards were so limited. At December 31, 2011, we recorded a valuation allowance against the full amount of our deferred tax assets, as our management believes it is uncertain that they will be fully realized. If we determine in the future that we will be able to realize all or a portion of our net operating loss or tax credit carryforwards, an adjustment to our net operating loss or tax credit carryforwards would increase net income in the period in which we make such a determination.

36 -------------------------------------------------------------------------------- Table of Contents Critical Accounting Policies Our financial statements are prepared in accordance with GAAP. The preparation of our financial statements and related disclosures requires us to make estimates, assumptions and judgments that affect the reported amount of assets, liabilities, revenue, costs and expenses, and related disclosures. We base our estimates and assumptions on historical experience and other factors that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions and conditions. Our most critical accounting policies are disclosed in the audited consolidated financial statements for the year ended December 31, 2011 included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 filed with the Securities and Exchange Commission, or the SEC, on March 29, 2012, as amended by our Annual Report on Form 10-K/A for the fiscal year ended December 31, 2011 filed with the SEC on April 26, 2012, which we refer to collectively as the 2011 Form 10-K.

Since the date of those financial statements, there have been no material changes to our significant accounting policies.

37 -------------------------------------------------------------------------------- Table of Contents Results of Operations for the Three and Nine Month Periods Ended September 30, 2011 and 2012 The following table presents our consolidated results of operations for the periods indicated. These consolidated results of operations are not necessarily indicative of the consolidated results of operations that will be achieved in any future period.

Three Months Ended September 30, Nine Months Ended September 30, % of % of % of % of(in thousands, except percentages) 2011 revenue 2012 revenue 2011 revenue 2012 revenue Revenue: Recurring technology and services $ 24,456 90 % $ 36,138 90 % $ 67,893 90 % $ 98,969 90 % Strategic consulting, software licenses and other 2,856 10 % 4,000 10 % 7,807 10 % 11,573 10 % Total revenue 27,312 100 % 40,138 100 % 75,700 100 % 110,542 100 % Cost of revenue: Recurring technology and services 11,926 44 % 16,696 42 % 32,391 43 % 45,809 41 % Strategic consulting, software licenses and other 1,142 4 % 1,588 4 % 3,659 5 % 4,835 4 % Total cost of revenue(1) 13,068 48 % 18,284 46 % 36,050 48 % 50,644 46 % Gross profit 14,244 52 % 21,854 54 % 39,650 52 % 59,898 54 % Operating expense: Sales and marketing (1) 4,113 15 % 6,275 16 % 11,774 16 % 17,732 16 % General and administrative (1) 4,683 17 % 8,083 20 % 12,855 17 % 21,830 20 % Research and development(1) 3,023 11 % 4,263 11 % 8,718 12 % 12,126 11 % Depreciation and amortization 1,249 5 % 2,297 6 % 3,380 4 % 6,168 6 % Restructuring charge 1,549 6 % - 0 % 1,549 2 % - 0 % (Loss) income from operations (373 ) (1 )% 936 2 % 1,374 2 % 2,042 2 % Other income (expense), net: Interest expense (1,427 ) (5 )% (256 ) (1 )% (2,863 ) (4 )% (683 ) (1 )% Interest income 14 0 % 22 0 % 21 0 % 60 0 % Decrease (increase) in fair value of warrants for redeemable convertible preferred stock 19 0 % - - (1,996 ) (3 )% - - (Loss) income before income tax provision (1,767 ) (6 )% 702 2 % (3,464 ) (5 )% 1,419 1 % Income tax provision 88 0 % 121 0 % 394 1 % 308 0 % Net (loss) income $ (1,855 ) (7 )% $ 581 1 % $ (3,858 ) (5 )% $ 1,111 1 % -------------------------------------------------------------------------------- (1) Amounts in table above include stock-based compensation expense, as follows: Cost of revenue $ 178 $ 362 $ 499 $ 947 Sales and marketing 207 586 589 1,455 General and administrative 466 1,643 1,447 3,727 Research and development 46 164 129 410 $ 897 $ 2,755 $ 2,664 $ 6,539 38 -------------------------------------------------------------------------------- Table of Contents Revenue The following table presents our components of revenue for the periods presented: Three Months Ended Nine Months Ended September 30, Increase September 30, Increase(in thousands, except percentages) 2011 2012 $ % 2011 2012 $ % Recurring technology and services $ 24,456 $ 36,138 $ 11,682 48% $ 67,893 $ 98,969 $ 31,076 46% Strategic consulting, software licenses and other 2,856 4,000 1,144 40% 7,807 11,573 3,766 48% Total revenue $ 27,312 $ 40,138 $ 12,826 47% $ 75,700 $ 110,542 $ 34,842 46% Our recurring technology and services revenue increased $11.7 million, or 48%, for the three months ended September 30, 2012 as compared to the same period of 2011, primarily due to an increase in the volume of fixed and mobile communications assets and service offerings being managed or provided through our on-demand communication management platform for current existing and new customers, combined with revenue attributable to customers acquired through our ProfitLine, Anomalous, ttMobiles and Symphony strategic acquisitions.

Our recurring technology and services revenue increased $31.1 million, or 46%, for the nine months ended September 30, 2012 as compared to the same period of 2011, primarily due to an increase in the volume of fixed and mobile communications assets and service offerings being managed or provided through our on-demand communication management platform for current existing and new customers, combined with revenue attributable to customers acquired through our HCL-EMS, Telwares, ProfitLine, Anomalous, ttMobiles and Symphony strategic acquisitions.

Our strategic consulting, software licenses and other revenue increased $1.1 million, or 40%, for the three months ended September 30, 2012 as compared to the same period of 2011, primarily due to increases in strategic sourcing revenue of $0.8 million, telecommunication accessories sales revenue of $0.4 million and mobile activation revenue of $0.1 million. These increases in revenue are attributable to current existing and new customers, combined with revenue attributable to customers acquired through our ProfitLine, Anomalous, ttMobiles and Symphony strategic acquisitions. These increases were partially offset by a decrease of $0.2 million in software license fee and other revenues.

Our strategic consulting, software licenses and other revenue increased $3.8 million, or 48%, for the nine months ended September 30, 2012 as compared to the same period of 2011, primarily due to increases in strategic sourcing revenue of $2.0 million, telecommunication accessories sales revenue of $1.2 million, mobile activation revenue of $0.5 million and software license fees of $0.4 million. These increases in revenue are attributable to current existing and new customers, combined with revenue attributable to customers acquired through our HCL-EMS, Telwares ProfitLine, Anomalous, ttMobiles and Symphony strategic acquisitions. These increases were partially offset by a decrease of $0.3 million in consulting and other revenues.

Costs and Expenses Cost of Revenue The following table presents our cost of revenue: Three Months Ended Nine Months Ended September30, Increase September30, Increase(in thousands, except percentages) 2011 2012 $ % 2011 2012 $ % Recurring technology and services $ 11,926 $ 16,696 $ 4,770 40% $ 32,391 $ 45,809 $ 13,418 41% Strategic consulting, software licenses and other 1,142 1,588 446 39% 3,659 4,835 1,176 32% Total cost of revenue $ 13,068 $ 18,284 $ 5,216 40% $ 36,050 $ 50,644 $ 14,594 40% Gross profit $ 14,244 $ 21,854 $ 7,610 53% $ 39,650 $ 59,898 $ 20,248 51% Gross margin 52% 54% 52% 54% 39 -------------------------------------------------------------------------------- Table of Contents Our recurring technology and services cost of revenue increased $4.8 million for the three months ended September 30, 2012 as compared to the same period in 2011. This increase is primarily due to an increase in personnel-related cost, including an increase in salary and other compensation-related costs, of $4.0 million, an increase in third-party contractor costs of $1.0 million and increases in other operational costs of $0.2 million. The increases in personnel-related costs, third-party contractor costs and other operational costs were primarily attributable to providing support for customer growth in our recurring technology and services business. These increases were partially offset by a reduction in third-party licensing fees of $0.4 million as acquired customers have migrated to our platforms.

Our recurring technology and services cost of revenue increased $13.4 million for the nine months ended September 30, 2012 as compared to the same period in 2011. This increase is primarily due to an increase in personnel-related costs, including an increase in salary and other compensation-related costs, of $11.6 million, an increase in third-party contractor costs of $1.6 million and increases in other operational costs of $0.6 million. The increases in personnel-related, third-party contractor costs and other operational costs were primarily attributable to providing support for customer growth in our recurring technology and services business. These increases were partially offset by a reduction in third-party licensing fees of $0.3 million as acquired customers have migrated to our platforms.

Our strategic consulting, software licenses and other cost of revenue increased $0.4 million for the three months ended September 30, 2012 as compared to the same period in 2011, primarily as a result of a $0.3 million increase in the costs associated with our sales of telecommunication accessories related to our mobile business as a result of increased sales volume and a $0.1 million increase in strategic sourcing personnel costs to support our growth in strategic sourcing revenue for the period.

Our strategic consulting, software licenses and other cost of revenue increased $1.2 million for the nine months ended September 30, 2012 as compared to the same period in 2011, primarily as a result of a $1.0 million increase in the costs associated with our sales of telecommunication accessories related to our mobile business as a result of increased sales volume and a $0.2 million increase in strategic sourcing personnel costs to support our growth in strategic sourcing revenue for the period.

As a percentage of revenue, gross profit increased to 54% for the three months ended September 30, 2012 as compared to 52% for the same period in 2011. This increase in gross margin was primarily due to the migration of customers acquired in the HCL-EMS and Telwares acquisitions onto our platforms, which operate at a higher gross margin than the legacy HCL-EMS and Telwares platforms on which we serviced these customers immediately following the HCL-EMS and Telwares acquisitions. The $7.6 million increase in gross profit in absolute dollars was primarily due to increased revenue.

As a percentage of revenue, gross profit increased to 54% for the nine months ended September 30, 2012 as compared to 52% for the same period in 2011. This increase in gross margin was primarily due to the migration of customers acquired in the HCL-EMS and Telwares acquisitions onto our platforms, which operate at a higher gross margin than the legacy HCL-EMS and Telwares platforms on which we serviced these customers immediately following the HCL-EMS and Telwares acquisitions. The $20.2 million increase in gross profit in absolute dollars was primarily due to increased revenue.

Operating Expense The following table presents our components of operating expense for the periods presented: Three Months Ended September 30, Nine Months Ended September 30, 2011 2012 2011 2012 % of % of Change % of % of Change (in thousands, except percentages) Amount Revenue Amount Revenue $ % Amount Revenue Amount Revenue $ % Sales and marketing $ 4,113 15% $ 6,275 16% $ 2,162 53% $ 11,774 16 % $ 17,732 16% $ 5,958 51% General and administrative 4,683 17% 8,083 20% 3,400 73% 12,855 17 % 21,830 20% 8,975 70% Research and development 3,023 11% 4,263 11% 1,240 41% 8,718 12 % 12,126 11% 3,408 39% Depreciation and amortization 1,249 5% 2,297 6% 1,048 84% 3,380 4 % 6,168 6% 2,788 82% Restructuring charge 1,549 6% - 0% (1,549 ) -100% 1,549 2 % - 0% (1,549 ) -100% Total operating expense $ 14,617 54% $ 20,918 52% $ 6,301 43% $ 38,276 51 % $ 57,856 82% $ 19,580 51% Sales and marketing expense. Our sales and marketing expense increased $2.2 million for the three months ended September 30, 2012 as compared to the same period of 2011, primarily due to increases in personnel-related costs, including salary and other compensation-related costs, of $1.7 million, as we increased the number of direct and indirect sales force employees to accommodate growth in sales opportunities, $0.3 million in travel expense as a result of the increased headcount and $0.2 million in other general sales and marketing expenses.

40 -------------------------------------------------------------------------------- Table of Contents Our sales and marketing expense increased $6.0 million for the nine months ended September 30, 2012 as compared to the same period of 2011, primarily due to increases in personnel-related costs, including salary and other compensation-related costs, of $4.7 million, as we increased the number of direct and indirect sales force employees to accommodate growth in sales opportunities, $0.8 million in travel expense as a result of the increased headcount and $0.3 million in marketing expense. The increase in marketing expenses was primarily attributable to attending several trade shows, market research and website expansion in an effort to expand brand awareness and increase lead generation.

General and administrative expense. Our general and administrative expenses increased $3.4 million for the three months ended September 30, 2012 as compared to the same period of 2011, primarily as a result of an increase in personnel-related costs, including salary and other compensation-related costs, of $1.9 million, which includes an increase in stock-based compensation of $1.2 million and employee compensation and benefits of $0.7 million due to an increase in headcount and stock-based equity awards. In addition, we incurred a $0.7 million increase in facility and overhead costs, primarily attributable to the rent and overhead costs associated with additional facilities, and an increase in professional fees of $0.2 million primarily attributable to the Symphony acquisition and operating as a public company.

Our general and administrative expenses increased $9.0 million for the nine months ended September 30, 2012 as compared to the same period of 2011, primarily as a result of an increase in personnel-related costs, including salary and other compensation-related costs, of $4.6 million, which includes an increase in stock-based compensation of $2.3 million and employee compensation and benefits of $2.3 million, due to an increase in headcount and stock-based equity awards. In addition, we incurred a $2.7 million increase in facility and overhead costs, primarily attributable to the rent and overhead costs associated with additional facilities, and an increase in professional fees of $1.2 million, primarily attributable to the Anomalous, ttMobiles and Symphony acquisitions and operating as a public company.

Research and development expense. Our research and development expenses increased $1.2 million for the three months ended September 30, 2012 as compared to the same period of 2011, primarily due to increased personnel-related costs, including salary and other compensation-related costs, of $0.9 million primarily arising from increased headcount. In addition, we incurred a $0.3 million increase in third-party consultant expenses. The higher costs were primarily the result of an initiative to enhance the functionality of our products and improve our ability to scale to increased demand.

Our research and development expenses increased $3.4 million for the nine months ended September 30, 2012 as compared to the same period of 2011, primarily due to increased personnel-related costs, including salary and other compensation-related costs, of $2.2 million primarily arising from increased headcount. In addition, we incurred a $1.1 million increase in third-party consultant expenses. The higher costs were primarily the result of an initiative to enhance the functionality of our products and improve our ability to scale to increased demand.

Depreciation and amortization expense. Depreciation and amortization expenses increased $1.0 million for the three months ended September 30, 2012 as compared to the same period of 2011, primarily due to an increase in amortization expense of $0.8 million and depreciation expense of $0.2 million. The increase in amortization expense was result of higher intangible assets as result of the ProfitLine, Anomalous, ttMobiles and Symphony acquisitions. The increase in depreciation expense was primarily due to an increase in capital expenditures to support our overall growth.

Depreciation and amortization expenses increased $2.8 million for the nine months ended September 30, 2012 as compared to the same period of 2011, primarily due to an increase in amortization expense of $2.3 million and depreciation expense of $0.5 million. The increase in amortization expense was result of higher intangible assets as result of the HCL-EMS, Telwares, ProfitLine, Anomalous, ttMobiles and Symphony acquisitions. The increase in depreciation expense was primarily due to an increase in capital expenditures to support our overall growth.

Restructuring charge. The restructuring charge recorded in the three and nine months ended September 30, 2011 was a result of the consolidation of office space in New Jersey. The consolidation of office space eliminated redundant office space acquired in the HCL-EMS and Telwares acquisitions. This charge reflects the fair value of the remaining rent payments for the office space we ceased using, net of estimated sublease income plus real estate commissions, and office relocation costs. Although we continue to attempt to sublet the office space, we do not know how long it will take to locate a subtenant or to come to terms on a sublease agreement or the terms on which we may be able to sublease the office space, which might not be favorable to us. Any differences between the estimated sublease income and the actual agreement will be recorded monthly over the life of the original lease.

41 -------------------------------------------------------------------------------- Table of Contents Other Income (Expense), Net The following table presents our components of other income (expense), net for the periods presented: Three Months Ended Nine Months Ended September 30, Increase September 30, Increase (in thousands) 2011 2012 $ 2011 2012 $ Interest expense $ (1,427 ) $ (256 ) 1,171 $ (2,863 ) $ (683 ) 2,180 Interest income 14 22 8 21 60 39 Decrease (increase) in fair value of warrants for redeemable convertible preferred stock 19 - (19 ) (1,996 ) - 1,996 Interest Expense. The decrease in interest expense for the three and nine months ended September 30, 2012 as compared to the same periods of 2011 was a result of higher average debt balances in 2011 as a result of an outstanding term loan related to the HCL-EMS and Telwares acquisitions.

Interest Income. The increase in interest income for the three and nine months ended September 30, 2012 as compared to the same periods in 2011 was a result of higher average cash balances in interest bearing bank accounts.

Increase in fair value of warrants to purchase redeemable convertible preferred stock. The elimination of the increase in the fair value of warrants to purchase redeemable convertible preferred stock for the three and nine months ended September 30, 2012 as compared to the same periods in 2011 was the result of all warrants to purchase redeemable convertible preferred stock being converted to warrants to purchase common stock upon the completion of our initial public offering in August 2011.

Income tax provision. Our income tax provision was comparable at $0.1 million for each of the three months ended September 30, 2012 and 2011.

Our income tax provision decreased $0.1 million for the nine months ended September 30, 2012 as compared to the same period in 2011, primarily due to deferred tax benefits recorded in 2012 related to intangible assets and a current tax benefit associated with foreign refundable research and development from our 2012 acquisitions of Anomalous and ttMobiles, and a reduction in our federal tax provision in 2012 due to tax benefits from stock option exercises.

These decreases were partially offset by an increase in state income taxes resulting from higher taxes on capital due to our initial and follow-on public stock offerings.

Liquidity and Capital Resources Sources of Liquidity Since our inception, we have funded our operations primarily from cash from operations, private placements of preferred stock, subordinated notes, term loans and revolving credit facilities. In addition, in August 2011 we raised approximately $66.0 million in net proceeds through an initial public offering of our common stock and in April 2012, we raised an additional $37.7 million in net proceeds through a follow-on public offering of our common stock. We intend to use the proceeds from the follow-on public offering for working capital and other general corporate purposes, which may include financing our growth, developing new solutions and funding capital expenditures, acquisitions and investments. As of September 30, 2012, we had cash and cash equivalents of $55.7 million, accounts receivable of $33.4 million and amounts due under various debts and credit facilities of $28.8 million. Amounts due under various debts and credit facilities of $28.8 million relates to the deferred consideration for the HCL-EMS, Telwares, ProfitLine, Anomalous, ttMobiles and Symphony acquisitions and capital lease and other obligations.

We believe that our existing cash and cash equivalents and our cash flow from operating activities will be sufficient to meet our anticipated cash needs for at least the next twelve months. 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, or investments in, businesses, services or technologies.

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.

42 -------------------------------------------------------------------------------- Table of Contents The following table sets forth our cash and cash equivalents and the major sources and uses of cash for each of the periods set forth below: As of December 31, September 30, (in thousands) 2011 2012 Cash and cash equivalents $ 43,407 $ 55,736 Nine Months Ended September 30, (in thousands) 2011 2012 Net cash provided by operating activities $ 5,311 $ 13,535 Net cash used in investing activities (8,648 ) (39,743 ) Net cash provided by financing activities 49,945 38,577 Effect of exchange rate on cash - (40 ) Net increase in cash and cash equivalents $ 46,608 $ 12,329 Cash Flows from Operating Activities Operating activities provided $13.5 million of net cash during the nine months ended September 30, 2012, which resulted from our net income of $1.1 million for the nine months ended September 30, 2012 principally supplemented by non-cash charges of stock-based compensation of $6.5 million and depreciation and amortization of $6.2 million. Cash provided by operating activities was adversely impacted by a $1.4 million decrease in deferred revenue and a $0.8 million increase in accounts receivable during the nine months ended September 30, 2012.

Operating activities provided $5.3 million of net cash during the nine months ended September 30, 2011, which resulted from our net loss of $3.9 million for the nine months ended September 30, 2011, principally offset by a $3.2 million increase in accounts payable and non-cash charges of depreciation and amortization of $3.4 million, stock-based compensation of $2.7 million, increase in fair value of warrants for redeemable convertible preferred stock of $2.0 million and a restructuring charge of $1.5 million. Cash provided by operating activities was adversely impacted by a $5.8 million increase in accounts receivable during the nine months ended September 30, 2011.

Cash Flows from Investing Activities Cash used in investing activities totaled $39.7 million during the nine months ended September 30, 2012 and consisted of $38.4 million paid in connection with the 2012 acquisitions and capital expenditures of $1.3 million primarily related to the purchase of computer equipment and software.

Cash used in investing activities totaled $8.6 million during the nine months ended September 30, 2011 and consisted of $8.2 million paid in connection with the HCL-EMS and Telwares acquisitions and capital expenditures of $0.5 million primarily related to the purchase of computer equipment and software.

Cash Flows from Financing Activities Cash flows provided by financing activities totaled $38.6 million during the nine months ended September 30, 2012 primarily due to $37.7 million of net proceeds from our follow-on offering, net of underwriting discounts and commissions and offering costs, and $3.7 million in proceeds from the exercise of stock options and stock warrants. Cash provided by financing activities was adversely impacted by debt repayments of $3.0 million.

43 -------------------------------------------------------------------------------- Table of Contents Cash flows provided by financing activities totaled $49.9 million during the nine months ended September 30, 2011 primarily due to $67.0 million of net proceeds from our initial public offering, net of underwriting discounts and commissions and offering costs, and $0.8 million in proceeds from the exercise of stock options and stock warrants. Cash provided by financing activities was adversely impacted by the net repayment under our credit facilities of $17.7 million Contractual Obligations The following table summarizes our material contractual obligations at September 30, 2012 and the effect such obligations are expected to have on our liquidity and cash flows in future periods.

Payments due by period Less than (dollars in thousands) Total 1 year 1-3 years 3-5 years Operating lease obligations $ 20,309 $ 6,418 $ 13,086 $ 805 Capital lease and other obligations 1,815 1,593 222 - Interest on capital lease obligations 59 48 11 - Symphony deferred purchase price 10,596 10,596 - - ProfitLine deferred purchase price 8,877 8,877 - - HCL-EMS contingent consideration 2,987 2,987 - - ttMobiles deferred purchase price 2,399 2,399 - - Telwares deferred purchase price 1,198 1,198 - - Anomalous deferred purchase price 971 971 - - $ 49,211 $ 35,087 $ 13,319 $ 805 † Operating lease obligations include minimum lease obligations with remaining terms in excess of one year primarily related to office space as well as certain equipment.

† Capital lease and other obligations include minimum lease obligations with remaining terms in excess of one year related to computer hardware and software and a deferred payment of $0.6 million due December 2012, related to customer contracts purchased.

† Symphony deferred purchase price includes payments of $4.4 million payable on February 8, 2013 and $6.4 million payable on August 8, 2013.

† ProfitLine deferred purchase price includes installments of $4.5 million payable on December 19, 2012 and June 19, 2013.

† HCL-EMS contingent consideration includes a payment following the second anniversary of the HCL-EMS closing date of January 25, 2011.

† ttMobiles deferred purchase price includes an installment of $2.4 million payable on February 21, 2013.

† Telwares deferred purchase price consists of an installment of $1.25 million payable on March 16, 2013.

† Anomalous deferred purchase price includes an installment of $1.0 million payable on January 10, 2013.

Off-Balance Sheet Arrangements We do not engage in any off-balance sheet financing activities, nor do we have any interest in entities referred to as variable interest entities.

Recent Accounting Pronouncements For information regarding recent accounting pronouncements, refer to Note 3 to our financial statements included in the 2011 Form 10-K.

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