Restructuring and Impairments
On March 31, 2009, we announced that we reduced our workforce by 45 employees, representing 10% of our total workforce. The reductions were primarily in back-office staff functions and included the elimination of certain senior management positions. We expect the total estimated costs associated with the restructuring to be approximately $1.2 million, of which we recorded $0.9 million during the three months ended March 31, 2009. We expect to incur all remaining charges by June 30, 2009. These costs relate primarily to non-recurring severance payments. Substantially all of these charges consist of cash expenditures.
| Stock-Based Compensation and Executive Transition |
On January 29, 2009, we announced the appointment of J. Eric Cooney as our president and Chief Executive Officer and a member of our board of directors effective March 16, 2009. Mr. Cooney succeeded James P. DeBlasio, who resigned as President and Chief Executive Officer effective as of March 16, 2009 and as a director effective as of March 15, 2009. In connection with his employment, Mr. Cooney will receive (1) an annual base salary of $600,000, (2) a cash signing bonus of $300,000 (under certain circumstances, Mr. Cooney will be obligated to reimburse us for $150,000 of the signing bonus if his employment terminates prior to March 1, 2011), (3) an option to purchase 600,000 shares of our common stock at a purchase price of $2.24, the closing price on the day of commencement of work, 25% of which will vest on the first anniversary of the grant date and the remainder to vest in 36 equal monthly installments thereafter, (4) a new hire grant of 300,000 shares of restricted stock, which will vest in four equal annual installments, (5) a grant of 200,000 shares of restricted stock on each of the first anniversary and the second anniversary of his commencement of work, both such grants to vest in four equal annual installments, (6) an annual incentive bonus based upon criteria established by our Board of Directors, with a target level of 100% of base salary and a maximum level of 200% of base salary and (7) customary benefits including vacation. The agreement provides for “at will” employment. The fair value of Mr. Cooney’s stock-based compensation awards is $2.4 million, including the shares that may be issued on the first and second anniversaries of the commencement of work.
Pursuant to the terms of a separation agreement with Mr. DeBlasio, he received (1) a cash payment of $927,000, one half of which was paid in March 2009 with the remainder recorded as a liability in the accompanying financial statements to be paid in September 2009, (2) full vesting of all equity awards previously granted to him as of March 16, 2009 having an incremental value of $0.8 million and (3) if he so elects, continued health, dental and vision insurance coverage under our group health plan until September 16, 2010. Mr. DeBlasio has until March 16, 2010 to exercise any stock options that were vested as of March 16, 2009.
----
----
During the three months ended March 31, 2009, we changed our method of counting customers. Under the previous approach, we counted (1) customers who we invoiced for at least one full month in the quarter, (2) customers who purchased our FCP product, which typically has a large non-recurring component and (3) new customers in the quarter who had signed contracts even though we had not yet invoiced them. Under our new method, we count only recurring-revenue customers who maintain service during the final month of each quarter, thereby excluding new customers acquired in the quarter that have not yet been invoiced and customers purchasing only FCP products. This change provides us and our stockholders more relevant information.
We currently have 3,174 customers, serving a variety of industries, including entertainment and media, financial services, healthcare, travel, e-commerce, retail and technology. Our customer count is summarized in the following table:
| | Number of Customers | ||
| March 31, 2009 | 3,174 | ||
| December 31, 2008 | 3,311 | ||
| September 30, 2008 | 3,375 | ||
| June 30, 2008 | 3,433 | ||
| March 31, 2008 | 3,414 |
----
We offer a comprehensive solution at 47 service points, including nine locations managed by us and 38 locations managed by third parties. We charge monthly fees for data center services based on the amount of square footage that the customer leases in our facilities. We have relationships with various providers to extend our P-NAP model into markets with high demand.
Segment Information. We operate in three business segments: IP services, data center services and CDN services. IP services include managed and premise-based high performance IP and route optimization technologies. Data center services include hosting of customer applications directly on our network to eliminate issues associated with the quality of local connections. Data center services are increasingly being bundled with our high performance IP connectivity services. CDN services include products and services for storing and delivering digital media to large global audiences over the Internet.
IP Services . Revenues for IP services decreased $2.5 million, or 8%, to $28.6 million for the three months ended March 31, 2009, compared to $31.1 million for the three months ended March 31, 2008. The decrease in IP revenues was driven by the loss of several large customers during the three months ended March 31, 2009 and a large equipment sale during the three months ended March 31, 2008, a reduction in the rate at which we signed new customers and a decline in IP pricing, partially offset by an increase in overall traffic. There have been ongoing industry-wide pricing declines over the last several years. The effective price we charge our customers for IP Services, measured in megabits per second, or Mbps, decreased approximately 26% from the three months ended March 31, 2008 to the three months ended March 31, 2009. However, we continue to experience increasing demand for our traditional IP services. IP traffic increased approximately 31% from the three months ended March 31, 2008 to the three months ended March 31, 2009. The increase in IP traffic resulted from customers requiring greater overall capacity due to growth in the usage of their applications, as well as in the nature of applications consuming greater amounts of bandwidth. IP services revenues also included FCP and other hardware sales of $0.7 million and $1.1 million for the three months ended March 31, 2009 and 2008, respectively.
The growth in data center revenues and direct costs of data center services largely follows our expansion of data center space, and we believe the demand for data center services continues to outpace industry-wide supply. Direct costs of data center services, exclusive of depreciation and amortization, have substantial fixed cost components, primarily for rent, but also significant demand-based pricing variables, such as utilities, which are highest in the summer for cooling the facilities. Direct costs of data center services as a percentage of revenues vary with the mix of usage between sites operated by us and third parties, referred to as partner sites, as well as the utilization of total available space. While we recognize some of the initial operating costs, especially rent, of sites operated by us in advance of revenues, these sites are more profitable at certain levels of utilization than the use of partner sites. Conversely, costs in partner sites are more demand-based and therefore are more closely associated with the recognition of revenues. We seek to optimize the most profitable mix of available data center space operated by us and our partners and have reduced the number of vendors utilized for partner sites. The increase in initial operating costs of sites operated by us drove the higher percentage of direct costs for the three months ended March 31, 2009 compared to the same period in 2008. We expect direct costs of data center services as a percentage of corresponding revenues to decrease as the recently expanded sites operated by us contribute to revenue and become more fully utilized.
CDN Services . Revenues for our CDN services segment decreased $1.0 million, or 18%, to $4.7 million for the three months ended March 30, 2009, compared to $5.7 million for the three months ended March 31, 2008. The decrease in revenues was primarily due to a continuing highly-competitive market for CDN services that is driving lower prices and higher customer churn.
As part of our ongoing review of our business and segments, we are considering possible changes in how we report, monitor and measure our CDN services relative to IP and data center services. We cannot anticipate that any such changes will directly result in restructuring or impairment charges. However, we may nevertheless incur additional restructuring or non-cash impairment charges to goodwill or other intangible assets in the future if operating results deteriorate or do not improve and/or if unfavorable changes continue to occur in other economic factors used to estimate fair values. This is particularly true for our CDN services reporting unit, as well as our FCP products reporting unit within IP services.
Direct Costs of Customer Support. Direct costs of customer support were $4.4 million for both the three months ended March 31, 2009 and 2008. There was an increase of $0.5 million in cash-basis compensation and benefits including severance related to a former vice president who was terminated separately from the restructuring plan, partially offset by decreases of $0.2 million in stock-based compensation and $0.1 million in facilities and related costs.
Product Development. Product development costs for the three months ended March 31, 2009 decreased 17% to $1.9 million from $2.3 million for the three months ended March 31, 2008. The decrease of $0.4 million was attributable to decreases of $0.1 million in each of professional services costs, cash-basis compensation and benefits, and stock-based compensation.
Sales and Marketing. Sales and marketing costs for the three months ended March 31, 2009 decreased 12% to $7.8 million from $8.8 million for the three months ended March 31, 2008. The decrease of $1.0 million was comprised primarily of $0.7 million in lower sales commissions and $0.1 million for stock-based compensation as discussed above.
Sales and Marketing. Sales and marketing costs for the three months ended March 31, 2009 decreased 12% to $7.8 million from $8.8 million for the three months ended March 31, 2008. The decrease of $1.0 million was comprised primarily of $0.7 million in lower sales commissions and $0.1 million for stock-based compensation as discussed above.
Posts
No comments:
Post a Comment