SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934/
For the quarterly period ended /March 31, 2001/
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE/
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 0-17920
Metasolv, Inc.
(Exact name of registrant as specified in its charter)
Delaware 75-2912166
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
5560 Tennyson Parkway
Plano, Texas 75024
(Address of principal executive offices)
Registrant's telephone number, including area code: (972) 403-8300
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of March 31, 2001, there were 36,046,722 shares of the registrant's common
stock outstanding.
METASOLV, INC.
INDEX
Page
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheets - March 31, 2001 and December 31, 2000........................... 3
Condensed Consolidated Statements of Operations - For the Three Months Ended
March 31, 2001 and 2000.............................................................................. 4
Condensed Consolidated Statements of Cash Flows - For the Three Months Ended
March 31, 2001 and 2000.............................................................................. 5
Notes to Condensed Consolidated Financial Statements................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................................................ 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................................. 18
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K....................................................................... 19
SIGNATURES....................................................................................................... 20
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
METASOLV, INC.
Condensed Consolidated Balance Sheets
(In thousands, except share data)
ASSETS
------
March 31, December 31,
2001 2000
---------- ------------
(Unaudited)
Current assets:
Cash and cash equivalents........................................ $111,429 $ 93,695
Marketable securities............................................ 33,774 48,843
Trade accounts receivable, less allowance for doubtful accounts
of $6,223 in 2001 and $5,200 in 2000........................... 30,830 23,994
Unbilled receivables............................................. 1,187 1,510
Prepaid expenses................................................. 4,753 6,090
Other current assets............................................. 4,628 4,921
-------- --------
Total current assets.......................................... 186,601 179,053
Property and equipment, net........................................ 15,456 14,491
Equity investments, at cost........................................ 4,000 4,000
Other assets....................................................... 100 84
-------- --------
Total assets.................................................. $206,157 $197,628
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable................................................. $ 6,805 $ 7,910
Accrued expenses................................................. 19,458 16,468
Deferred revenue................................................. 26,415 24,025
-------- --------
Total current liabilities....................................... 52,678 48,403
Deferred income taxes.............................................. 308 275
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized,
no shares issued or outstanding................................. -- --
Common stock, $.005 par value, 100,000,000 shares authorized,
36,046,722 issued at March 31, 2001 and 35,930,345 issued
at December 31, 2000............................................ 180 180
Additional paid-in capital....................................... 129,634 130,522
Deferred compensation............................................ (371) (300)
Unrealized gains on marketable securities........................ 65 --
Retained earnings................................................ 23,663 18,548
-------- --------
Total stockholders' equity...................................... 153,171 148,950
-------- --------
Total liabilities and stockholders' equity...................... $206,157 $197,628
======== ========
See Notes to Condensed Consolidated Financial Statements
-3-
METASOLV, INC.
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
Three Months Ended
March 31,
------------------
2001 2000
------- -------
(Unaudited)
Revenues:
License............................ $24,930 $13,193
Service............................ 13,876 12,797
------- -------
Total revenues.................. 38,806 25,990
------- -------
Cost of revenues:
License............................ 2,998 547
Service............................ 7,324 7,528
------- -------
Total cost of revenues.......... 10,322 8,075
------- -------
Gross profit.................... 28,484 17,915
------- -------
Operating expenses:
Research and development........... 8,317 7,047
Sales and marketing................ 7,991 4,647
General and administrative......... 5,869 3,542
------- -------
Total operating expenses........ 22,177 15,236
------- -------
Income from operations............... 6,307 2,679
Interest and other income, net....... 1,877 1,619
------- -------
Income before taxes.................. 8,184 4,298
Income tax expense................... 3,069 1,719
------- -------
Net income........................... $ 5,115 $ 2,579
======= =======
Earnings per share of common stock:
Basic.............................. $ 0.14 $ 0.07
======= =======
Diluted............................ $ 0.13 $ 0.06
======= =======
See Notes to Condensed Consolidated Financial Statements
-4-
METASOLV, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
Three Months Ended
March 31,
--------------------
2001 2000
-------- --------
(Unaudited)
Cash flows from operating activities:
Net income............................................... $ 5,115 $ 2,579
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.......................... 996 622
Deferred tax (benefit)................................. (222) (364)
Tax benefit from disqualifying dispositions............ -- 1,788
Changes in operating assets and liabilities:
Trade accounts receivable, net...................... (6,836) (2,378)
Unbilled receivables................................ 323 2,462
Other assets........................................ 1,869 (1,770)
Accounts payable and accrued expenses............... 1,885 (122)
Deferred revenue.................................... 2,390 520
-------- --------
Net cash provided by operating activities............ 5,520 3,337
-------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment............... (1,882) (1,491)
Proceeds from sale of marketable securities.............. 15,134 --
-------- --------
Net cash provided by (used in) investing activities.. 13,252 (1,491)
-------- --------
Cash flows from financing activities:
Proceeds from common stock transactions.................. 553 613
Purchase of treasury stock............................... (1,591) --
-------- --------
Net cash provided by (used in) financing activities.. (1,038) 613
-------- --------
Increase in cash and cash equivalents..................... 17,734 2,459
Cash and cash equivalents, beginning of period............ 93,695 112,341
-------- --------
Cash and cash equivalents, end of period.................. $111,429 $114,800
======== ========
See Notes to Condensed Consolidated Financial Statements
-5-
METASOLV, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1) Basis of Presentation
These unaudited condensed consolidated financial statements reflect all
adjustments (consisting only of those of a normal recurring nature), which are,
in the opinion of management, necessary to fairly present the financial
position, results of operations and cash flows for the interim periods. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted, although the Company believes that the disclosures are
adequate to make the information presented not misleading. These condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto for the year ended
December 31, 2000, contained in the Company's Annual Report to Stockholders and
Form 10-K filed with the Securities and Exchange Commission. Operating results
for the three months ended March 31, 2001, are not necessarily indicative of the
results that may be expected for the full year ending December 31, 2001.
2) Revenue Recognition
Effective January 1, 2000, the Company adopted Statement of Position
(SOP) 98-9, Modification of SOP 97-2, Software Revenue Recognition, With Respect
to Certain Transactions. SOP 98-9 amends SOP 97-2 to require recognition of
revenue using the "residual method" when there is vendor-specific objective
evidence of the fair values of all undelivered elements in a multiple-element
arrangement that is not accounted for using long-term contract accounting. Under
the residual method, the arrangement fee is recognized as follows: (1) the total
fair value of the undelivered elements, as indicated by vendor-specific
objective evidence, is deferred and subsequently recognized in accordance with
the relevant sections of SOP 97-2 and (2) the difference between the total
arrangement fee and the amount deferred for the undelivered elements is
recognized as revenue related to the delivered elements. Adoption of SOP 98-9
did not have a material effect on the Company's financial position or results of
operations.
3) Earnings Per Share
Following is a reconciliation of the weighted average shares used to compute
basic and diluted earnings per share (in thousands):
Three Months Ended
March 31,
------------------
2001 2000
------ ------
Weighted average common shares outstanding.. 35,940 34,884
Effect of dilutive securities:
Options.................................... 3,749 5,660
------ ------
Weighted average common and common
equivalent shares outstanding.............. 39,689 40,544
====== ======
Securities that were not included in the computation of diluted earnings per
share because their effect was antidilutive consist of options to purchase
1,211,265 shares of common stock in the first quarter of 2001 and 36,600 shares
of common stock in the first quarter of 2000.
-6-
4) Segment Information
The Company operates in a single operating segment: communications software
and related services. Revenue information regarding operations for different
products and services is as follows (in thousands):
Three Months Ended
March 31,
------------------
2001 2000
------- -------
Software license fees........... $24,930 $13,193
Professional services........... 4,850 8,248
Post-contract customer support.. 9,026 4,549
------- -------
Total revenues................. $38,806 $25,990
======= =======
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements
From time to time, information provided by the Company, statements made by
its employees or information included in its filings with the Securities and
Exchange commission, including this form 10-Q report, may contain certain
"forward-looking" information, as that term is defined by the Private Securities
Litigation Reform Act of 1995 (the "Act"). Statements that describe future
market conditions, future revenues, future profitability or company plans are
forward-looking statements. The words "expects," "anticipates," "believes" and
similar words generally signify a "forward-looking" statement. These forward-
looking statements are made pursuant to the safe harbor provisions of the Act.
The reader is cautioned that all forward-looking statements are necessarily
speculative and that there are certain risks and uncertainties that could cause
actual events or results to differ materially from those referred to in such
forward-looking statements. Such risks and uncertainties include those in the
section below entitled "Certain Factors That May Affect Future Results." The
Company undertakes no obligation to publicly revise any forward-looking
statement due to changes in circumstances after the date of this report, or to
reflect the occurrence of unanticipated events.
Overview
MetaSolv is a leading provider of software designed to make it easier for
communications service providers to take, manage and fulfill orders for service
from their customers. These communications service providers offer a full array
of communications services including local and long-distance voice services,
high-speed data services and Internet services, often as a bundled offering.
We derive substantially all of our revenue from the sale of licenses, related
professional services, and maintenance and support of our MetaSolv Solution(TM)
packaged software to these convergent communications service providers.
We generally recognize license revenues when our customer has signed a
license agreement, we have delivered the software product, product acceptance is
not subject to express conditions, the fees are fixed or determinable and we
consider collection to be probable. We allocate the agreed fees for multiple
products and services licensed or sold in a single transaction among the
products and services using the "residual method" as required by SOP 98-9,
deferring the fair market value of the undelivered elements and recognizing the
residual amount of the fees as revenue upon delivery of the software license. On
occasion we may enter into a license agreement with a customer requiring
development of additional software functions or services necessary for the
software's performance of specified functions. For those agreements, we
recognize revenue for the entire arrangement on a percentage-of-completion basis
as the development services are provided. We generally recognize service
revenues as the services are performed. We recognize revenues from maintenance
agreements ratably over the maintenance period, usually one year.
Licensing and service terms are typically covered by signed orders that
reference our master agreement with the customer. We normally ship our software
and perform services shortly after we receive orders. As a result, our quarterly
license revenues are largely dependent on orders booked and delivered during
that quarter. Our sales for a given period typically involve large financial
commitments from a relatively small number of customers. Accordingly, delays in
the completion of sales near the end of a quarter could negatively impact
revenues in that quarter. Consistent with industry
-7-
practice, we sometimes agree to bill our license fees in more than one
installment. Extended payment terms that do not exceed six months are considered
fixed obligations. In these situations, amounts not billed immediately are
recorded as unbilled receivables. Obligations that extend beyond six months from
shipment of software are deferred and recorded as revenue when billed.
We have structured the pricing of our software to meet the needs of each of
our target market segments, from start-up resellers to large, facility-based
incumbent service providers. We charge a base price for the core subsystems,
coupled with additional license fees for add-on modules. In addition, we charge
a per-user license fee, with customary volume discounts on purchases of large
numbers of user licenses. We price annual maintenance and support contracts as a
percentage of the license fee that is current for the product being maintained.
For a new customer, our initial sale of licenses and associated services,
including maintenance and support, generally ranges from one to several millions
of dollars.
We occasionally include complementary software developed by third parties to
extend the capabilities of our software, accelerate product introductions and to
otherwise utilize proprietary intellectual property. From time to time we also
evaluate opportunities to provide a broader solution to our customers by
acquiring complementary software technology.
Service revenues consist principally of software implementation, consulting
and customer training, as well as software maintenance agreements that include
both customer support and the right to product updates. We use our own employees
and subcontract with our alliance partners to provide implementation consulting
services to our customers. We primarily offer and expect to continue to offer
the majority of our services on an hourly basis. We also offer several fixed-
price consulting packages, primarily for repeatable solutions.
We anticipate that future revenues will be generated from five principal
sources:
License fees from new customers;
License fees for additional products to existing customers;
License fees for additional users in our existing customer base;
Implementation and other service fees related to product license sales; and
Maintenance fees from both existing and new customers.
Percentage of Revenues and Year over Year Growth
The following table sets forth, for the periods indicated, the percentage of
total revenues represented by certain line items in the Company's statements of
operations.
Three Months Ended
March 31, Percentage Dollar
2001 2000 Change
---- ---- -----------------
(Unaudited)
Revenues:
License....................... 64% 51% 89%
Service....................... 36% 49% 8%
---- ----
Total revenues............. 100% 100% 49%
---- ----
Cost of revenues:
License....................... 8% 2% 448%
Service....................... 19% 29% (3%)
---- ----
Total cost of revenues..... 27% 31% 28%
---- ----
Gross profit.................... 73% 69% 59%
Operating expenses:
Research and development...... 21% 27% 18%
Sales and marketing........... 21% 18% 72%
General and administrative.... 15% 14% 66%
---- ----
-8-
Total operating expenses... 57% 59% 46%
---- ----
Income from operations.......... 16% 10% 135%
Interest and other income, net.. 5% 6% 16%
---- ----
Income before taxes............. 21% 17% 90%
Income tax expense.............. 8% 7% 79%
---- ----
Net income...................... 13% 10% 98%
==== ====
Revenues
Total revenues increased 49% to $38.8 million for the quarter ended March 31,
2001, from $26.0 million for the quarter ended March 31, 2000. The increase in
revenues is primarily related to an increase in the number and size of software
license sales earned and delivered during the most recent quarter, and a larger
number of customers subscribing to our maintenance support.
License fees. License revenues increased 89% to $24.9 million for the quarter
ended March 31, 2001, from $13.2 million for the quarter ended March 31, 2000.
License revenue includes sales of software to new customers, and follow-on sales
of additional modules and user seats to existing customers.
During the quarter ended March 31, 2001, we signed orders with three new
customers, compared to a quarterly average of 13 new customers during 2000. The
adverse revenue impact from the lower number of new customer orders during the
quarter ended March 31, 2001, was largely offset by revenues earned from orders
signed in prior periods and follow-on orders from existing customers.
Fluctuation in the number of new customers in a single fiscal quarter is not
expected to have a substantial impact on the Company's long-term growth, but a
sustained reduction in the number of new customers would result in lower
revenues and profits from licenses and services. We believe the slowdown in new
customer orders reflects an overall lower level of capital spending by some
segments of the North American communications industry. Our globalization and
market diversification strategies are expected to reduce the adverse effects
from future market downturns in specific regions and customer segments.
However, longer-term contractions in our customer markets could adversely affect
future revenues. These and other risks are described in the section of this
report titled Certain Factors That May Affect Future Results.
Services. Services revenues increased 8% to $13.9 million for the quarter
ended March 31, 2001, from $12.8 million for the quarter ended March 31, 2000.
The growth in services revenues was due to growth in the number of customers
subscribing to maintenance agreements, while revenue from consulting and
training services declined 41% compared to the year-ago quarter.
Post-contract customer support, or maintenance revenues increased 98% to $9.0
million for the quarter ended March 31, 2001, from $4.5 million for the quarter
ended March 31, 2000. The increase in maintenance revenue is due to the growth
in our active customer base and a high percentage of maintenance agreement
renewals. Despite the high maintenance renewal rate from our customers, several
have recently declared bankruptcy or leased operations, which is expected to
slow the growth of our maintenance revenues in future periods.
Consulting and training revenues declined 41% to $4.9 million for the quarter
ended March 31, 2001, from $8.2 million for the quarter ended March 31, 2000.
The decline in consulting and training revenue is attributable to fewer new
customer product implementations during the quarter ended March 31, 2001, the
increasing ability of alliance partners to provide consulting services directly
to our customers, and shortened software implementation times that have reduced
consulting costs for our customers.
Demand for our consulting services is largely influenced by the number and
size of our new license sales. We expect that increases or decreases in the
number and size of new customer license sales generally will have a
corresponding increase or decrease in consulting and training revenue. We also
expect that the maintenance component of service revenues will continue to
increase faster than the company's consulting revenue due to the high level of
maintenance contract renewals we have experienced and the continuing trend of
third party consulting firms contracting directly with our customers to provide
implementation services.
-9-
We recognized $0.5 million of revenue during the quarter ended March 31,
2001, from sources outside the continental United States and Canada,
representing 1% of total revenue. We expect our international revenues to
increase by a substantially higher percentage than domestic sales during the
next twelve months as our product enhancements and language options expand our
potential market, and as we strengthen our customer support capabilities in
overseas markets. We cannot be certain that our investments in international
operations will produce desired levels of revenues or profitability.
Cost of Revenues
License Costs. License costs consist primarily of royalties for third party
software that is used to develop or is embedded in our products, and for product
features that were originally developed for specific customers. These software
components are now included in our software and payments are made to the
original companies that funded the development of those components. Cost of
license revenues also includes costs of packaging materials and the production
of software media and documentation.
License costs were $3.0 million for the quarter ended March 31, 2001, and
$0.5 million for the quarter ended March 31, 2000, representing 12% and 4% of
license revenues during each period, respectively. The increase in license costs
was due to royalty expense for use of third party e-commerce software that we
have embedded in our products and an increase in license revenues on which
royalty payments are based. We expect to continue use of third party software
where it provides an advantage for our customers and where it lowers our overall
product development cost. Most of our royalty agreements provide for payment
caps or time limitations.
Service Costs. Service costs consist primarily of compensation and related
expenses for MetaSolv employees and fees for third-party consultants who provide
consulting, training and customer support services for our customers.
Service costs were $7.3 million for the quarter ended March 31, 2001, and
$7.5 million for the quarter ended March 31, 2000, representing 53% and 59% of
service revenues in each period respectively. A $2.0 million decrease in
subcontracted consulting costs was essentially offset by a $1.8 million increase
in MetaSolv compensation and related overhead for customer support, training and
consulting services. The decrease in service costs as a percentage of service
revenues was due to the relatively higher proportion of higher-margin
maintenance revenue, compared to consulting and training revenue, and repeatable
implementation processes and standard customizable tools that have reduced
implementation times and costs for tasks such as data migration.
We expect future service costs to fluctuate proportionately with changes in
demand for software-related consulting and training. We expect that our
alliance partners who generate some of our license sales will increasingly
contract directly with our customers to provide implementation and integration
consulting services and this is expected to result in a slower growth of our
services operation. Services costs related to support for overseas customers is
also expected to increase substantially during 2001.
Operating Expenses
Research and Development Expense. Research and development expenses consist
primarily of costs related to our staff of software developers, contracted
development costs, and the associated infrastructure costs required to support
product development. Product research and development expenses increased 18% to
$8.3 million for the quarter ended March 31, 2001, from $7.0 million for the
quarter ended March 31, 2000. Research and development expenses represented 21%
and 27% of total revenues in each period, respectively. The increase in
expenses was due to a 27% increase in research and development personnel to meet
market demand for new features, functionality and advances in product
architecture, partially offset by lower contracted development expenses. During
the quarter ended March 31, 2001, research and development work included
enhancements for high-speed internet and data communications networks, internet
commerce, adapting our software for international differences in data formats,
standards and language, and advances in product architecture that will allow our
customers to more quickly address future changes in their service offerings,
thus providing them with an enduring competitive advantage.
We expect that our future investment in product development will continue to
increase as we address additional emerging technologies to enable communications
providers and businesses to manage their next generation networks and services
worldwide.
-10-
Our product development methodology generally achieves technological
feasibility near the end of the process, when we have a working model.
Accordingly, we have not capitalized any software development costs.
Sales and Marketing Expenses. Sales and marketing expenses consist primarily
of salary, commission, travel, trade show and other related expenses required to
sell our software in our targeted markets. Sales and marketing expenses
increased 72% to $8.0 million for the quarter ended March 31, 2001, from $4.6
million for the quarter ended March 31, 2000, representing 21% and 18% of total
revenues in each period, respectively. Sales and marketing expenses increased
primarily due to the expansion of our sales and marketing staff required to
execute our global, next-generation and enterprise strategies, and for revenue-
related commission expenses to our sales force and to alliance partners who
assisted in selling our products.
General and Administrative Expenses. General and administrative expenses
consist of costs related to information systems infrastructure, facilities,
finance and accounting, legal, human resources and corporate management, that
have not been allocated to other departments. General and administrative
expenses increased 66% to $5.9 million for the quarter ended March 31, 2001,
from $3.5 million for the quarter ended March 31, 2000, representing 15% and 14%
of total revenues in each period, respectively. The increase in general and
administrative expenses, in dollars and as a percent of revenue, resulted from a
higher provision for doubtful accounts which increased 256% from the prior year.
General and administrative expenses also increased between these two periods due
to staff increases in information systems to support our larger scale of
operations. We expect general and administrative expenses to continue to
increase to support business growth, including costs to strengthen our
international operations.
Interest and Other Income, Net. Interest and other income consisting of
interest income, interest expense, and gains and losses on disposition of
assets, was $1.9 million in the quarter ended March 31, 2001, compared to $1.6
million in the quarter ended March 31, 2000. The increase in interest and other
income in the most recent fiscal quarter was primarily due to our higher
balances of cash and marketable securities on which we receive interest income,
partially offset by lower interest rates earned on invested balances.
Income Tax Expense. Income tax expense was $3.1 million in the quarter ended
March 31, 2001, compared to $1.7 million in the quarter ended March 31, 2000,
representing effective tax rates as a percent of pre-tax income of 37.5% and
40.0% in each period, respectively. The effective tax rate has declined from
the prior year primarily due to realization of research and development tax
credits.
Liquidity and Capital Resources. At March 31, 2001, our primary sources of
liquidity were $111.4 million in cash and cash equivalents, and $33.8 million in
marketable securities, totaling $145.2 million and representing 70% of total
assets. The company has invested its cash in excess of current operating
requirements in short and intermediate term investment grade securities that are
available for sale as needed to finance future company growth. Total cash and
marketable securities increased $2.7 million from $142.5 million at December 31,
2000, primarily due to cash generated from operating activities.
Cash provided by operating activities was $5.5 million during the quarter
ended March 31, 2001, compared to $3.3 million during the equivalent period in
2000. The increase in cash generated from operating activities was due
primarily to higher operating profits of the company.
Deferred revenue consists of customer payments that we have received for
future deliverables and includes prepaid maintenance revenue that we recognize
on a pro-rata basis over the term of the agreement. Deferred revenues were
$26.4 million as of March 31, 2001, compared to $24.0 million at December 31,
2000, reflecting an increase primarily related to future delivery of
international product functionality.
Accounts receivable, net, increased from $24.0 million at the end of 2000 to
$30.8 million as of March 31, 2001, due to slower-paying customers and a small
increase in revenues between these periods.
Cash provided by investing activities was $13.3 million in the quarter ended
March 31, 2001. This amount includes $1.9 million for purchases of computer
hardware and software, furniture and leasehold improvements, and $15.1 million
from redemptions of marketable securities that were converted to cash
equivalents.
Net cash used in financing activities was $1.0 million in the quarter ended
March 31, 2001, primarily due to the purchase of shares of the company's
outstanding stock.
-11-
We believe that our cash flows generated by operations, together with current
cash and marketable security balances, will be sufficient to meet our
anticipated cash needs for working capital and capital expenditures for at least
the next 12 months. From time to time, we evaluate potential acquisitions of
complementary businesses, products and technologies. Should cash balances be
insufficient to complete one of these acquisitions, we may seek to sell
additional equity or debt securities. The decision to sell additional equity or
debt securities could be made at any time and could result in additional
dilution to our stockholders.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. The
provisions of this statement, as amended, require that an entity recognize all
derivatives as either assets or liabilities measured at fair value. The
accounting for changes in the fair value of a derivative depends on the use of
the derivative. The adoption of this standard on January 1, 2001, did not have
any impact on our results of operations or financial position.
Certain Factors That May Affect Future Results
The Communications Market is Changing Rapidly, and Failure to Anticipate and
React to the Rapid Change Could Result in Loss of Customers or Wasteful Spending
Over the last decade, the market for communications products and services has
been characterized by rapid technological developments, evolving industry
standards, dramatic changes in the regulatory environment, emerging companies
and frequent new product and service introductions. Our future success depends
largely on our ability to enhance our existing products and services and to
introduce new products and services that are capable of adapting to changing
technologies, industry standards, regulatory changes and customer preferences.
If we are unable to successfully respond to these changes or do not respond in a
timely or cost-effective way, our sales could decline and our costs for
developing competitive products could increase.
New technologies, services or standards could require significant changes in
our business model, development of new products or provision of additional
services. New products and services may be expensive to develop and may result
in our encountering new competitors in the marketplace. Furthermore, if the
overall market for order processing, management and fulfillment software grows
more slowly than we anticipate, or if our products and services fail in any
respect to achieve market acceptance, our revenues would be lower than we
anticipate and operating results and financial condition could be materially
adversely affected.
The Communications Industry is Experiencing Consolidation, Which May Reduce
the Number of Potential Customers for Our Software
The North American communications industry has experienced significant
consolidation. In the future, there may be fewer potential customers requiring
operations support systems and related services, increasing the level of
competition in the industry. In addition, larger, consolidated communications
companies have strengthened their purchasing power, which could create pressure
on the prices we charge and the margins we could realize. These companies are
also striving to streamline their operations by combining different
communications systems and the related operations support systems into one
system, reducing the number of vendors needed. Although we have sought to
address this situation by continuing to market our products and services to new
customers and by working with existing customers to provide products and
services that they need to remain competitive, we cannot be certain that we will
not lose customers as a result of industry consolidation.
Our Customers' Financial Strength, and their Ability to Obtain Financing May
Lead to Lower Sales and Decreased Profitability
Many of our customers are small to medium sized Competitive Communications
Service Providers with limited operating histories. Many of these customers are
not profitable and highly dependent on private sources of venture capital to
fund their operations. During the last half of 2000 and in the most recent
fiscal quarter, many competitive communications service providers have been
unable to access either the debt or equity markets to continue the expansion
-12-
of their business. The inability of these companies to raise capital has
resulted in a decrease in the number of potential customers that are capable of
purchasing our software, a delay by some of our existing customers to purchase
additional products, and delays in payments by existing customers, or failure to
pay for our products. We cannot be certain that market conditions will not
continue to affect the ability of these customers to obtain adequate financing
for capital expenditures. Because we currently derive all of our revenue from
the licensing, related professional services and maintenance and support of our
MetaSolv Solution software products, if our customers are unable to obtain
adequate financing, sales of our software could suffer. The failure to continue
to increase revenue related to our software would adversely affect our operating
results and financial condition. In addition, limitations on the ability of our
current customers to obtain adequate financing could adversely affect our
ability to collect outstanding accounts receivable resulting in increased bad
debt losses and a decrease in our overall profitability. Any of our current
customers who cease to be viable business operations would no longer be a source
of maintenance revenue, or revenue from sales of additional MetaSolv license or
services products, and this could adversely affect our profitability.
We Rely on a Limited Number of Customers for a Significant Portion of Our
Revenue
A significant portion of revenue each quarter is derived from a relatively
small number of large sales. The amount of revenue we derive from a specific
customer is likely to vary from period to period, and a major customer in one
period may not produce significant additional revenue in a subsequent period.
During the year 2000, our top 10 customers accounted for 27% of our total
revenue, compared to 44% during the year 1999. No single customer accounted for
more than 5% of total revenue in 2000. However, to the extent that any major
customer terminates its relationship with us, our revenue could be adversely
affected. While we believe that the loss of any single customer would not
seriously harm our overall business or financial condition, our inability to
consummate one or more substantial sales in any future period could seriously
harm our operating results for that period.
Competition from Larger, Better Capitalized or Emerging Competitors for the
Communications Products and Services that We Offer Could Result in Price
Reductions, Reduced Gross Margins and Loss of Market Share
Competition in the communications products market is intense. Although we
compete against other companies selling communications software and services,
the in-house development efforts of our customers may also result in our making
fewer sales. We expect competition to persist and intensify in the future. We
cannot be certain that we will be able to compete successfully with existing or
new competitors, and increased competition could result in price reductions,
reduced gross margins and loss of market share.
Competitors vary in size and scope, in terms of products and services
offered. We encounter direct competition from several vendors, including Eftia
OSS Solutions, Granite Systems, Telcordia Technology, and Wisor Telecom. We
compete indirectly with large equipment vendors like Nortel Networks and ADC
Telecommunications, since their respective acquisitions of Architel and CommTech
Corp. We also compete with systems integrators and with the information
technology departments of large communications service providers. Finally, we
are aware of communications service providers, software developers, and smaller
entrepreneurial companies that are focusing significant resources on developing
and marketing products and services that will compete with MetaSolv. We
anticipate continued growth in the communications industry and the entrance of
new competitors in the order processing, management and fulfillment software
market, and that the market for our products and services will remain intensely
competitive.
Some of our current competitors have longer operating histories, a larger
customer base, greater brand recognition and greater financial, technical,
marketing and other resources than we do. This may place us at a disadvantage in
responding to our competitors' pricing strategies, technological advances,
advertising campaigns, strategic alliances and other initiatives. In addition,
many of our competitors have well-established relationships with our current and
potential customers and have extensive knowledge of our industry. As a result,
our competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements. They may also be able to
devote more resources to the development, promotion and sale of their products
and services than we can. To the extent that our competitors offer customized
products that are competitive with our more standardized product offerings, our
competitors may have a substantial competitive advantage, which may cause us to
lower our prices and realize lower margins.
Current and potential competitors also have established or may establish
cooperative relationships among themselves or with others to increase their
ability to address customer needs. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share. In addition, some of our competitors may develop
products and services that are superior to, or have greater market acceptance
than, the products and related services that we offer.
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If the Internet and Internet-Based Services Growth Slows, Demand for Our
Products May Fall
Our success depends heavily on the Internet being accepted and widely used as
a medium of commerce and communication. The growth of the Internet has driven
changes in the public communications network and has given rise to the growth of
the next-generation service providers who are our core customers. Rapid growth
in the use of the Internet and on-line services is a recent phenomenon, and it
may not continue. If use of the Internet does not continue to grow or grows more
slowly than expected, the market for software that manages communications over
the Internet may not develop and our sales would be adversely affected.
Consumers and businesses may reject the Internet as a viable commercial medium
for a number of reasons, including potentially inadequate network
infrastructure, slow development of technologies or insufficient commercial
support. The Internet infrastructure may not be able to support the demands
placed on it by increased usage and bandwidth requirements. In addition, delays
in the development or adoption of new standards and protocols required to handle
increased levels of Internet activity, or increased government regulation could
cause the Internet to lose its viability as a commercial medium. Even if the
required infrastructure, standards, protocols or complementary products,
services or facilities are developed, we may incur substantial expense adapting
our solutions to changing or emerging technologies.
Changes in Communications Regulation Could Adversely Affect Our Customers and
May Lead to Lower Sales
Our customers are subject to extensive regulation as communications service
providers. Changes in legislation or regulation that adversely affect our
existing and potential customers could lead them to spend less on order
processing, management and fulfillment software, which would reduce our
revenues, which could seriously affect our business and financial condition.
We Rely on Sales of Our MetaSolv Solution Products for Our Revenue
We currently derive all of our revenue from the licensing, related
professional services and maintenance and support of our MetaSolv Solution
software products, previously known as Telecom Business Solution. We expect
that we will continue to depend on revenue related to new and enhanced versions
of our software for the foreseeable future. We cannot be certain that we will be
successful in upgrading and marketing our software or that we will successfully
develop and market new products or services. Failure to continue to increase
revenue related to our software or to generate revenue from new products and
services would adversely affect our operating results and financial condition.
If We Fail to Accurately Estimate the Resources Necessary to Complete Any
Fixed-Price Contract, Or If We Fail to Meet Our Performance Obligations, We May
Be Required to Absorb Cost Overruns and We May Suffer Losses On Projects
In addition to time and materials contracts, we have periodically entered
into fixed-price contracts for software implementation, and we may do so in the
future. These fixed-price contracts involve risks because they require us to
absorb possible cost overruns. Our failure to accurately estimate the resources
required for a project or our failure to complete our contractual obligations in
a manner consistent with the project plan would likely cause us to have lower
margins or to suffer a loss on such a project, which would negatively impact our
operating results. On occasion we have been required to commit unanticipated
additional resources to complete projects. We may experience similar situations
in the future.
Our Quarterly Operating Results Can Vary Significantly and May Cause Our
Stock Price to Fluctuate
Our quarterly operating results can vary significantly and are difficult to
predict. As a result, we believe that period-to-period comparisons of our
results of operations are not a good indication of our future performance. It is
likely that in some future quarter or quarters our operating results will be
below the expectations of public market analysts or investors. In such an event,
the market price of our common stock may decline significantly. A number of
factors are likely to cause our quarterly results to vary, including:
. The overall level of demand for communications services by consumers and
businesses and its effect on demand for our products and services by our
customers;
. Our customers' willingness to buy, rather than build, order processing,
management and fulfillment software;
-14-
. The timing of individual software orders, particularly those of our major
customers involving large license fees that would materially affect our
revenue in a given quarter;
. The introduction of new communications services and our ability to react
quickly compared to our competitors;
. Our ability to manage costs, including costs related to professional
services and support services;
. The utilization rate of our professional services employees and the extent
to which we use third party subcontractors to provide consulting services;
. Costs related to possible acquisitions of other businesses;
. Our ability to collect outstanding accounts receivable from very large
product licenses;
. Innovation and introduction of new technologies, products and services in
the communications and information technology industries; and
. Costs related to the expansion of our operations.
We forecast the volume and timing of orders for our operational planning, but
these forecasts are based on many factors and subjective judgments, and we
cannot assure their accuracy. We have hired and trained a large number of
personnel in core areas, including product development and professional
services, based on our forecast of future revenues. As a result, significant
portions of our operating expenses are fixed in the short term. Therefore,
failure to generate revenue according to our expectations in a particular
quarter could have an immediate negative effect on results for that quarter.
Our quarterly revenue is dependent, in part, upon orders booked and delivered
during that quarter. We expect that our sales will continue to involve large
financial commitments from a relatively small number of customers. As a result,
the cancellation, deferral, or failure to complete the sale of even a small
number of licenses for our products and related services may cause our revenues
to fall below expectations. Accordingly, delays in the completion of sales near
the end of a quarter could cause quarterly revenue to fall substantially short
of anticipated levels. Significant sales may also occur earlier than expected,
which could cause operating results for later quarters to compare unfavorably
with operating results from earlier quarters.
Some contracts for software licenses may not qualify for revenue recognition
upon product delivery. Revenue may be deferred when there are significant
elements required under the contract that have not been completed, there are
express conditions relating to product acceptance, there are deferred payment
terms, or when collection is not considered probable. With these uncertainties
we may not be able to predict accurately when revenue from these contracts will
be recognized.
In Order to Generate Increased Revenue, We Need to Expand Our Sales and
Distribution Capabilities
We must expand our direct and indirect sales operations to increase market
awareness of our products and to generate increased revenue. We cannot be
certain that we will be successful in these efforts. Our products and services
require a sophisticated sales effort targeted at the senior management of our
prospective customers. New hires will require training and take time to achieve
full productivity. We cannot be certain that our recent hires will become as
productive as necessary or that we will be able to hire enough qualified
individuals in the future. We also plan to expand our relationships with systems
integrators and other third-party resellers to build an indirect sales channel.
Failure to expand these sales channels could adversely affect our revenues and
operating results. In addition, we will need to manage potential conflicts
between our direct sales force and third-party reselling efforts.
We Depend on Certain Key Personnel, and the Loss of Any Key Personnel Could
Affect Our Ability to Compete
We believe that our success will depend on the continued employment of our
senior management team and key technical personnel. This dependence is
particularly important to our business because personal relationships are a
critical element of obtaining and maintaining business contacts with our
customers. Our senior management team and key technical personnel would be very
difficult to replace and the loss of any of these key employees could seriously
harm our business. In addition, we currently do not have non-compete agreements
in place, and if any of these key employees were to join a competitor or form a
competing company, some of our customers might choose to use the products or
services of that competitor or of a new company instead of ours.
-15-
Our Ability to Attract, Train and Retain Qualified Employees is Crucial to
Results of Operations and Future Growth
As a company focused on the development, sale and delivery of software
products and related services, our personnel are our most valued assets. Our
future success depends in large part on our ability to hire, train and retain
software developers, systems architects, project managers, communications
business process experts, systems analysts, trainers, writers, consultants and
sales and marketing professionals of various experience levels. Skilled
personnel are in short supply, and this shortage is likely to continue. As a
result, competition for these people is intense, and the industry turnover rate
for them is high. Any inability to hire, train and retain a sufficient number of
qualified employees could hinder the growth of our business.
Our Future Success Depends on Our Continued Use of Strategic Relationships to
Implement and Sell Our Products
We have entered into relationships with third-party systems integrators, as
well as with hardware platform and software applications developers. We rely on
these third parties to assist our customers and to lend expertise in large
scale, multi-system implementation and integration projects, including overall
program management and development of custom interfaces for our product. Should
these third parties go out of business or choose not to provide these services,
we may be forced to develop those capabilities internally, incurring significant
expense and adversely affecting our operating margins. In addition, we have
derived and anticipate that we will continue to derive, a significant portion of
our revenues from customers that have established relationships with our
marketing and platform alliances. We could lose sales opportunities if we fail
to work effectively with these parties or fail to grow our base of marketing and
platform alliances.
The Expansion of Our Products With New Functionality and to New Customer
Markets May be Difficult and Costly
We plan to invest significant resources and management attention to expanding
our products by adding new functionality and to expanding our customer base by
targeting customers in markets that we have not previously served. We cannot be
sure that expanding the footprint of our products or selling our products into
new markets will generate acceptable financial results due to uncertainties
inherent in entering new markets and in our ability to execute our plans. Costs
associated with our product and market expansions may be more costly than we
anticipate, and demand for our new products and in new customer markets may be
lower than we expect.
Our Planned International Operations May Be Difficult and Costly
We intend to devote significant management and financial resources for our
international expansion. In particular, we will have to attract experienced
management, technical, sales, marketing and support personnel for our
international offices. Competition for these people is intense and we may be
unable to attract qualified staff. International expansion may be more difficult
or take longer than we anticipate, especially due to language barriers, currency
exchange risks and the fact that the communications infrastructure in foreign
countries may be different than the communications infrastructure in the United
States. If we are unable to expand our international operations successfully and
in a timely manner, our expenses could increase at a greater rate than our
revenues, and our operating results could be adversely affected.
Moreover, international operations are subject to a variety of additional
risks that could adversely affect our operating results and financial condition.
These risks include the following:
. Longer payment cycles;
. Problems in collecting accounts receivable;
. The impact of recessions in economies outside the United States;
. Unexpected changes in regulatory requirements;
. Variable and changing communications industry regulations;
-16-
. Trade barriers and barriers to foreign investment, in some cases
specifically applicable to the communications industry;
. Barriers to the repatriation of capital or profits;
. Fluctuations in currency exchange rates;
. Restrictions on the import and export of certain technologies;
. Lower protection for intellectual property rights;
. Seasonal reductions in business activity during the summer months,
particularly in Europe;
. Potentially adverse tax consequences;
. Increases in tariffs, duties, price controls or other restrictions on
foreign currencies; and
. Requirements of a locally domiciled business entity.
Potential Future Acquisitions or Joint Business Ventures Could Be Difficult
to Integrate, Disrupt Our Business, Dilute Stockholder Value and Adversely
Affect Our Operating Results
We may acquire other businesses in the future, which would complicate our
management tasks. We may need to integrate widely dispersed operations that have
different and unfamiliar corporate cultures. These integration efforts may not
succeed or may distract management's attention from existing business
operations. Our failure to successfully manage future acquisitions or other
joint business ventures could seriously harm our business. Also, our existing
stockholders would be diluted if we financed the acquisitions by issuing equity
securities.
Our Failure to Meet Customer Expectations or Deliver Error-Free Software
Could Result in Losses and Negative Publicity
The complexity of our products and the potential for undetected software
errors increase the risk of claims and claim-related costs. Due to the mission-
critical nature of order processing, management and fulfillment software,
undetected software errors are of particular concern. The implementation of our
products, which we accomplish through our professional services division and
with our alliance partners, typically involves working with sophisticated
software, computing and communications systems. If our software contains
undetected errors or we fail to meet our customers' expectations or project
milestones in a timely manner, we could experience:
. Delayed or lost revenues and market share due to adverse customer reaction;
. Loss of existing customers;
. Negative publicity regarding us and our products, which could adversely
affect our ability to attract new customers;
. Expenses associated with providing additional products and customer
support, engineering and other resources to a customer at a reduced charge
or at no charge;
. Claims for substantial damages against us, regardless of our responsibility
for any failure;
. Increased insurance costs; and
. Diversion of development and management time and resources.
Our licenses with customers generally contain provisions designed to limit
our exposure to potential claims, such as disclaimers of warranties and
limitations on liability for special, consequential and incidental damages. In
addition, our license agreements usually cap the amounts recoverable for damages
to the amounts paid by the licensee to us for the product or services giving
rise to the damages. However, we cannot be sure that these contractual
provisions will protect us from additional liability. Furthermore, our general
liability insurance coverage may not continue to be available on reasonable
terms or in sufficient amounts to cover one or more large claims, or the insurer
may disclaim coverage as to any future claim. The successful assertion of any
large claim against us could adversely affect our operating results and
financial condition.
-17-
Our Limited Ability to Protect Our Proprietary Technology May Adversely
Affect Our Ability to Compete, and We May Be Found to Infringe on the
Proprietary Rights of Others
Our success depends in part on our proprietary software technology. We rely
on a combination of patent, trademark, trade secret and copyright law and
contractual restrictions to protect our technology. We cannot guarantee that
the steps we have taken to protect our proprietary rights will be adequate to
deter misappropriation of our intellectual property, and we may not be able to
detect unauthorized use and take appropriate steps to enforce our intellectual
property rights. If third parties infringe or misappropriate our copyrights,
trademarks, trade secrets or other proprietary information, our business could
be seriously harmed. In addition, although we believe that our proprietary
rights do not infringe on the intellectual property rights of others, other
parties may assert infringement claims against us or claim that we have violated
their intellectual property rights. Claims against us, either successful or
unsuccessful, could result in significant legal and other costs and may be a
distraction to management. We currently focus on intellectual property
protection within the United States. Protection of intellectual property outside
of the United States will sometimes require additional filings with local
patent, trademark, or copyright offices, as well as the implementation of
contractual or license terms different from those used in the United States.
Protection of intellectual property in many foreign countries is weaker and less
reliable than in the United States. If our business expands into foreign
countries, costs and risks associated with protecting our intellectual property
abroad will increase
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risks principally relates to changes in interest rates
that may affect our fixed income investments. Our excess cash is invested in
debt securities issued by U.S. government agencies and corporate debt
securities. We place our investments with high quality issuers and limit our
credit exposure by restricting the amount of securities that may be placed with
any single issuer. Our general policy is to limit the risk of principal loss
and assure the safety of invested funds by limiting market and credit risk. All
highly liquid investments with original maturities of three months or less are
considered to be cash equivalents. At March 31, 2001, the weighted average pre-
tax interest rate on the investment portfolio is approximately 5.25%. Market
risk related to these investments can be estimated by measuring the impact of a
near-term adverse movement of 10% in short-term market interest rates. If these
rates average 10% more in 2001 than in 2000, there would be no material adverse
impact on our results of operations or financial position. During the quarter
ended March 31, 2001, had short-term market interest rates averaged 10% more
than in 2000, there would have been no material adverse impact on our results of
operations or financial position.
Our exposure to adverse movements in foreign exchange rates is insignificant.
Therefore, we do not hedge our foreign currency exposure, nor do we use
derivative financial instruments for speculative trading purposes. Market risk
related to foreign currency exchange rates can be estimated by measuring the
impact of a near-term adverse movement of 10% in foreign currency exchange rates
against the U.S. dollar. During the quarter ended March 31, 2001, had these
rates averaged 10% more than in 2000, there would have been no material impact
on our results of operations or financial position.
-18-
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
None
(b) Reports on Form 8-K.
(i) Current Report on Form 8-K of Metasolv Software, Inc. dated
January 2, 2001, reporting the holding company reorganization of
the Company.
(ii) Current report on Form 8-K of MetaSolv, Inc. dated February 1,
2001, reporting the filing of a press release.
(iii) Current report on Form 8-K at MetaSolv, Inc. dated April 13,
2001, reporting the filing of a press release.
-19-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 14, 2001
METASOLV, INC.
/s/ Glenn A. Etherington
-----------------------------------------------------
Glenn A. Etherington
Chief Financial Officer
Duly Authorized Officer on behalf of the Registrant
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