part 1 of 2
November 14, 2000
TUMBLEWEED COMMUNICATIONS CORP (TMWD)
Quarterly Report (SEC form 10-Q)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Tumbleweed is a leading provider of advanced messaging solutions for business communications. Tumbleweed's products and services enable businesses to extend existing networks and applications, creating secure online channels for interactive, business-critical communication. Tumbleweed Integrated Messaging Exchange, or Tumbleweed IME, is a platform and set of applications for creating secure communications channels between a business and its customers, partners and suppliers. Tumbleweed Messaging Management System, or Tumbleweed MMS, is a comprehensive solution that extends internal e-mail systems to the Internet through centralized management, policy enforcement, filtering and archiving. Used together, Tumbleweed IME and Tumbleweed MMS automatically apply security policies and redirect sensitive e-mail for secure, trackable delivery.
On January 31, 2000, we completed the acquisition of Worldtalk Communications Corporation ("Worldtalk"), a leading provider of Internet security and policy management solutions that enable organizations to define and manage electronic mail and web security usage policies to manage the risks and liabilities associated with Internet communications. The business combination has been accounted for as a pooling of interests and, accordingly, Tumbleweed's historical financial statements have been restated to include the accounts and results of operations of Worldtalk. Except as otherwise indicated, the terms "Tumbleweed," "we" and "our" refer to Tumbleweed and its subsidiaries, including Worldtalk, in this discussion.
On September 1, 2000, Tumbleweed completed the acquisition of Interface Systems, Inc. ("Interface"). Interface's Legacy to internet (L2i) products and services simplify the process of transforming and using data found in legacy computer systems into electronic content that is easy to distribute and use online. The L2i products adapt legacy print streams and other data types to the Internet and intelligently convert them into formats such as Portable Document Format, HyperText Markup Language or eXtensible Markup Language for use online. The combination of L2i with Tumbleweed IME will give our customers a comprehensive, end-to-end solution for electronic statement presentment.
Tumbleweed's revenue consists of (i) license revenue, (ii) services revenue and (iii) transaction revenue. License revenue consists of initial license fees and the sale of distribution rights. License revenue typically is recognized upon the later of customer acceptance or software shipment. Revenue from the sale of distribution rights is recognized upon the execution of a distribution agreement. Services revenue consists of consulting fees and support and maintenance fees. Consulting fees related to installation are recognized upon acceptance of the installation, and time and material billing while all other consulting fees are recognized based on percentage of completion. Support and maintenance fees are paid for ongoing customer support as well as for the right to receive future upgrades of our products during the term of the maintenance agreement. Revenue from support and maintenance is recognized ratably over the period the support is provided. Transaction revenue is based on the volume of transactions by our customers, and the related revenue is recognized based on payment schedules and transaction reports from our customers. A number of our contracts include minimum transaction volume requirements. In these cases, the minimum guaranteed revenue is recognized when fees are due and payable during those months where transaction volume does not exceed the designated minimums.
The composition of the top 5 customers changes from quarter to quarter. For the nine months ended September 30, 2000 and 1999, our top five customers contributed 18% and 28% of total revenue, respectively.
A substantial portion of Tumbleweed's revenue relates to international customers or operations. Most of Tumbleweed's contracts are denominated in U.S. dollars. However, in the future, an increasing number of contracts may be denominated in foreign currencies. Tumbleweed currently does not have
hedging or similar arrangements to protect us against foreign currency fluctuations. Therefore, we increasingly may be subject to currency fluctuations, which could harm our operating results in future periods. On May 15, 2000, we repurchased from Hikari 5% of the outstanding stock of Tumbleweed KK ("TKK"), for a price of approximately $700,000. As a result, Tumbleweed owns a controlling interest of the Japanese subsidiary and began accounting for the Japanese subsidiary under the consolidation method effective April 1, 2000. On August 29, 2000, Tumbleweed repurchased an additional 25% of the outstanding shares of the jointly owned Japanese subsidiary, increasing Tumbleweed's ownership position to 80%.
Tumbleweed's future net income and cash flow may be adversely affected by limitations on its ability to apply net operating losses for federal income tax reporting purposes against taxable income in future periods, including limitations due to ownership changes, as defined in Section 382 of the Internal Revenue Code, arising from issuances of its stock.
On August 1, 2000, Tumbleweed completed a primary and secondary public offering of 3,000,000 shares of its common stock at a price of $56.00 per share. Of the 3,000,000 shares of common stock, 1,500,000 primary shares were sold by Tumbleweed and 1,500,000 secondary shares were sold by stockholders of Tumbleweed. Tumbleweed will not receive any of the proceeds from shares sold by its stockholders. Net proceeds of $77.6 million from the offering of primary shares will be used for working capital and other general corporate purposes. In addition, Tumbleweed may use a portion of the net proceeds to acquire complementary products, technologies or businesses.
RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
REVENUE. Revenue is comprised of license revenue, services revenue and transaction fees revenue. Total revenue from continuing product lines for the three months ended September 30, 2000 increased 183% to $12.4 million from $4.4 million (excluding revenue of $273,000 from discontinued product lines) for the same three months in 1999. Total revenue from continuing product lines for the nine months ended September 30, 2000 increased 171% to $29.1 million from $10.7 million (excluding $1.5 million from discontinued product lines) for the same nine months in 1999. Total revenue from continuing product lines increased in both periods due to increases in license revenue and services revenue and transaction fees revenue.
License revenue for the three months ended September 30, 2000 increased 147% to $7.6 million from $3.1 million for the same three months in 1999. License revenue for the nine months ended September 30, 2000 increased 128% to $18.6 million from $8.2 million for the same nine months in 1999. License revenue increased due to bringing new customers into production and to additional license fees paid by existing customers.
Services revenue for the three months ended September 30, 2000 increased 150% to $2.5 million from $1.0 million for the same three months in 1999. Services revenue for the nine months ended September 30, 2000 increased 190% to $6.0 million from $2.1 million for the same nine months in 1999. The increase in services revenue was due to an increase in contract development work by our professional services organization, and, to a lesser extent, increases in maintenance fees.
Transaction fees revenue for the three months ended September 30, 2000 increased 632% to $2.3 million from $318,000 for the same three months in 1999. Transaction fees revenue for the nine months ended September 30, 2000 increased 773% to $4.6 million from $524,000 for the same nine months in 1999. The increase in transaction fees revenue resulted from transaction fee payments made by new customers who launched IME-based services as well as the increasing revenue related to transaction fee payments from existing customers.
Total revenue from the Tumbleweed IME product line for the three months ended September 30, 2000 increased 236% to $5.7 million from $1.7 million for the same three months in 1999. Total
revenue from the Tumbleweed IME product line for the nine months ended September 30, 2000 increased 364% to $15.7 million from $3.4 million for the same nine months in 1999. These increases were due to increases in license, services and transaction fees revenue. License revenue from the IME product line for the three months ended September 30, 2000 increased 229% to $2.7 million from $828,000 for the same three months in 1999. License revenue from the IME product line for the nine months ended September 30, 2000 increased 343% to $8.5 million from $1.9 million for the same nine months in 1999. The increases in license revenue were due to bringing new customers into production and to additional license fees paid by existing customers. Services revenue from the IME product line for the three months ended September 30, 2000 increased 157% to $1.4 million from $539,000 for the same three months in 1999. Services revenue from the IME product line for the nine months ended September 30, 2000 increased 270% to $3.5 million from $947,000 for the same nine months in 1999. The increases in services revenue were due to an increase in contract development work by our professional services organization, and, to a lesser extent, increases in maintenance fees. Transaction fees revenue from the IME product line for the three months ended September 30, 2000 increased 384% to $1.5 million from $319,000 for the same three months in 1999. Transaction fees revenue from the IME product line for the nine months ended September 30, 2000 increased 609% to $3.7 million from $524,000 for the same nine months in 1999. The increases in transaction fees revenue resulted from minimum transaction fee payments made by new customers who launched IME based services.
Total revenue from the Tumbleweed MMS product line for the three months ended September 30, 2000 increased 142% to $6.5 million from $2.7 million for the same three months in 1999 (excluding revenue of $272,000 from discontinued products). Total revenue from the Tumbleweed MMS product line for the nine months ended September 30, 2000 increased 79% to $13.2 million from $7.4 million for the same nine months in 1999 (excluding revenue of $1.5 million from discontinued products). These increases were due to increases in license, services and transaction fees revenue. License revenue from the MMS product line for the three months ended September 30, 2000 increased 114% to $4.8 million from $2.3 million for the same three months in 1999. License revenue from the MMS product line for the nine months ended September 30, 2000 increased 60% to $10.0 million from $6.3 million for the same nine months in 1999. The increases in license revenue were due to bringing new customers into production. Services revenue from the MMS product line for the three months ended September 30, 2000 increased 107% to $953,000 from $460,000 for the same three months in 1999. Services revenue from the MMS product line for the nine months ended September 30, 2000 increased 108% to $2.3 million from $1.1 million for the same nine months in 1999. The increases in services revenue were due to an increase in contract development work by our professional services organization, and to a lesser extent, increases in maintenance fees and training. Transaction fees for the three and nine months ended September 30, 2000 were $786,000 and $856,000, respectively, compared to $0 in the three and nine months ended September 30, 1999. |
