[May 04, 2012]

MAGICJACK VOCALTEC LTD - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) This Management's Discussion and Analysis of Operations and Financial Condition should be read in conjunction with our unaudited consolidated financial statements as of March 31, 2012 and for the three month periods ended March 31, 2012 and 2011. This Management's Discussion and Analysis of Operations and Financial Condition contain forward-looking statements, the accuracy of which involves risk and uncertainties. We use words such as "anticipates," "believes," "plans," "expects," "future," "intends," "estimates," "projects," and similar expressions to identify forward-looking statements. Readers should not place undue reliance on these forward-looking statements, which apply only as of the date of this report. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons. Factors that might cause or contribute to such differences include, but are not limited to those discussed under the section entitled "Risk Factors" of our Form 10-K for the year ended December 31, 2011 filed on March 15, 2012.

Overview magicJack VocalTec is a cloud communications leader that is the inventor of voice-over-Internet-Protocol ("VoIP"), the softphone ("magicJack PC") and the award winning magicJack® products. magicJacks weigh about one ounce and plug into the USB port on a computer or into a power adapter and high speed Internet source, providing users with complete phone service for home, enterprise and while traveling. We charge as little as $20 a year for a license renewal to access our servers, and our customers then continue to obtain free telephone services. During September 2011, we began providing additional products and services, which include voice apps on smart phones, as well as the magicJack PLUS, which is a standalone magicJack that has its own CPU and can connect a regular phone directly to the user's broadband modem/router and function as a standalone phone without using a computer. Our products and services allow users to make and receive free telephone calls to and from anywhere in the world where the customer has broadband access to the Internet, and allow customers to make free calls back to the United States and Canada from anywhere legally permitted in the world.

magicJack VocalTec is a vertically integrated group of companies. We own a micro processor chip design company, an appserver and session border controller company, a wholesale provider of VoIP services, a softphone company, and the developer and provider of the magicJack product line. We intend to soon expand these existing platforms to allow its customers to use search, shopping, click-to-call and other services via the Internet through intellectual property right pending and proprietary technologies. We also wholesale telephone service to VoIP providers and others telecommunication carriers.

During September 2011, we began promoting the magicJack PC, a softphone that can be used to make or receive telephone calls between two computers or between the customer's computer and a public switch telephone network ("PSTN"). The customer can use a headphone or a computer's speakers and microphone to make and receive telephone calls. In September 2011, the magicJack APP also became available for the iPhone, iPad and iPod Touch, and we expect will soon be available to other smart phones, including Android.

Basis of Presentation Our consolidated financial statements are prepared in conformity with United States generally accepted accounting principles ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of regulation S-K. Accordingly, our consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements that are included in the Company's Annual report on Form 10-K for the year ended December 31, 2011. The balance sheet at December 31, 2011 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements.

Management believes, however, that all adjustments of a normal, recurring nature considered necessary for a fair presentation have been included.

The Company's consolidated financial statements are the basis for the discussion and analysis of our results of operations, liquidity and capital resource.

References to authoritative accounting literature in this report, where applicable, are based on the Accounting Standards Codification ("ASC"). Our functional and reporting currency is the United States Dollar ("U.S. Dollar"), which is the currency of the primary economic environment in which our consolidated operations are conducted. Transactions and balances originally denominated in dollars are presented at their original amounts. Transactions and balances in currencies other than dollars, including Israeli New Shekel ("NIS"), are re-measured in dollars in accordance with the principles set forth in ASC 830, "Foreign Currency Matters".

22 --------------------------------------------------------------------------------Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Such estimates and judgments are revised periodically as required. Actual results could differ from those estimates.

Significant estimates include allowances for billing adjustments, sales and doubtful accounts, the recoverability of long-lived assets and goodwill and estimates of likely outcomes related to certain contingent liabilities. We evaluate our estimates on an ongoing basis. Our estimates and assumptions are based on factors such as historical experience, trends within the Company and the telecommunications industry, general economic conditions and on various other assumptions that we believe to be reasonable under the circumstances. The results of such assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily available. Actual results may differ from our estimates and assumptions as a result of varying market and economic conditions, and may result in lower revenues and lower operating income or higher operating losses.

Basis of Consolidation The Company's consolidated financial statements include the accounts of magicJack VocalTec and its wholly-owned subsidiaries, YMax, YMax Communications Corp., magicJack Holdings Corporation, magicJack, LP, SJ Labs, Inc. ("SJ Labs"), Tiger Jet Network, Inc. ("TigerJet"), VocalTec Communications, LLC ("VocalTec US", formerly Stratus Telecommunications, LLC), and Predictive Marketing, LLC and B Kruse and Associates, LLC (collectively, "Dialmaxx"). All intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications have been made to prior period financial statement amounts to conform to the current presentation. The results for the three months ended March 31, 2012, may not be indicative of the results for the entire year. The interim unaudited consolidated financial statements should be read in conjunction with our financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations included in this report and in our Annual Report on Form 10-K for the year ended December 31, 2011 filed on March 15, 2012.

CRITICAL ACCOUNTING POLICIES We have identified below our critical accounting policies. These policies are both the most important to the portrayal of our financial condition and results of operations and require our management's most difficult, subjective and complex judgments and estimates. Actual results may differ from these estimates under different assumptions or conditions.

REVENUE RECOGNITION Revenues consists of revenue from sales of the magicJack and magicJack PLUS to retailers, wholesalers or directly to customers, license renewal fees, fees charged for shipping the magicJack and magicJack PLUS, usage of prepaid minutes, call termination charges to other carriers and other miscellaneous charges for telecommunication usage, sales of telecommunications hardware, software and related services. Revenue is recorded net of sales returns and allowances.

magicJack and magicJack PLUS Revenue We recognize revenues from sales and shipping of direct sales of the magicJack and magicJack PLUS over the license period associated with the initial 12-month license period. Customers may purchase licenses for continued use of our software to access our switches for additional years either when the original purchase is made, or at any time thereafter. The revenue associated with a license for additional years is deferred and recognized ratably over the extended license period.

Sales Return Policy We offer our direct sales customers a 30-day free trial before they have to pay for their magicJack or magicJack PLUS unit. We do not record or recognize revenue until the 30-day trial period has expired and a customer's credit card has been charged.

Returns from retailers are accepted on an authorized basis. We have offered certain retailers the right to return any unsold merchandise from their initial stocking orders. We estimate potential returns under these arrangements at point of sale based and re-estimate potential returns on a quarterly basis. For the three months ended March 31, 2012 and 2011, our estimates of returns and actual returns from initial stocking orders have not been materially different.

Telephony Services Revenue Telephony revenue is recognized as minutes are used. Telephony revenue is generated from the usage of prepaid minutes, fees for origination of calls to 800-numbers, access fees charged to other telecommunication carriers on a per-minute basis for Interexchange Carriers ("IXC") calls terminated on our switches, and wholesaling telephone service to VoIP providers and others telecommunication carriers. Revenues from access fee charges to other telecommunication carriers are recorded based on rates set forth in the respective state and federal tariffs, less a provision for billing adjustments of $2.2 million and $2.6 million for the three months ended March 31, 2012 and 2011, respectively. We have estimated and provided allowances for billing adjustments of access charges to carrier customers. Refer to Note 10, "Commitments and Contingencies," in the Notes to our unaudited consolidated financial statements included elsewhere herein for further details.

23 --------------------------------------------------------------------------------Sales of Telecommunications Hardware, Software and Service Agreements Revenues from sales of telecommunications hardware and our proprietary software meeting the criteria for recognition upon shipment are recognized at the time of shipment to customers. Similar revenues that do not meet the criteria for recognition upon shipment are recognized over the term of the related service agreements. Revenues from service agreements are recognized over the term (generally one year) of the service agreement. Service agreements include maintenance, technical support, training and upgrades. If a service agreement for additional year(s) is purchased, the associated revenue is deferred and recognized ratably over the extended term of the service agreement. Revenues from sales of parts, services not covered by a service agreement and custom design services are recognized as parts are shipped or services are performed.

INCOME TAXES We recognize deferred tax assets and liabilities for the expected tax consequences of temporary differences between the tax basis of assets and liabilities and their book basis using enacted tax rates in effect for the year the differences are expected to reverse. We record a valuation allowance to reduce the deferred tax assets to the amount that it estimates is more-likely-than-not to be realized.

We assess our income tax positions and record tax benefits for all years subject to examination based upon our evaluation of the facts, circumstances and information available at the reporting date. For those tax positions where there is a greater than 50% likelihood that a tax benefit will be sustained, we have recorded the largest amount of tax benefit that may potentially be realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where there is 50% or less likelihood that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements.

We record our income tax expense for interim financial statements by using an estimated annual income tax rate based on our expected annual results after offset for net operating loss carryforwards and other nontaxable items. The tax benefits of net operating loss carryforwards are recognized for financial reporting purposes to the extent that we report income before taxes. We did not recognize additional deferred tax assets for unused net operating loss carryforwards as it is not more-likely-than-not that such benefits will be realized.

24 --------------------------------------------------------------------------------RESULTS OF OPERATIONS The following table presents our consolidated results of operations for the periods indicated (in thousands). The consolidated statements of operations below have been expanded to show the composition of our operating revenue and cost of revenues items to enable a more meaningful discussion of our operations.

Three Months Ended 2012 March 31, Compared to 2012 2011 2011Revenue Sale of magicJack and magicJack PLUS $ 14,970 $ 13,027 $ 1,943 14.9 License renewals 10,263 7,913 2,350 29.7 Shipping and handling 1,190 648 542 83.6 magicJack-related products 2,485 746 1,739 233.1 Prepaid minutes 5,847 2,915 2,932 100.6 Access and termination charges 1,907 2,171 (264 ) (12.2 ) Other 925 2,666 (1,741 ) (65.3 ) Total Operating Revenue 37,587 30,086 7,501 24.9 Cost of Revenues Cost of magicJack and magicJack PLUS sold 4,850 3,424 1,426 41.6 Shipping and handling 1,009 279 730 261.6 Credit card processing fees 1,112 958 154 16.1 Network and carrier charges 7,609 6,967 642 9.2 Other 980 1,365 (385 ) (28.2 ) Total Cost of Revenues 15,560 12,993 2,567 19.8 Gross Profit 22,027 17,093 4,934 28.9 Operating expenses: Advertising 8,704 6,676 2,028 30.4 General and administrative 6,834 7,370 (536 ) (7.3 ) Research and development 658 656 2 0.3 Total operating expenses 16,196 14,702 1,494 10.2 Operating income 5,831 2,391 3,440 143.9 Other income (expense): Gains (losses) on marketable securities 597 (1,309 ) 1,906 * Interest and dividend income 251 194 57 * Interest expense (119 ) - (119 ) * Fair value gain on common equity put options 1,656 568 1,088 * Other income, net 10 12 (2 ) * Total other income 2,395 (535 ) 2,930 * Income before income taxes 8,226 1,856 6,370 343.2 Income tax expense 30 28 2 * Net income $ 8,196 $ 1,828 $ 6,368 348.4 * - Not meaningful.

THREE MONTHS ENDED MARCH 31, 2012 COMPARED TO THREE MONTHS ENDED MARCH 31, 2011 Revenues Total revenue was $37.6 million and $30.1 million for the three months ended March 31, 2012 and 2011, respectively, representing an increase of $7.5 million, or 24.9%. This increase in revenues was primarily attributable to the following: · $2.9 million increase in revenues from prepaid minutes primarily as a result of the Company making an operational change in February 2012 which allowed it to identify the point in time when prepaid minutes expire under the terms of service, resulting in approximately $3.0 million attributable to prepaid minutes that expired between February 2008 and February 2012 being recognized as revenue; 25-------------------------------------------------------------------------------- · a $2.4 million increase in renewal revenues as a result of the continued increase in the number of active customers beyond their first year of service; · a $2.3 million combined increase in revenues recognized for the sale of the magicJack and magicJack PLUS, primarily as a result of: (i) the recognition of revenues on sales of the magicJack PLUS, which started in September 2011, and (ii) higher average unit price due to an higher percentage of magicJack PLUS units being sold directly to consumers at retail prices as opposed to retailers and distributors at wholesale prices as opposed to direct sales to customers at retail prices, offset in part by the sale of fewer units of the magicJack; · a $1.7 million increase in the sale of magicJack-related products, primarily driven by the increase in numbers and porting fees; and · a $0.5 million increase in shipping and handling revenues primarily as a result of the Company starting to sell the magicJack PLUS in September 2011, offset by fewer magicJack units sold.

These increases in revenue were partially offset by the following: · a $1.7 million decrease in other revenues as a result of reduced sales of telecommunications hardware and our proprietary software as we discontinued efforts to acquire new customers for such products; · a $0.4 million allowance related to sales of the magicJack to retailers, which is included in revenues from the sale of the magicJack and magicJack PLUS; and · a $0.3 million decrease in access and termination charge revenue as a result of the Company increasing the provision for billing adjustments, primarily as a result of the FCC November 18, 2011 order described in Item 1, "Legal Proceedings." For the three months ended March 31, 2012 and 2011, sales of the magicJack and magicJack PLUS units through retail outlets represented approximately 60% and 76%, respectively, of sales of all magicJack and magicJack PLUS units sold. For the same periods, direct sales represented approximately 40% and 24%, respectively, of magicJack and magicJack PLUS units sold.

For the three months ended March 31, 2012 and 2011, no retailer or telecommunication carrier accounted for more than 10% of our total revenues.

Cost of Revenues Total cost of revenues was $15.6 million and $13.0 million for the three months ended March 31, 2012 and 2011, respectively, representing an increase of $2.6 million, or 19.8%. This increase in cost of revenues was primarily attributable to the following: · a $2.3 million combined increase in the cost of magicJack and magicJack PLUS units sold, shipping and handling cost and credit card processing fees primarily as a result of the Company starting to sell the magicJack PLUS in September 2011 and large sales of license renewals as a result of anticipated price increases; and · a $0.6 million increase in network and carrier charges due to a higher number of active magicJack and magicJack PLUS units, which resulted in higher number of calls made by our customers, offset in part by better rates from telecommunication carriers.

These increases in cost of revenues were partially offset by the following: · a decrease in VocalTec US and Israel costs as a result of a lower hardware cost as we discontinued efforts to acquire new customers for such products; · reduced depreciation expense as a result of a change in estimated useful lives of certain switches effective January 1, 2012; and · lower amortization expense primarily as a result of certain intangible assets becoming fully amortized in late 2011 Operating Expenses Total operating expenses was $16.2 million and $14.7 million for three months ended March 31, 2012 and 2011, respectively, representing an increase of $1.5 million, or 10.2%. This increase in operating expenses was primarily due to the following: · a $2.0 million increase in advertising-related expense as a result of a strong advertising campaign to drive sales of the magicJack PLUS; and · higher personnel related costs as a result of new hires in late 2011 and quarter ended March 31, 2012.

26-------------------------------------------------------------------------------- These increases in operating expenses were partially offset by a $1.3 million reduction in legal-related fees as a result of fewer legal cases and reduced litigation driven by the November 18, 2011 FCC order. We believe we will be able to continue to reduce legal expenses related to collection efforts and litigation in future periods due to: (i) certain upcoming expected legal settlements, and (ii) more certainty for rules around billing and collections of access charges as a result of the FCC order of November 18, 2011 described in Item 1, "Legal Proceedings." Advertising-related expenses have varied, and may continue to vary from quarter to quarter.

Other Income (Expense) Total other income (expense) for the three months ended March 31, 2012 was $2.4 million, as compared to $(0.5) million for the three months ended March 31, 2011, representing an increase of representing an increase of $2.9 million. This increase in other income (expense) was due to changes in the items discussed below.

Gains and Losses on Marketable Securities Gain on marketable securities for the three months ended March 31, 2012 was $0.6 million, as compared to a loss on marketable securities of $1.3 million in the three months ended March 31, 2011.

Interest and Dividend Income Interest and dividend income was $0.3 million and $0.2 million for the three months ended March 31, 2012 and 2011, respectively, representing an increase of $0.1 million. This increase in interest and dividend income is attributable to higher balances invested in dividend generating investments.

Interest Expense Interest expense was $0.1 million and $0 for the three months ended March 31, 2012 and 2011, respectively.

Interest expense for the three months ended March 31, 2012 represented imputed interest as a result of recording the value of certain intangible assets we purchased in late June 2011 at fair value, which is lower the sum of future payments we will make to the seller of these intangible assets.

Fair Value Gain on Common Equity Put Options Starting in 2011, we sold common equity put option contracts in connection with our share repurchase program in order to lower the average share price paid for ordinary shares we purchases. We recognized gains on such instruments as a result of: (i) unrealized gains on outstanding common equity put option contracts outstanding as the end of each fiscal quarter, and (ii) realized gains on common equity put option contracts exercised or expired during each fiscal quarter.

Fair value gain on common equity put options was $1.7 million and $0.6 million for the three months ended March 31, 2012 and 2011, respectively. The $1.1 million increase was primarily attributable to more common equity put contracts being sold and expired during the quarter ended March 31, 2012 as compared to the prior year comparable period. Refer to the "Stock Repurchase Program" within the Liquidity and Capital Resources section below for further detail.

Income Taxes Total income tax expense was $30 thousand and $28 thousand for the three months ended March 31, 2012 and 2011, respectively. Refer to Note 15, "Income Taxes," in the Notes to our unaudited consolidated financial statements included in Item 1 herein for further details.

Net income As a result of the foregoing items, net income was $8.2 million and $1.8 million for the three months ended March 31, 2012 and 2011, respectively.

27 --------------------------------------------------------------------------------LIQUIDITY AND CAPITAL RESOURCES Our primary sources of liquidity are cash generated from operations and cash on hand. As of March 31, 2012, we had cash and cash equivalents of $32.2 million, available-for-sale marketable securities of $28.3 million and accounts receivables of $9.7 million. Our accounts payable at March 31, 2012 was $3.1 million.

During the three months ended March 31, 2012, we generated positive operating cash flows of $24.2 million, as compared to $6.2 million for the three months ended March 31, 2011. The $18.0 million increase was primarily attributable to: a significant increase in deferred revenues as a result of strong initial sales of the magicJack PLUS since its launch in September 2011 and higher sales of renewal in anticipation of a price increase, (ii) increases in accrued expenses and other current liabilities as a result of the Company holding short position in certain investments and timing of bills received from vendors, (iii) a decrease in inventory due to strong sales of the magicJack PLUS since its introduction in September 2011 and write down of obsolete inventories, and (iv) a net positive impact to our operation cash flows resulting from non-cash items.

These items were partially offset by changes in other operating assets and liabilities mainly driven by timing of payments to vendors and receipts from customers and Refer to our unaudited consolidated statement of cash flows included in Item 1 herein for additional details.

We currently believe that available funds and cash flows generated by operations will be sufficient to fund our working capital and capital expenditure requirements for at least the next twelve months. If we decide to make future acquisitions, we may require new sources of funding, including additional debt, equity financing or some combination thereof. There can be no assurances that we will be able to secure additional sources of funding or that such additional sources of funding will be available to us on acceptable terms.

Cash Flow - Operating Activities Net cash provided by operating activities was $24.2 million and $6.2 million for the three months ended March 31, 2012 and 2011, respectively.

During the three months ended March 31, 2012, net cash provided by operating activities was primarily attributable to: (i) a $19.7 million increase in deferred revenues attributable strong initial sales of the magicJack PLUS since its launch in September 2011 and higher sales of renewal in anticipation of a price increase, (ii) a $1.7 million increase in accrued expenses and other current liabilities as a result of the Company holding short position in certain investments and timing of bills received from vendors, (iii) a $1.4 million decrease in inventories as a result of strong sales of the magicJack PLUS since its introduction in September 2011, which resulted in depletion of inventory built up in late 2011, as well as a $0.4 million write down of obsolete inventories, (iv) $0.9 million in non-cash expenses primarily as a result of a $2.6 million provision for billing adjustments and sales allowances and $0.6 million for depreciation and amortization expense, offset in part by a combined $2.3 million in fair value gains on common equity put options and gains on marketable securities. These items were partially offset by: (i) a $3.7 million decrease in accounts payable primarily due to timing of payments to our vendors, (ii) a $3.5 million increase in accounts receivables due to the strong sales of the magicJack PLUS to retailers, and (iii) a $1.4 million increase in deferred costs.

During the three months ended March 31, 2011, net cash provided by operating activities was primarily attributable to: (i) $4.6 million in non-cash expenses primarily as a result of a $2.6 million provision for billing adjustments as a result of the aforementioned FCC order of November 18, 2011, $1.3 million loss on sale of securities, and $1.0 million for depreciation and amortization expense, offset in part by a $0.6 million fair value gain on common equity put options, (ii) $2.6 million increase in accounts payable primarily due to timing of payments to our vendors, (iii) a $2.3 million increase in deferred revenues attributable primarily to sales of license renewals, and (iv) $1.8 million net income. These items were partially offset by: (i) a $3.8 million increase in accounts receivable primarily due to low collections associated with access fees charged to other carriers, (ii) a $1.3 million increase in inventories as a result of timing of receipts from our suppliers and manufacturer, and (iii) a $0.6 million decrease in accrued expenses and current liabilities.

Cash Flow - Investing Activities Net cash used in investing activities was $2.3 million and $1.4 million for the three months ended March 31, 2012, and 2011, respectively.

Net cash used in investing activities during the three months ended March 31, 2012 was primarily attributable to: (i) $6.4 million net purchase of marketable securities, and (ii) $1.0 million used to purchase certain intangible assets.

These used of cash were partially offset by $5.2 million net proceeds from sale of short investment positions.

Net cash used in investing activities during the three months ended March 31, 2011 was primarily attributable to $1.1 million used to purchase marketable securities and $0.2 million used for purchases of property and equipment.

28 --------------------------------------------------------------------------------Cash Flow -Financing Activities Net cash used in financing activities was $2.7 million and $5.5 million for the three months ended March 31, 2012 and 2011, respectively.

Net cash used in financing activities during the three months ended March 31, 2012 primarily consisted of $5.0 million in cash used to purchase ordinary shares as part of our share repurchase program, partially offset by: (i) $1.6 million in premiums received from the sale of common equity put options in connection with our share repurchase program, and (ii) $0.7 million in cash received from the exercise of ordinary share options. Refer to the section below for additional information on our share repurchase program.

Net cash used in financing activities during the three months ended March 31, 2011 primarily consisted of $7.1 million in cash used to purchase ordinary shares as part of our share repurchase program, offset by: (i) $0.9 million in premiums received from the sale of common equity put options in connection with our share repurchase program, and (ii) $0.7 million in cash received from the exercise of ordinary share options.

Stock Repurchase Program On July 20, 2010, the Company announced that its Board of Directors had authorized a stock repurchase program to enable the Company to purchase up to $12 million of its ordinary shares through the following 12 months. On April 27, 2011, the Company announced that it had increased its repurchase program by $10 million, to $22 million. The repurchase was authorized to be made at such times as management deems appropriate. The repurchase program was further increased by $13 million, to $35 million in October 2011, and increased by $20 million, to $55 million in January 2012. The objective of the Company's stock repurchase program is to improve stockholders' returns.

We may sell put option contracts or buy call option contracts in connection with our share repurchase program in order to lower the average share price paid for ordinary shares we purchase.

During the three months ended March 31, 2012 and 2011, we sold put option contracts to purchase 1,087,700 and 1,147,200 ordinary shares, respectively, in connection with our share repurchase program. We received $1.6 million and $0.9 million, respectively, in premiums related to these sales of put option contracts. During the three months ended March 31, 2012 and 2011, 439 and 2,532 put option contracts were exercised, respectively, resulting in us purchasing 43,900 and 253,200 ordinary shares, respectively. During the three months ended March 31, 2012 and 2011, 15,530 and 1,000 put contracts expired unexercised, respectively.

During the three months ended March 31, 2012, we purchased call option contracts to purchase 176,000 ordinary shares in connection with our share repurchase program for $0.2 million. During the three months ended March 31, 2012, we exercised 2,692 call option contracts to purchase 269,200 ordinary shares in connection with our share repurchase program for approximately $4.1 million, or $15.32 per share. During the three months ended March 31, 2011, we also purchased 430,786 ordinary shares through other purchases for approximately $4.6 million, or $10.68 per share.

Without taking into consideration the proceeds received from the sale of 439 and 2,532 put option contracts exercised during the three months ended March 31, 2012 and 2011, respectively, we expended approximately: (i) $5.0 million purchasing 313,100 shares of outstanding ordinary shares at an average price of $15.88 under our stock repurchase program during the three months ended March 31, 2012 and (ii) $7.0 million purchasing 683,986 shares of outstanding ordinary shares at an average price of $10.18 under our stock repurchase program during the three months ended March 31, 2011. At March 31, 2012 there was $16.5 million in available funds to purchase ordinary shares pursuant to the stock repurchase program. All shares purchased, not yet retired, are recorded as treasury shares.

At March 31, 2012, there were 1,756 put option contracts outstanding with strike prices ranging from $20.00 to $25.00 and expiring in April 2012. If these outstanding put option contracts had been exercised as of March 31, 2012, we would have been required to pay approximately $3.7 million to purchase 175,600 ordinary shares, representing our maximum exposure. As of March 31, 2012, these outstanding put option contracts have a fair value of $0.3 million, which is included in accrued expenses and other current liabilities in the accompanying unaudited consolidated balance sheet, and unrealized gains of $0.1 million, which are included in fair value gains on common equity put options in the Company's unaudited consolidated statements of operations.

In the three months ended March 31, 2012 and 2011, we recognized a fair value gain of $1.7 million and $0.6 million, respectively. That gain is comprised of unrealized gains on outstanding put option contracts as of the end of each three month period and realized gains or losses on put option contracts that were assigned to us or expired unexercised during each of the three months ended March 31, 2012 and 2011.

29 --------------------------------------------------------------------------------Other Liabilities As of March 31, 2012, we had outstanding indebtedness in connection with an agreement entered during June 2011 for the purchase of certain intangible assets, and secured only by such intangible assets, under which we will be required to make four non-interest bearing future annual payments of $1.5 million beginning May 31, 2012. The liability for such payments has been discounted at a rate of 10% to a net present value of $5.2 million at March 31, 2012. Refer to Note 9, "Other Liabilities," in the Notes to our unaudited consolidated financial statements included elsewhere herein for further details.

RECENT ACCOUNTING PRONOUNCEMENTS In May 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2011-04, "Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs." The guidance in ASU 2011-04 changes the wording used to describe the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements, including clarification of the FASB's intent about the application of existing fair value and disclosure requirements and changing a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The amendments in ASU 2011-04 should be applied prospectively and are effective for interim and annual periods beginning after December 15, 2011. Early adoption by public entities is not permitted. We adopted the provisions under ASU 2011-04 in this quarterly report on Form 10-Q. The adoption of this guidance did not have a material impact on our consolidated financial statements or disclosures.

In September 2011, the FASB issued ASU No. 2011-08, "Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment." This Update applies to annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Under ASU 2011-08, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. Under the amendments in this Update, an entity has the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the first step of the two-step goodwill impairment test. An entity may resume performing the qualitative assessment in any subsequent period. The amendments in ASU 2011-08 are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. The adoption of this guidance did not impact our consolidated financial statements.

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Software Telco Congress

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