e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Fiscal Year Ended
April 30, 2009
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission file number:
001-33923
ArcSight, Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
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52-2241535
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(State or Other Jurisdiction
of
Incorporation or Organization)
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(I.R.S. Employer
Identification No.)
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5 Results
Way
Cupertino, California 95014
(Address
of Principal Executive Offices, including Zip
Code)
(408) 864-2600
(Registrants
Telephone Number, including Area Code)
Securities
registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, par value $0.00001 per share
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NASDAQ Global Market
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Securities registered pursuant to Section 12(g) of the
Act:
None
(Title of Class)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). Yes o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§ 229.405) is not contained herein, and will not be
contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The aggregate market value of voting stock held by
non-affiliates of the registrant was $161,486,459 based upon the
closing price on The NASDAQ Global Market on the last business
day of the registrants most recently completed second
fiscal quarter (October 31, 2008).
The number of outstanding shares of the registrants common
stock as of July 1, 2009 was 33,142,506.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for registrants
2009 Annual Meeting of Stockholders to be held on
September 24, 2009 and to be filed pursuant to
Regulation 14A within 120 days after registrants
fiscal year ended April 30, 2009 are incorporated by
reference into Part III of this Annual Report on
Form 10-K.
FISCAL
2009 ANNUAL REPORT ON
FORM 10-K
TABLE OF
CONTENTS
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Forward
Looking Statements
The information in this Annual Report on
Form 10-K
contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, or
the Securities Act, and Section 21E of the Securities
Exchange Act of 1934, as amended, or the Exchange Act. Such
statements are based upon current expectations that involve
risks and uncertainties. Any statements contained herein that
are not statements of historical facts may be deemed to be
forward-looking statements. For example, words such as
may, will, should,
estimates, predicts,
potential, continue,
strategy, believes,
anticipates, plans, expects,
intends and similar expressions are intended to
identify forward-looking statements. Our actual results and the
timing of certain events may differ significantly from the
results discussed in the forward-looking statements. Factors
that might cause or contribute to such differences include, but
are not limited to, those discussed elsewhere in this Annual
Report on
Form 10-K
in the section titled Risk Factors and the risks
discussed in our other filings with the Securities and Exchange
Commission, or the SEC. We undertake no obligation to publicly
release any revisions to the forward-looking statements after
the date of this Annual Report on
Form 10-K.
PART I
Overview
We are a leading provider of compliance and security management
solutions that protect enterprises and government agencies. Our
products help customers comply with corporate and regulatory
policy, safeguard their assets and processes and control risk.
Our platform collects and correlates user activity and event
data across the enterprise so that businesses can rapidly
identify, prioritize and respond to compliance violations,
policy breaches, cybersecurity attacks and insider threats.
Our security information and event management, or SIEM, platform
delivers a centralized, real-time view of disparate digital
alarms, alerts and status and activity messages, which we refer
to as events, across geographically dispersed and heterogeneous
business and technology infrastructures. Our products collect
and correlate massive numbers of events from thousands of
security point solutions, network and computing devices and
applications, enabling intelligent identification,
prioritization and response to compliance and corporate policy
violations, and external and insider threats. We also provide
complementary software that delivers pre-packaged analytics and
reports tailored to specific compliance and security
initiatives, as well as appliances that streamline event log
collection, storage, analysis and reporting.
We have designed our platform to support the increasingly
complex business and technology infrastructure of our customers.
Our platform ships with over 275 pre-built software connectors
for products from more than 80 vendors. It also integrates
easily with products for which we do not provide pre-built
connectors and with proprietary enterprise applications to
ensure that event logs from these products are seamlessly
integrated into our platform for intelligent correlation and
analysis. As of April 30, 2009, we have sold our products
to more than 725 customers across a number of industries
and government agencies in the United States and
internationally, including companies in the Fortune Top 5 of the
aerospace and defense, energy and utilities, financial services,
food production and services, healthcare, high technology,
insurance, media and entertainment, retail and
telecommunications industries, and more than 20 major
U.S. government agencies.
No customer accounted for more than 10% of our revenues in
fiscal 2009, 2008 or 2007. Our top ten customers accounted for
23%, 26% and 31% of our product revenues during fiscal 2009,
2008 and 2007, respectively. See Note 10 of the notes to
our Consolidated Financial Statements for a discussion of total
revenues by geographical region for fiscal 2009, 2008 and 2007.
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Our
Strategy
Our objective is to be the leading provider of compliance and
security management solutions that protect enterprises and
government agencies. To achieve this goal, we plan to:
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grow our customer base by further penetrating the Global 2000,
expanding into new geographies and reaching into the mid-market;
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further penetrate our existing customers by expanding their use
of our platform across the enterprise and extending their use of
our products to new use cases;
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extend and broaden our partner network and improve the
effectiveness of our channel partners;
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extend our expertise in compliance and security best practices
and launch new and innovative applications that open up
additional markets or address specific compliance and security
needs and use cases; and
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extend our value proposition to additional event sources and
business use cases beyond traditional compliance and IT security.
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Our
Solutions and Products
The primary components of our SIEM platform are our ESM
products, which collect streaming data from the devices and
applications in an organizations architecture, which we
refer to as event sources, translate the streaming data into a
common format, and then process the data with our correlation
engine in which complex algorithms determine if events taking
place conform to normal patterns of behavior, established
security policies and compliance regulations. A single device or
application can generate thousands of events in a single day,
most of which are low priority and typically provide information
about a narrow aspect of the infrastructure or only a portion of
the threat or compliance risk involved. Our ESM products
identify and prioritize high-risk activity and present a
consolidated view of threats to, and compliance risks and other
events in, the business and technology infrastructure in rich,
graphical displays. In addition, through our ArcSight Logger
appliances, we enable efficient and scalable collection,
storage, analysis and reporting of terabytes of enterprise log
data for compliance requirements or forensic analysis. Our
customers enhance the value of other compliance and security
products in their business and technology infrastructure by
integrating them with our platform. Key benefits of our
solutions include:
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Enterprise-Class Technology and
Architecture. We design our solutions to serve
the needs of the largest organizations, which typically have
highly complex, geographically dispersed and heterogeneous
business and technology infrastructures. We deliver
enterprise-class solutions by providing interoperability,
flexibility, scalability and efficient archiving.
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Intelligent Correlation. Our correlation
engine intelligently distills millions of events occurring daily
into information that allows customers to identify, analyze,
prioritize and respond to specific threats, compliance
violations and other events of interest.
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Cost-Effective Storage. Our log management
suite provides easy, scalable, cost-effective storage and
enables customers to demonstrate the integrity and availability
of log data both in transit and at rest, facilitating automated
compliance reporting and reducing the cost of audits.
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Reporting and Visualization. We present
threat, compliance risk and other event information through a
rich and intuitive graphical user interface, through which
customers can view risk across their organization in a variety
of ways, address internal and external compliance requirements
and communicate the value and effectiveness of the
organizations security operations.
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Customers can enhance these key benefits through deployment of
one of our solution packages, which are combinations of leading
compliance and security management products that focus on
security or particular compliance needs, ranging from
Sarbanes-Oxley (SOX) to Federal Information Security Management
Act (FISMA) to Payment Card Industry (PCI). For example, our
recently launched solution package for North American
Electric Reliability Corporation (NERC) Critical Infrastructure
Protection, or CIP, includes ArcSight ESM, ArcSight Logger,
ArcSight Connectors, ArcSight TRM (Threat Response Manager),
ArcSight IdentityView and ArcSight Compliance Insight Package
for NERC CIP standards
002-009.
These components allow a variety
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of deployments for compliance with NERC CIP standards
002-009. Our
family of leading compliance and security management products
include:
ArcSight ESM. ArcSight ESM, our flagship
product, is designed specifically to address the compliance,
security and business risk concerns of large,
geographically-distributed organizations with complex,
heterogeneous IT environments. ArcSight ESM serves as a
centralized system for understanding and managing risks across
an organizations entire business and technology
infrastructure. In conjunction with our ArcSight Connectors and
ArcSight Compliance Insight Packages, the key elements within
ArcSight ESM include:
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ArcSight Manager. ArcSight Manager is
server-based software that manages event aggregation and
storage, controls the various elements of our platform and
provides the engine for high-speed real-time correlation and
incident response workflow. In 2008, we made an appliance
version of ArcSight Manager available to facilitate procurement
and provide turnkey deployment to address the needs of some
mid-market customers. ArcSight Manager comes with standard rules
that address common compliance and security issues and business
risks. It also provides an intuitive system that enables
customers to write customized rules that apply an
organizations compliance and security policies into the
real-time analytics of the correlation engine as well as
seamless integration with rules generated by our ArcSight
Pattern Discovery product. ArcSight Manager enables real-time
collaboration and case management among security analysts, to
track risk-prioritized response and remediation. In addition, it
provides case resolution metrics to demonstrate compliance and
security process and control effectiveness. Our case management
system also can integrate with third-party trouble ticketing
systems, such as BMC Software. Our architecture was designed to
allow customers to scale from a single centralized deployment to
a distributed, global deployment by deploying additional
Managers that work in concert.
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ArcSight Console, ArcSight Web and ArcSight
Viewer. ArcSight Console is the primary user
interface to interact with and control ArcSight ESM. Through its
intuitive interface, the Console provides administrators,
analysts and operators with graphical data summaries and an
intuitive interface to perform tasks ranging from real-time
monitoring and analysis to incident investigation and response
to system administration and authoring of new content. The
Console is highly configurable to reflect individual customer
environments and can display threat and risk information in a
wide variety of formats including by geography, by division or
line of business, by type of threat, and by compliance or policy
initiative. With ArcSight Console, customers can run a wide
variety of reports to answer internal and external compliance
audits and communicate the value and effectiveness of the
organizations security operations. We also provide an
authoring system that customers can use to create new reports to
meet their specific business needs. ArcSight ESM contains
hundreds of standard report templates that immediately address
common compliance, security and business risk reporting
requirements. To facilitate remote access for IT administrators
as well as provide a portal for
line-of-business
viewing of status summaries and scheduled reports, our ArcSight
Web product provides browser-based access to all Console
functions and content, except administration and authoring, and
our ArcSight Viewer product provides browser-based read-only
access to all Console content.
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ArcSight Logger. ArcSight Logger, a suite of
appliances available in a variety of feature sets and
capacities, enables organizations to collect and store event
data in support of compliance and security requirements. Our
ArcSight Logger appliances provide customers with an easily
searchable log data repository, together with reporting
capabilities, that can be leveraged across networking, security
and IT operations teams. As with ArcSight ESM, ArcSight Logger
provides administrators, analysts and operators with graphical
data summaries and an intuitive interface to perform search,
reporting and management tasks. Access controls and intelligent
search technology enable customers to interact with historical
raw event data for insight into specific events. ArcSight Logger
currently captures raw logs at sustained rates of up to 100,000
events per second per appliance and provides approximately 10:1
compression capability of event data, storing 30 terabytes or
more of data per appliance. Multiple ArcSight Logger appliances
can be deployed to linearly scale both storage and performance.
Large organizations with multiple administrative domains or
managed security service providers can choose to deploy multiple
ArcSight Logger appliances in a hierarchical or
peer-to-peer
manner to extend capacity and performance as needed. Because
multiple ArcSight Logger
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appliances operate as an array, a comprehensive view into
enterprise-wide log data remains available. ArcSight Logger can
flexibly and selectively forward security events to ArcSight ESM
for real-time, cross-device correlation, visualization and
threat detection. In turn, ArcSight ESM can send correlated
alerts back to ArcSight Logger for archival and subsequent
retrieval. As with our ESM products, our ArcSight Logger
products are deployed in conjunction with our ArcSight
Connectors and are also the basis for their own add-on
Compliance Insight Packages.
ArcSight Express. ArcSight Express is a
pre-packaged set of appliances, and designed to serve as a
security expert in a box for mid-sized organizations
without the resources or in-house compliance and security
expertise needed to deploy a large enterprise-scale system and
to build custom threat detection rules, dashboards and reports.
Our ArcSight Express products provide a simplified, easy-to-use
correlation appliance coupled with a similarly simplified and
easy-to-use log management appliance for long term storage, as
well as pre-built expert rules, dashboards and reports that were
developed through years of advanced deployments targeted at the
compliance and security needs of mid-market organizations. These
appliances work with our ArcSight Connector and ArcSight
Compliance Insight Package products and are available with a
variety of feature sets and capacities allowing rapid
procurement and deployment at a cost appropriate for a range of
mid-market customers.
ArcSight Connectors. Connectors are software
or appliances that collect event data streams from sources
across an organizations business and technology
infrastructure and feed that event data to our ESM, ArcSight
Logger and ArcSight Express products. Our connector appliances
are available in a range of feature sets and throughput
capacities. These connectors implement extensive normalization
and categorization capabilities to restructure event data into a
common taxonomy so events from hundreds of different sources can
be compared meaningfully and queried systematically irrespective
of which device is reporting the information. The normalized
event data stream is then intelligently aggregated and
compressed to eliminate irrelevant and duplicate messages and
reduce bandwidth and storage consumption. Our SmartConnectors
receive and translate event data streams from over 275 different
devices and applications from more than 80 vendors and in
more than 36 different solution categories. Further, using our
FlexConnector toolkit, our customers can create custom
connectors tailored to their environment, such as for new
products, proprietary applications and mainframe and other
legacy systems. Our connectors can be deployed on intermediate
collection points, such as third-party management consoles,
where available, avoiding the requirement to provision our
connectors directly onto end devices.
ArcSight Compliance Insight Packages. We offer
pre-packaged software solutions that enable our ESM, ArcSight
Logger and ArcSight Express products to provide technical-and
business-level checks on corporate compliance with regulatory
and policy requirements for perimeter security, protection of
key business processes, threat management and incident response.
These packages comprise relevant rules and reports to accelerate
implementation by our customers and can be customized or
extended by the customer, and include tailored monitoring,
assessing and reporting to address specific security, regulatory
or policy concerns, including IT governance, SOX and the
Japanese analogue of Sarbanes-Oxley (J-SOX), FISMA, PCI, NERC
CIP standards
002-009,
Gramm-Leach-Bliley Act (GLBA), Health Insurance Portability and
Accountability Act (HIPAA), Basel II Framework,
International Standardization Organization/International
Electrotechnical Commission (ISO/IEC 27002:2005) and National
Institute of Standards and Technology (NIST
800-53)
compliance.
ArcSight IdentityView. ArcSight IdentityView
is an
off-the-shelf
add-on module for our ESM products that increases the value of
customers existing identity and access management, or IAM,
systems, allowing enterprise customers to address the insider
threat and fraud risks they face as well as their compliance and
audit needs. IdentityView includes specialized connectors to
leading IAM systems and pre-built capabilities for correlating
multiple user identities to a single identity key. Using that
single identity key and the event data collected from the wide
variety of data sources available to our ESM products, beyond
those connected to IAM systems, IdentityView collects all of a
users activity information and analyzes it to determine if
the user is performing unauthorized activities. The pre-packaged
reports and dashboards include activity-based modeling to
reflect activities for a particular role, comprehensive activity
reporting to track user activity across systems, automatic watch
lists to track unauthorized actions, separation of duty tracking
for internal control
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compliance, application usage tracking for license compliance
and role tracking of the rights available to particular users
across systems. IdentityView also utilizes the technology
underlying our ArcSight Pattern Discovery module to utilize
machine learning to automatically create new risk profiles
employing IAM information.
ArcSight Discovery Modules. Our ArcSight
Discovery modules, which provide additional advanced analytics
and visualization on our ESM products, include:
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Our ArcSight Pattern Discovery software is a powerful
complement to our correlation engine. It is an advanced pattern
identification engine that retrospectively examines large
amounts of security events previously collected and processed by
ArcSight ESM to discover patterns of activity that may be
characteristic of threats, such as emerging worms, new worm
variants, self-concealing malware, and low profile, slowly
developing attacks. ArcSight Pattern Discovery proactively
alerts the security operations analyst about existing or
emerging patterns that are not comprehended by any rules in our
correlation engine, and provides the customer the option to
classify the patterns and also to optionally or automatically
generate new rules for our ESM products that will detect and
respond to similar threatening patterns in the future.
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Our ArcSight Interactive Discovery visualization software
helps IT security professionals pan, zoom and switch
perspectives across complex technical data to perform in-depth
analysis of security data as well as featuring visuals and
drill-down capabilities that enable non-technical employees to
see relevant threat information in a non-technical format.
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ArcSight TRM (Threat Response
Manager). ArcSight TRM is an appliance that
enables customers to quickly and precisely reconfigure network
control devices to remediate compliance, security and business
risks, consistent with an organizations policy directives.
ArcSight TRM profiles a networks topology through
communication with devices without the need to install a
software agent on the device. Through advanced algorithms, it
can identify the exact location of any node (wireless, wired or
VPN) on the network, analyze, recommend and, at the
customers option, execute specific, policy-based actions
in response to a threat, attack or other
out-of-policy
situation. ArcSight TRM can block, quarantine or filter
undesirable users and systems at the individual port level.
ArcSight TRM integrates seamlessly with ArcSight ESM to
accelerate incident response by facilitating the coordination
between the security and networking groups, thus improving the
effectiveness of the response and acute remediation function.
ArcSight NCM (Network Configuration
Manager). ArcSight NCM is an appliance that
automates the audit of network topology, maintaining protected
records of all prior configurations for purposes of rollback,
audit and compliance reporting. ArcSight NCM presents network
topology in a visual format, allowing organizations to identify
mis-configurations, redundant links and multiple wide area
network (WAN) access routes. ArcSight NCM dynamically compares
existing device configuration and highlights discrepancies from
desired configuration policies that generally map to regulatory
requirements, operational guidelines and business rules.
Maintenance
and Professional Services
We offer a range of services after a sale occurs, principally
installation and implementation, project planning, advice on
business use cases and training services that complement our
product offerings. Initial implementation of our SIEM platform
typically is accomplished within two to four weeks, while our
ArcSight Logger, ArcSight Express and other appliance products
are typically implemented in a matter of days. On an ongoing
basis, we offer consulting services and training related to
application of our SIEM platform to address additional or
customer-specific compliance and security issues and business
risks. Following deployment, our technical support organization
provides ongoing maintenance for our software and appliance
products. We provide standard and, for customers that require
24-hour
coverage seven days a week, premium tiers of maintenance and
support, which include telephone- and web-based technical
support and updates, if and when available, to our software and
appliances during the period of coverage. Our three major
support centers are located in Hong Kong, London and Cupertino,
California. In addition, we sell an enhanced maintenance service
that provides security content updates for our ESM products and
extended hardware maintenance for our appliance products. These
content updates
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reflect emerging threats and risks in the form of signature
categorization, vulnerability mapping and knowledge base
articles on an ongoing basis. For large enterprise customers,
for which design, staffing and operation of a security
operations center, or SOC, is not a part of their core IT
expertise, we offer turnkey SOC service engagements through
which we and our partners provide these functions and customize
them for the customer.
Product
Development and Technology
We have developed and continue to enhance technologies that
underlie three core features incorporated into one or more of
our products. These technologies include:
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Multi-Vector Correlation. The strengths of our
correlation engine are its contextual analysis, mathematical
correlation, identity correlation and timestamp and time window
analysis techniques, which together lead to meaning and
significance in addition to identification of threats and
compliance violations.
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Scalable Architecture. We designed the
architecture of our ESM products so that it can scale and adjust
to the ongoing needs of an organization by offering
cross-platform compatibility, utilizing a modular connector
design, allowing for multi-Manager scaling and including
in-memory correlation and concurrent, flexible storage.
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Vendor Agnostic. We have developed proprietary
technologies that are designed to enable deployment of our
products in business and technology infrastructures with a wide
range of event sources, including the creation and promotion of
a common format for event sources to output their log data. Our
architecture handles the complex tasks of translation,
categorization and normalization of event data produced in
highly heterogeneous formats and taxonomies. To further
facilitate interoperability, we publish and promote an open
event data format standard called Common Event Format, or CEF,
including for products beyond traditional network security
compliance-related devices and applications. As CEF adoption
increases, the value of this standard increases and drives
additional sales opportunities by accelerating event source
compatibility and expanding the range of risks that our platform
can address.
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Research
and Development
Building on our history of innovation, we believe that continued
and timely development of new products and enhancements to our
existing products are necessary to maintain our competitive
position. Accordingly, we have invested, and intend to continue
to invest, significant time and resources in our research and
development activities to extend our technology leadership. At
present, our research and development efforts are focused on
improving and broadening the capabilities of each of our major
product lines and developing additional products. We work
closely with our customers as well as technology partners to
understand their emerging requirements and use cases for our
products. As of April 30, 2009, our research and
development team had 109 employees. Our research and
development expenses were $22.5 million, $19.8 million
and $14.5 million during fiscal 2009, 2008 and 2007,
respectively.
Sales and
Marketing
We market and sell our software through our direct sales
organization and indirectly through value added resellers and
systems integrators. Historically, the majority of our sales are
made through our direct sales organization. We structure our
sales organization by function, including direct and channel
sales, strategic accounts, technical pre-sales, customer and
sales operations, and by region, including Americas,
U.S. Federal, EMEA, APAC and Japan. As of April 30,
2009, we had 141 employees in our sales and marketing
organizations.
The selling process for our products follows a typical
enterprise software sales cycle. It generally involves one or
more of our direct sales representatives, even when a channel
partner is involved. The sales cycle for an initial sale
normally takes from three to six months, but can extend to more
than a year for some sales of ArcSight ESM, from the time of
initial prospect qualification to consummation, and typically
includes product demonstrations and proof of concepts. We deploy
a combination of field account management supported by technical
pre-sales specialists to manage the activities from
qualification through close. After initial deployment, our sales
personnel focus on ongoing account management and follow-on
sales. To assist our customers with reaching their business
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and technical goals for their implementations of our products,
our Customer Success Ownership, or CSO, organization meets with
customers to determine their success criteria and to help
formulate both short- and long-term plans for their deployments
of our products. We also have assigned specific sales personnel
to our larger, more diverse and often global customers in order
to understand their individual needs and increase customer
satisfaction.
We derive a portion of our revenues from sales of our products
and related services through channel partners, such as resellers
and systems integrators. In particular, systems integrators are
an important source of sales leads for us in the
U.S. public sector, as government agencies often rely on
them to meet IT needs, and we use resellers to augment our
internal resources in international markets and, to a lesser
extent, domestically. Our agreements with our channel partners
are generally non-exclusive. Historically, we used our channel
partners to support direct sales of our SIEM platform products.
Sometimes we are required by our U.S. government customers
to utilize particular resellers. We anticipate that we will
derive a significant portion of our ArcSight Express sales
through channel partners. We also anticipate that we will derive
a substantial portion of our ArcSight Logger product sales to
the mid-market through channel partners. We are currently
engaged in a program to increase the effectiveness of our
channel partners, while continuing to broaden our channel
program, but with a decreased emphasis on adding new channel
partners. In part to address the mid-market, we created a
dedicated channel team in each of our geographic regions
responsible for recruiting, managing and supporting our channel
partners and for developing channel partners that will operate
more independently.
We focus our marketing efforts on building brand awareness and
on customer lead generation, including advertising, cooperative
marketing, public relations activities, web-based seminars and
targeted direct mail and
e-mail
campaigns. We also are building our brand through articles
contributed to various trade magazines, public speaking
opportunities and international, national and regional trade
show participation. We reinforce our brand and loyalty among our
customer base with our annual users conference.
Competition
Our primary product is ArcSight ESM, the key elements of which
are the ESM Manager, the connectors and the related toolkit for
the creation of custom connectors and the Consoles that serve as
the primary user interface. In addition, we offer complementary
software for our ESM products that delivers pre-packaged
analytics and reports tailored to specific compliance and
security initiatives, as well as our complementary appliance
products, such as ArcSight Logger which assists our customers in
log collection and storage, and ArcSight Express which provides
a correlation appliance coupled with log management capabilities.
We believe that the market for a compliance and security
management software platform that collects and correlates event
data from across a heterogeneous IT infrastructure, which we are
addressing with ArcSight ESM, is a developing market. Existing
competitors for a platform-wide solution such as ArcSight ESM
primarily are specialized, privately held companies, such as
Intellitactics and netForensics, as well as larger companies
such as CA, Cisco, EMC, IBM, Novell and Symantec. A greater
source of competition is represented by the custom efforts
undertaken by potential customers to analyze and manage the
information produced from their existing devices and
applications to identify and remediate threats. In addition,
some organizations have outsourced these functions to managed
security services providers.
In addition to our existing competitors for our ESM products, we
believe that we face potential competition from a wide variety
of sources that could become effective competitors. Many large,
integrated software companies offer suites of products that
include software applications for compliance and security and
enterprise management. Hardware vendors, including diversified,
global concerns, also offer products that address other
compliance and security needs of the enterprises and government
agencies that comprise our target market. If and to the extent
that the market for our software platform continues to grow, we
expect that large software and hardware vendors may seek to
enter this market, either by way of the organic development of a
competing product line or through the acquisition of a
competitor.
For our ESM products, we believe that we compete principally on
the basis of functionality, analytical capability, scalability,
interoperability with other components of the network and
business infrastructure, and customers ability to
successfully and rapidly deploy the product. We believe that we
compete favorably with our
9
existing competitors with respect to these factors. However, we
may be at a competitive disadvantage when seeking customers that
do not require the full range of features and functionality
available in our ESM products, especially those that may be
price sensitive, which may particularly be the case for smaller
organizations. Those potential customers may instead elect to
purchase a less feature-rich product.
The market for our ArcSight Logger products is also competitive.
We expect that to be successful in addressing this market we
will need to work effectively with channel partners. We are
unable to predict the extent to which we will be successful
selling these products independently of sales of our ESM
products. Further, we may be at a disadvantage in dealing with
our channel partners, who also may have relationships with large
competitors that offer a wide variety of products.
Current competitors for sales of our ArcSight Logger products
include specialized, privately-held companies, such as LogLogic
and SenSage. In addition to these current competitors, we expect
to face competition for our appliance products from both
existing large, diversified software and hardware companies,
from specialized, smaller companies and from new companies that
may seek to enter this market. The primary competitive factors
for our appliance products are functionality, price,
scalability, interoperability with other components of the
network and customers ability to successfully and rapidly
deploy the product. We believe that we currently compete
favorably with respect to these factors.
Mergers, acquisitions or consolidations by and among actual and
potential competitors present heightened competitive challenges
to our business. We believe that consolidation in our industry
may increase the competitive pressures we face on all our
products. Further, continued industry consolidation may impact
customers perceptions of the viability of smaller or even
medium-sized software firms and consequently customers
willingness to purchase from such firms.
Competitors that offer a large array of security or software
products may be able to offer products or functionality similar
to ours at a more attractive price than we can by integrating or
bundling them with their other product offerings. The
consolidation in our industry increases the likelihood of
competition based on integration or bundling. If we are unable
to sufficiently differentiate our products from the integrated
or bundled products of our competitors, such as by offering
enhanced functionality, performance or value, we may see a
decrease in demand for those products, which would adversely
affect our business, operating results and financial condition.
Similarly, if customers seek to concentrate their software
purchases in the product portfolios of a few large providers, we
may be at a competitive disadvantage notwithstanding the
superior performance that we believe our products can deliver.
Increased competition could result in fewer customer orders,
price reductions, reduced gross margins and loss of market
share. Many of our existing and potential competitors enjoy
substantial competitive advantages, such as wider geographic
presence, access to larger customer bases and the capacity to
leverage their sales efforts and marketing expenditures across a
broader portfolio of products, and substantially greater
financial, technical and other resources. As a result, they may
be able to adapt more quickly and effectively to new or emerging
technologies and changing opportunities, standards or customer
requirements. In addition, large competitors, such as integrated
software companies and diversified, global hardware vendors, may
regularly sell enterprise-wide and other large software
applications, or large amounts of infrastructure hardware, to,
and may have more extensive relationships within, large
enterprises and government agencies worldwide, which may provide
them with an important advantage in competing for business with
those potential customers. In addition, if our target market
continues to grow small, highly specialized competitors may
continue to emerge.
Intellectual
Property
Our intellectual property is an essential element of our
business. We use a combination of copyright, patent, trademark,
trade secret and other intellectual property laws,
confidentiality agreements and license agreements to protect our
intellectual property. It is our policy that our employees and
independent contractors involved in development are required to
sign agreements acknowledging that all inventions, trade
secrets, works of authorship, developments and other processes
generated by them on our behalf are our property, and assigning
to us any ownership that they may claim in those works. Despite
our precautions, it may be possible for third parties to obtain
and use without consent intellectual property that we own or
license. Unauthorized use of our intellectual property
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by third parties, and the expenses incurred in protecting our
intellectual property rights, may adversely affect our business.
Patents and Patent Applications. We have seven
issued patents and a number of patent applications pending in
the United States, internationally and in specific foreign
countries. Our issued patents, expire between 2024 and 2027. We
do not know whether any of our patent applications will result
in the issuance of a patent or whether the examination process
will require us to narrow our claims, except that some of our
patent applications have received office actions and in some
cases we have modified the claims. Any patents that may be
issued to us may be contested, circumvented, found unenforceable
or invalidated, and we may not be able to prevent third parties
from infringing them. Therefore, the exact effect of having a
patent cannot be predicted with certainty.
Oracle License Agreement. We license database
software from Oracle that we integrate with our ESM products.
Our agreement with Oracle, which runs through May 2011, permits
us to distribute Oracle database software embedded in our ESM
products. Under this agreement, we have agreed to make
third-party royalty payments totaling $4.8 million over the
term of the license. The agreement allows us to offer this
database software to our customers and partners that may not
have previously acquired their own database management software.
From time to time, we may encounter disputes over rights and
obligations concerning intellectual property. Although we
believe that our product offerings do not infringe the
intellectual property rights of any third party, we cannot be
certain that we will prevail in any intellectual property
dispute. If we do not prevail in these disputes, we may lose
some or all of our intellectual property protection, be enjoined
from further sales of our products that are determined to
infringe the rights of others,
and/or be
forced to pay substantial royalties to a third party, any of
which would adversely affect our business, financial condition
and results of operations.
Employees
As of April 30, 2009, we had a total of 400 employees,
consisting of 141 employees in sales and marketing,
109 employees in research and development,
60 employees in professional services, 36 employees in
support and 54 employees in general and administrative
functions. A total of 64 employees are located outside the
United States. None of our employees is represented by a union
or covered by a collective bargaining agreement. We consider our
employee relations to be good and have never experienced a work
stoppage.
Corporate
History and Information
We were incorporated in Delaware on May 3, 2000 as Wahoo
Technologies, Inc. On March 30, 2001, we changed our name
to ArcSight, Inc. Our principal executive offices are located at
5 Results Way, Cupertino, California 95014, and our telephone
number is
(408) 864-2600.
We launched our first product in January 2002, and made our
first product sale in June 2002. Following the completion of our
fiscal year ended December 31, 2002, we changed our fiscal
year end to April 30. As a result of the change, the first
full fiscal year in which we sold our products and services was
the fiscal year ended April 30, 2004. Our revenues have
grown from $0.2 million in the fiscal year ended
December 31, 2002 and $15.3 million in fiscal 2004 to
$136.2 million in the fiscal year ended April 30,
2009. We initially funded our operations primarily through
convertible preferred stock financings that raised a total of
$26.8 million. We made our first sale to the
U.S. federal government in September 2002 and our first
sale internationally in December 2002. We completed our initial
public offering, or IPO, in February 2008.
We believe that our product revenue has been somewhat seasonal
historically, with the first quarter of our fiscal year
typically having relatively lower product revenue and the fourth
quarter of our fiscal year typically having relatively higher
product revenue. See the discussion of seasonality under
Sources of Revenues, Cost of Revenues and Operating
Expenses Product Revenues in Item 7.
Managements Discussion and Analysis of Financial
Condition and Results of Operations for a more complete
description of the factors contributing to seasonal variation in
our business.
We released version 1.0 of our flagship ESM product, which
featured a proprietary security taxonomy that normalizes and
categorizes data to enable cross-device, cross-vendor,
time-based correlation as well as connectors based on a common
architecture, in January 2002. Version 2.0 was released in
November 2002, integrating vulnerability and asset criticality
information to the data analyzed in order to prioritize security
events. Version 2.5,
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released in September 2003, added real-time geospatial mapping
to the incoming event stream as well as advanced visual analysis
tools, such as three-dimensional dashboard monitors to enable
more efficient analysis and response. In July 2004, we released
version 3.0, which included real-time analyst collaboration and
an enhanced security taxonomy. At that time, we also launched
our ArcSight Pattern Discovery product. We released version 3.5
in November 2005, adding quality of service metrics, improved
performance, richer reporting and auditing. We introduced the
first of our compliance insight packages in January 2006. In
June 2006, we acquired substantially all of the assets of Enira
Technologies, LLC, primarily consisting of the predecessors to
our ArcSight TRM and ArcSight NCM products. We launched our
ArcSight TRM and ArcSight NCM products in June 2006 and our
initial ArcSight Logger product in December 2006. We announced
the availability of version 4.0 of our ESM product in May 2007.
This release introduced integrated identity and role-based
correlation capabilities as well as significant improvements to
asset management capability and scalability. We released the
availability of our ESM software as an appliance and the
availability of IdentityView in June 2008, availability of
version 3.0 of our ArcSight Logger products in September 2008
and the availability of our initial ArcSight Express product in
April 2009.
ArcSight and the ArcSight logo are registered
trademarks of ArcSight in the United States and in some other
countries. Where not registered, these marks and ArcSight
Console, ArcSight Express, ArcSight
Manager, ArcSight Web,
FlexConnector, IdentityView,
ArcSight Logger, ArcSight NCM,
SmartConnector and ArcSight TRM,
ArcSight Viewer, ArcSight Interactive
Discovery and ArcSight Pattern Discovery are
trademarks of ArcSight.
Available
Information
Our Internet address is www.arcsight.com. There we make
available, free of charge, our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and any amendments to those reports, as soon as reasonably
practicable after we electronically file such material with, or
furnish it to, the SEC. Our SEC reports can be accessed through
the Investor Relations section of our website. The information
found on our website is not part of this or any other report we
file with or furnish to the SEC. The SEC also maintains an
Internet website that contains reports, proxy and information
statements and other information regarding registrants, such as
ArcSight, that file electronically with the SEC. The address of
the website is www.sec.gov. In addition, you may read and copy
any filing that we make with the SEC at the public reference
room maintained by the SEC, located at 100 F Street,
N.E., Room 1580, Washington, D.C. 20549. Please call
the SEC at
1-800-SEC-0330
for further information about the public reference room.
Risk
Related to Our Business and Industry
We
operate in an emerging and evolving market and have a history of
losses, and we are unable to predict the extent of any future
losses.
We launched our ESM products in January 2002 and our first
ArcSight Logger product in December 2006. Because the market for
our products is relatively new and rapidly evolving, it is
difficult for us to predict our operating results and the
ultimate size of the market for our products. Although we
recorded net income of $9.9 million for the fiscal year
ended April 30, 2009, we have a history of losses from
operations, incurring losses from operations of
$1.4 million, $0.3 million and $16.8 million for
the fiscal years ended April 30, 2008, 2007 and 2006,
respectively. As of April 30, 2009, our accumulated deficit
was $36.8 million. We expect our operating expenses to
increase over the next several years as we hire additional sales
and marketing personnel, expand and improve the effectiveness of
our distribution channel program and develop our technology and
new products. In addition, we have incurred, and anticipate that
we will continue to incur, significant legal, accounting and
other expenses relating to being a public company. If our
revenues do not increase to offset these expected increases in
operating expenses, we may not continue to be profitable in
future periods. Our historical revenue growth has been
inconsistent, reflects fluctuations not related to performance
and should not be considered indicative of our future
performance. See the section entitled Managements
Discussion and Analysis of Financial Condition and Results of
Operations Sources of Revenue, Cost of Revenues and
Operating Expenses. Further, in future periods, our
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revenues could decline and, accordingly, we may not be able to
sustain or increase profitability on a consistent basis, which
may result in a decline in our common stock price.
Our
future operating results may fluctuate significantly and our
current operating results may not be a good indication of our
future performance.
Our revenues and operating results could vary significantly from
period to period as a result of a variety of factors, many of
which are outside of our control. As a result, comparing our
revenues and operating results on a
period-to-period
basis may not be meaningful, and you should not rely on our past
results as an indication of our future performance. For example,
revenues in fiscal 2006 and prior years excluded revenues
related to multiple element sales transactions consummated in
that year that were deferred because we did not have
vendor-specific objective evidence of fair value, or VSOE, for
some product elements that were not delivered in the fiscal year
of the transaction. In fiscal 2008 and 2007, we either delivered
these product elements, or we and our customers amended the
contractual terms of these sales transactions to remove the
undelivered product elements. Our operating results in any
particular quarterly period in fiscal 2010 may be similarly
impacted as we recognize this previously deferred revenue. We
may not be able to accurately predict our future revenues or
results of operations. We base our current and future expense
levels on our operating plans and sales forecasts, and our
operating costs are relatively fixed in the short term. As a
result, we may not be able to reduce our costs sufficiently to
compensate for an unexpected shortfall in revenues, and even a
small shortfall in revenues could disproportionately and
adversely affect financial results for that quarter. In
addition, we recognize revenues from sales to some customers or
resellers when cash is received, which may be delayed because of
changes or issues with those customers or resellers. If our
revenues or operating results fall below the expectations of
investors or any securities analysts that may choose to cover
our stock, the price of our common stock could decline
substantially.
In addition to other risk factors listed in this section,
factors that may affect our operating results include:
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the timing of our sales during the quarter, particularly since a
large portion of our sales occurs in the last few weeks of the
quarter and loss or delay of a few large contracts may have a
significant adverse impact on our operating results;
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changes in the mix of revenues attributable to higher-margin
revenues from ESM products as opposed to lower-margin revenues
from sales of our appliance products;
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the timing of satisfying revenue recognition criteria,
including, for example, establishing (1) VSOE for new
products and maintaining VSOE for maintenance and services,
particularly where we accrue the associated commission expense
in a different period, and (2) sufficient history with
respect to our newly introduced appliance licensing model such
that revenue recognition criteria would be met on shipment of
our appliances, rather than delaying revenue recognition until
payment for these transactions in which we will be required to
do until such history is established;
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changes in the renewal rate of maintenance agreements;
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our ability to estimate warranty claims accurately;
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general economic conditions, both domestically and in our
foreign markets, and economic conditions specifically affecting
industries in which our customers participate, such as the
impact of the recent and continuing severe deterioration in
global and U.S. economic and financial market conditions on
the financial services and retail industries; and
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the impact of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, an Interpretation of SFAS 109,
or FIN 48, which requires us to establish reserves for
uncertain tax positions and accrue potential tax penalties and
interest.
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Our
sales cycle is long and unpredictable, and our sales efforts
require considerable time and expense. As a result, our revenues
are difficult to predict and may vary substantially from quarter
to quarter, which may cause our operating results to
fluctuate.
Our operating results may fluctuate, in part, because of the
intensive nature of our sales efforts, the length and
variability of the sales cycle of our ESM products and the
short-term difficulty in adjusting our operating expenses.
Because decisions to purchase products such as our ESM products
involve significant capital commitments by customers, potential
customers generally have our products evaluated at multiple
levels within an organization, each often having specific and
conflicting requirements. Enterprise customers make product
purchasing decisions based in part on factors not directly
related to the features of the products, including but not
limited to the customers projections of business growth,
uncertainty regarding economic conditions, capital budgets and
anticipated cost savings from implementation of the software. As
a result of these factors, selling our products often requires
an extensive effort throughout a customers organization.
The recent and continuing severe deterioration in global and
U.S. economic and financial market conditions has increased
the duration and intensity of our sales efforts as customers
enhance their review of spending decisions. In addition, we have
less experience with sales of ArcSight Logger, ArcSight Express
and our other appliance products. As a result, the sales cycle
for these products may be lengthy or may vary significantly. Our
sales efforts involve educating our customers, who are often
relatively unfamiliar with our products and their technical
capabilities, as well as the value of our products, including
the potential cost savings to the organization that our products
may generate. We spend substantial time, effort and money in our
sales efforts without any assurance that our efforts will
produce any sales.
The length of our sales cycle, from initial evaluation to
delivery of products, tends to be long and varies substantially
from customer to customer. Our sales cycle is typically three to
six months but can extend to more than a year for some sales. We
typically recognize a large portion of our product revenues in
the last few weeks of a quarter. It is difficult to predict
exactly when, or even if, we will actually make a sale with a
potential customer. As a result, large individual sales have, in
some cases, occurred in quarters subsequent to those we
anticipated, or have not occurred at all. The loss or delay of
one or more large product transactions in a quarter could impact
our operating results for that quarter and any future quarters
for which revenues from that transaction are delayed. As a
result of these factors, it is difficult for us to accurately
forecast product revenues in any quarter. Because a substantial
portion of our expenses are relatively fixed in the short term,
our operating results will suffer if revenues fall below our
expectations in a particular quarter, which could cause the
price of our common stock to decline significantly.
If we
fail to further develop and manage our distribution channels,
our revenues could decline and our growth prospects could
suffer.
We derive a portion of our revenues from sales of our products
and related services through channel partners, such as resellers
and systems integrators. In particular, systems integrators are
an important source of sales leads for us in the
U.S. public sector, as government agencies often rely on
them to meet information technology, or IT, needs. We also use
resellers to augment our internal resources in international
markets and, to a lesser extent, domestically. We may be
required by our U.S. government customers to utilize
particular resellers that may not meet our criteria for
creditworthiness, and revenues from those resellers may not be
recognizable until receipt of payment. We have derived, and
anticipate that in the future we will continue to derive, a
substantial portion of the sales of ArcSight Logger and other
appliance products through channel partners, including parties
with which we have not yet developed relationships. We expect
that channel sales will represent a substantial portion of our
U.S. government and international revenues for the
foreseeable future and, we believe, a growing portion of our
U.S. commercial revenues. We may be unable to successfully
expand and improve the effectiveness of our channel sales
program. If we do not successfully execute our strategy to
increase channel sales, particularly to further penetrate the
mid-market and sell our appliance products, our growth prospects
may be materially and adversely affected.
Our agreements with our channel partners are generally
non-exclusive and many of our channel partners have more
established relationships with our competitors. If our channel
partners do not effectively market and sell our products, if
they choose to place greater emphasis on products of their own
or those offered by our competitors, or if they fail to meet the
needs of our customers, our ability to grow our business and
sell our products may be adversely affected, particularly in the
public sector, the mid-market and internationally. Similarly,
the loss of a substantial
14
number of our channel partners, who may cease marketing our
products and services with limited or no notice and with little
or no penalty, and our possible inability to replace them, the
failure to recruit additional channel partners, or any reduction
or delay in their sales of our products and services or
conflicts between channel sales and our direct sales and
marketing activities could materially and adversely affect our
results of operations. In addition, changes in the proportion of
our revenues attributable to sales by channel partners, which
are more likely than direct sales to involve collectability
concerns at the time of contract execution and product delivery,
may cause our operating results to fluctuate from period to
period.
Because
we derive a majority of our revenues from ArcSight ESM and
related products and services, any failure of this product to
satisfy customer demands or to achieve increased market
acceptance will harm our business, operating results, financial
condition and growth prospects.
We have derived a majority of our product revenues from ArcSight
ESM and related products. Demand for ArcSight ESM is affected by
a number of factors beyond our control, including the timing of
development and release of new products by us and our
competitors, technological change, and
lower-than-expected
growth or a contraction in the worldwide market for enterprise
compliance and security management solutions or other risks
described in this Annual Report on
Form 10-K.
If we are unable to continue to meet customer demands or to
achieve more widespread market acceptance of ArcSight ESM, our
business, operating results, financial condition and growth
prospects will be adversely affected.
If we
are unable to successfully develop and market new products, make
enhancements to our existing products or expand our offerings
into new markets, our business may not grow and our operating
results may suffer.
We introduced our first ArcSight Logger product in fiscal 2007
and are currently developing new versions of this product, ESM
and the other products in our SIEM platform, as well as new
complementary products. Our growth strategy and future financial
performance will depend, in part, on our ability to market and
sell these products and to diversify our offerings by
successfully developing, timely introducing and gaining customer
acceptance of new products.
The software in our products, particularly our ArcSight ESM and
ArcSight Express products, is especially complex because it must
recognize, effectively interact with and manage a wide variety
of devices and applications, and effectively identify and
respond to new and increasingly sophisticated security threats
and other risks, while not impeding the high network performance
demanded by our customers. The typical development cycle for a
patch to our ESM software is one to three months, a service pack
is four to six months and a new version or major
sub-version
is 12 to 18 months, if and when available. Customers and
industry analysts expect speedy introduction of software to
respond to new threats and risks and to add new functionality,
and we may be unable to meet these expectations. Since
developing new products or new versions of, or add-ons to,
existing products is complex, the timetable for their commercial
release is difficult to predict and may vary from our historical
experience, which could result in delays in their introduction
from anticipated or announced release dates. We may not offer
updates as rapidly as new threats affect our customers. If we do
not quickly respond to the rapidly changing and rigorous needs
of our customers by developing and introducing on a timely basis
new and effective products, upgrades and services that can
respond adequately to new security threats, our competitive
position, business and growth prospects will be harmed.
Diversifying our product offerings and expanding into new
markets will require significant investment and planning, will
bring us more directly into competition with software providers
that may be better established or have greater resources than we
do, will require additional investment of time and resources in
the development and training of our channel and strategic
partners and will entail significant risk of failure. Sales of
our ArcSight Logger and ArcSight Express products and other
products that we may develop and market may reduce revenues of
our flagship ESM product and our overall margin by offering a
subset of features or capabilities of our flagship ESM products
at a reduced price with a lower gross margin. If the average
selling price for orders of such alternate products is lower, we
may need to sell to a larger number of customers to achieve
equivalent revenues, potentially incurring increased sales,
marketing and general and administrative expenses in support of
those sales. Moreover, increased emphasis on the sale of our
appliance products, add-on products or new product lines could
distract us
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from sales of our core ArcSight ESM offering, negatively
affecting our overall sales. If we fail or delay in diversifying
our existing offerings or expanding into new markets, or we are
unsuccessful competing in these new markets, our business,
operating results and prospects may suffer.
If we
are not able to maintain and enhance our brand, our business and
operating results may be harmed.
We believe that maintaining and enhancing our brand identity is
critical to our relationships with, and to our ability to
attract, new customers and partners. The successful promotion of
our brand will depend largely upon our marketing and public
relations efforts, our ability to continue to offer high-quality
products and services, and our ability to successfully
differentiate our products and services from those of our
competitors, especially to the extent that our competitors
integrate or bundle competitive offerings with a broader array
of products and services that they may offer. Our brand
promotion activities may not be successful or yield increased
revenues. In addition, extension of our brand to products and
uses different from our traditional products and services may
dilute our brand, particularly if we fail to maintain the
quality of our products and services in these new areas.
Moreover, it may be difficult to maintain and enhance our brand
in connection with sales through channel or strategic partners.
The promotion of our brand requires us to make substantial
expenditures, and we anticipate that the expenditures will
increase as our market becomes more competitive and as we expand
into new markets. To the extent that these activities yield
increased revenues, these revenues may not offset the expenses
we incur. If we do not successfully maintain and enhance our
brand, our business may not grow, we may have reduced pricing
power relative to competitors with stronger brands, and we could
lose customers and channel partners, all of which would harm our
business, operating results and financial condition.
In addition, independent industry analysts often provide reviews
of our products and services, as well as those of our
competitors, and perception of our products in the marketplace
may be significantly influenced by these reviews. We have no
control over what these industry analysts report, and because
industry analysts may influence current and potential customers,
our brand could be harmed if they do not provide a positive
review of our products and services or view us as a market
leader.
We
face intense competition in our market, especially from larger,
better-known companies, and we may lack sufficient financial or
other resources to maintain or improve our competitive
position.
The market for enterprise compliance and security management and
log collection and storage products is intensely competitive,
and we expect competition to increase in the future. A
significant number of companies have developed, or are
developing, products that currently, or in the future are likely
to, compete with some or all of our products. We may not compete
successfully against our current or potential competitors,
especially those with significantly greater financial resources
or brand name recognition. Companies competing with us may
introduce products that have greater performance or
functionality or incorporate technological advances that we have
not yet developed or implemented. In addition, companies
competing with us may price their products more competitively
than ours, or have an entirely different pricing or distribution
model, such as making introductory versions with limited
functionality available as freeware products.
Our competitors include large software companies, software or
hardware network infrastructure companies, smaller software
companies offering more narrowly focused enterprise compliance
and security management and log collection and storage products,
and small and large companies offering point solutions that
compete with components of our platform or individual products.
Existing competitors for a compliance and security management
software platform solution such as our ESM products primarily
are specialized, privately-held companies, such as
Intellitactics and netForensics, as well as larger companies
such as CA, Cisco, EMC, IBM, Novell and Symantec. Current
competitors for sales of our ArcSight Logger products include
specialized, privately-held companies, such as LogLogic and
SenSage. In addition to these current competitors, we expect to
face competition for our appliance products from existing large,
diversified software and hardware companies, from specialized,
smaller companies and from new companies that may seek to enter
this market.
Another source of competition is represented by the custom
internal efforts undertaken by potential customers to analyze
and manage the information produced from their existing devices
and applications to identify and
16
remediate threats. Many companies, in particular large corporate
enterprises, have developed software internally that is an
alternative to our enterprise compliance and security management
and log collection and storage products. Wide adoption of our
Common Event Format, which we are promoting as a standard for
event logs generated by security and other products, may
facilitate this internal development.
Wide adoption of our Common Event Format may also allow our
competitors to offer products with a degree of compatibility
similar to ours or may facilitate new entrants into our
business. New competitors may emerge and rapidly acquire
significant market share due to factors such as greater brand
name recognition, larger installed customer bases and
significantly greater financial, technical, marketing and other
resources and experience. If these new competitors are
successful, we would lose market share and our revenues would
likely decline.
Mergers or consolidations among our competitors, or acquisitions
of our competitors by large companies, present heightened
competitive challenges to our business. For example, in recent
years IBM has acquired Internet Security Systems, Inc.,
Micromuse and Consul, Novell acquired
e-Security
and EMC acquired Network Intelligence. These acquisitions will
make these combined entities potentially more formidable
competitors to us if their products and offerings are
effectively integrated. Continued industry consolidation may
impact customers perceptions of the viability of smaller
or even medium-sized software firms and, consequently,
customers willingness to purchase from those firms.
Many of our existing and potential competitors enjoy substantial
competitive advantages, such as:
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greater name recognition and longer operating histories;
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larger sales and marketing budgets and resources;
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the capacity to leverage their sales efforts and marketing
expenditures across a broader portfolio of products;
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broader distribution and established relationships with
distribution partners;
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access to larger customer bases;
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greater customer support;
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greater resources to make acquisitions;
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lower labor and development costs; and
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substantially greater financial, technical and other resources.
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As a result, they may be able to adapt more quickly and
effectively to new or emerging technologies and changing
opportunities, standards or customer requirements. In addition,
these companies have reduced, and could continue to reduce, the
price of their enterprise compliance and security management,
log collection and storage products and managed security
services, resulting in intensified pricing pressures within our
market.
Increased competition could result in fewer customer orders,
price reductions, reduced operating margins and loss of market
share. Our larger competitors also may be able to provide
customers with different or greater capabilities or benefits
than we can provide in areas such as technical qualifications,
geographic presence, or provide customers a broader range of
services and products and price. In addition, large competitors
may have more extensive relationships within large enterprises,
the federal government or foreign governments, which
relationships may provide them with an advantage in competing
for business with those potential customers. Our ability to
compete will depend upon our ability to provide better
performance than our competitors at a competitive price. We may
be required to make substantial additional investments in
research, development, marketing and sales in order to respond
to competition, and we cannot assure you that we will be able to
compete successfully in the future.
We may
not be able to compete effectively with companies that integrate
or bundle products similar to ours with their other product
offerings.
Many large, integrated software companies offer suites of
products that include software applications for compliance and
security management. In addition, hardware vendors, including
diversified, global concerns, offer products that address the
compliance and security needs of the enterprises and government
agencies that comprise
17
our target market. Further, several companies currently sell
software products that our customers and potential customers
have broadly adopted, providing them a substantial advantage
when they sell products that perform functions substantially
similar to some of our products. Competitors that offer a large
array of security or software products may be able to offer
products or functionality similar to ours at a more attractive
price than we can by integrating or bundling them with their
other product offerings. The consolidation in our industry
increases the likelihood of competition based on integration or
bundling. Customers may also increasingly seek to consolidate
their enterprise-level software purchases with a small number of
larger companies that can purport to satisfy a broad range of
their requirements. If we are unable to sufficiently
differentiate our products from the integrated or bundled
products of our competitors, such as by offering enhanced
functionality, performance or value, we may see a decrease in
demand for our products, which would adversely affect our
business, operating results and financial condition. Similarly,
if customers seek to concentrate their software purchases with a
few large providers, we may be at a competitive disadvantage.
We
have less experience with sale, manufacture, delivery, service
and support of ArcSight Logger and our other appliance products
and rely on a single contract manufacturer for manufacture and
fulfillment of our appliance products, and as a result we may be
unable to successfully forecast demand or fulfill orders for
these appliance products.
We introduced our first ArcSight Logger product in fiscal 2007.
Prior to June 2006, we offered only software products and
related services, and as a result have less experience with
sales of appliance-based products than we have with our flagship
ESM products. Fulfillment of sales of our appliance products
involves hardware manufacturing, inventory, import certification
and return merchandise authorization processes with which we
have less experience. For example, if we fail to accurately
predict demand and as a result our manufacturer maintains
insufficient hardware inventory or excess inventory, we may be
unable to timely deliver ordered products or may have
substantial inventory expense. As the size of individual orders
increases, we may be unable to cause delivery of large
unforecasted orders, particularly near the end of quarterly
periods. In addition, we use a single source for manufacture and
fulfillment of our appliance products and if our equipment
vendor fails to manufacture our appliance products or fulfill
orders in required volumes, in a timely manner, at a sufficient
level of quality, or at all, if it is no longer financially
viable or for other reasons, we may be unable to fulfill
customer orders and our operating results may fluctuate from
period to period, particularly if a disruption occurs near the
end of a fiscal period. Disruptions in the manufacture and
fulfillment of our products could damage our reputation and
relationships with our customers and result in revenue declines
and a negative effect on our growth prospects. In addition, if
we change our hardware configuration or manufacturer, some
countries may require us to reinitiate their import
certification process. If we are unable to successfully perform
these functions or develop a relationship with a fulfillment
partner that does so for us, our sales, operating results and
financial condition may be harmed. In addition, the process of
obtaining additional or alternative capacity with another
contract manufacturer would likely result in an increase of cost
of goods sold, which could negatively impact our financial
performance if we are unable to offset such increases with
increases in the prices we charge our customers.
We
face risks related to customer outsourcing to managed security
service providers.
Some of our customers have outsourced the management of their IT
departments or the network security operations function to large
systems integrators or managed security service providers, or
MSSPs. If this trend continues our established customer
relationships could be disrupted and our products could be
displaced by alternative system and network protection solutions
offered by systems integrators or MSSPs. Significant product
displacements could impact our revenues and have a negative
effect on our business. While to date we have developed a number
of successful relationships with MSSPs, they may develop or
acquire their own technologies rather than purchasing our
products for use in provision of managed security services.
Seasonality
may cause fluctuations in our operating results.
We believe that our product revenue has been somewhat seasonal
historically, with the first quarter of our fiscal year
typically having relatively lower product revenue, the second
and third quarters of our fiscal year increasing
18
from there and the fourth quarter of our fiscal year typically
having relatively higher product revenue. We believe that this
seasonality results from a number of factors, including:
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the fiscal year end procurement cycles of both our government
and commercial customers;
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the budgeting, procurement and work cycles of our customers,
including customers in the public sector;
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the timing of our annual sales club for top
performers and annual training for our entire sales force in our
first fiscal quarter;
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seasonal reductions in business activity during the summer
months in the United States, Europe and certain other regions;
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sales to customers with a standard December 31 fiscal year end
that may positively impact our license revenue in the third
quarter of our fiscal year; and
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the structure of our direct sales incentive and compensation
program, which may reinforce the tendency of our direct sales
team to book the largest volume of deals toward the end of our
fiscal year.
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The timing of our quarterly period boundaries and the
U.S. federal governments September 30 fiscal year end
may impact product sales to governmental agencies in the second
quarter of our fiscal year, offsetting the otherwise seasonal
downturn in later summer months. We expect these seasonal
factors to continue to impact our business in the future, and
any seasonality that we experience may cause fluctuations in our
operating results. We believe that our rapid historical growth,
the timing of the launch of new products and the timing of large
product sales transactions near period boundaries, may have
overshadowed the nature or magnitude of seasonal or cyclical
factors that might have influenced our business to date. They
may do so again in the future. Seasonal or cyclical variations
in our operations may become more pronounced over time and may
materially adversely affect our results of operations in the
future.
Our
business depends, in part, on sales to the public sector, and
significant changes in the contracting or fiscal policies of the
public sector could have a material adverse effect on our
business.
We derive a portion of our revenues from contracts with federal,
state, local and foreign governments and government agencies,
and we believe that the success and growth of our business will
continue to depend on our successful procurement of government
contracts. For example, we have historically derived, and expect
to continue to derive, a significant portion of our revenues
from sales to agencies of the U.S. federal government,
either directly by us or through systems integrators and other
resellers. In the fiscal years ended April 30, 2009, 2008
and 2007, we derived 22%, 20% and 32% of our revenues,
respectively, from contracts with agencies of the
U.S. federal government. Accordingly:
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changes in fiscal or contracting policies or decreases in
available government funding;
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changes in government programs or applicable requirements;
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the adoption of new laws or regulations or changes to existing
laws or regulations;
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changes in political or social attitudes with respect to
security issues; and
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potential delays or changes in the government appropriations
process
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could cause governments and governmental agencies to delay or
refrain from purchasing the products and services that we offer
in the future or otherwise have an adverse effect on our
business, financial condition and results of operations.
Failure
to comply with laws or regulations applicable to our business
could cause us to lose U.S. government customers or our ability
to contract with the U.S. government.
We must comply with laws and regulations relating to the
formation, administration and performance of
U.S. government contracts, which affect how we and our
channel partners do business with U.S. government agencies.
These laws and regulations may impose added costs on our
business, and failure to comply with these or
19
other applicable regulations and requirements, including
non-compliance in the past, could lead to claims for damages
from our channel partners, and penalties, termination of
contracts and suspension or debarment from government
contracting for a period of time with U.S. government
agencies. Any such damages, penalties, disruption or limitation
in our ability to do business with the U.S. government
could have a material adverse effect on our business, operating
results and financial condition.
Our
government contracts may limit our ability to move development
activities overseas and to source components from some
countries, which may impair our ability to optimize our product
development costs and compete for non-government
contracts.
Increasingly, product development and component sourcing are
being shifted to lower-cost countries, such as India and China.
However, some contracts with U.S. government agencies
require that at least 50% of the components of each of our
products be of U.S. origin or that each product be
substantially transformed in the U.S. or in a country on
the U.S. governments list of designated countries.
Consequently, our ability to optimize our product development by
conducting it overseas and to lower our costs of goods sold by
sourcing from lower cost regions may be hampered. Some of our
competitors do not rely on contracts with the
U.S. government to the same degree as we do and may develop
product or source components offshore, or may have the scale to
permit them to separately source versions of their competing
products for sale to customers other than U.S. government
agencies. If we are unable to develop product or source
components as cost-effectively as our competitors, our ability
to compete for our non-government customers may be reduced and
our customer sales may decline, resulting in decreased revenues.
Real
or perceived errors, failures or bugs in our products could
adversely affect our operating results and growth
prospects.
Because we offer very complex products, undetected errors,
failures or bugs may occur, especially when products are first
introduced or when new versions are released. Our products are
often installed and used in large-scale computing environments
with different operating systems, system management software and
equipment and networking configurations, which may cause errors
or failures in our products or may expose undetected errors,
failures or bugs in our products. Despite testing by us, errors,
failures or bugs may not be found in new products or releases
until after commencement of commercial shipments. In the past,
we have discovered software errors, failures and bugs in some of
our product offerings after their introduction.
In addition, our products could be perceived to be ineffective
for a variety of reasons outside of our control. Hackers could
circumvent our customers security measures, and customers
may misuse our products resulting in a security breach or
perceived product failure. We provide a top-level enterprise
compliance and security management solution that integrates a
wide variety of other elements in a customers IT and
security infrastructure, and we may receive blame for a security
breach that was the result of the failure of one of the other
elements.
Real or perceived errors, failures or bugs in our products could
result in negative publicity, loss of or delay in market
acceptance of our products, loss of competitive position or
claims by customers for losses sustained by them. In such an
event, we may be required, or may choose, for customer relations
or other reasons, to expend additional resources in order to
help correct the problem. Our product liability insurance may
not be adequate. Further, provisions in our license agreements
with end users that limit our exposure to liabilities arising
from such claims may not be enforceable in some circumstances or
may not fully protect us against such claims and related
liabilities and costs. Defending a lawsuit, regardless of its
merit, could be costly and could limit the amount of time that
management has available for
day-to-day
execution and strategic planning or other matters.
Many of our end-user customers use our products in applications
that are critical to their businesses and may have a greater
sensitivity to defects in our products than to defects in other,
less critical, software products. In addition, if an actual or
perceived breach of information integrity or availability occurs
in one of our end-user customers systems, regardless of
whether the breach is attributable to our products, the market
perception of the effectiveness of our products could be harmed.
Alleviating any of these problems could require significant
expenditures of our capital and other resources and could cause
interruptions, delays or cessation of our product
20
licensing, which could cause us to lose existing or potential
customers and could adversely affect our operating results and
growth prospects.
In addition, because we are a leading provider of enterprise
security products and services, hackers and others
may try to access our data or compromise our systems. If we are
the subject of a successful attack, then our reputation in the
industry and with current and potential customers may be
compromised and our sales and operating results could be
adversely affected.
Incorrect
or improper use of our complex products, our failure to properly
train customers on how to utilize our products or our failure to
properly provide consulting and implementation services could
result in customer dissatisfaction and negatively affect our
results of operations and growth prospects.
Our ESM products are complex and are deployed in a wide variety
of network environments. The proper use of our products,
particularly our ESM products, requires training of the end
user. If our products are not used correctly or as intended,
inadequate performance may result. For example, among other
things, deployment of our ESM products requires categorization
of IT assets and assignment of business or criticality values
for each, selection or configuration of one of our pre-packaged
rule sets, user interfaces and network utilization parameters,
and deployment of connectors for the various devices and
applications from which event data are to be collected. Our
customers or our professional services personnel may incorrectly
implement or use our products. Our products may also be
intentionally misused or abused by customers or their employees
or third parties who obtain access and use of our products.
Similarly, our ArcSight Express product, and to a lesser extent
our ArcSight Logger products, while less complex than our ESM
products, are often distributed through channel partners and
sold to customers with smaller or less sophisticated IT
departments, potentially resulting in
sub-optimal
installation and, consequently, performance that is less than
the level anticipated by the end user. Because our customers
rely on our product, service and maintenance offerings to manage
a wide range of sensitive security, network and compliance
functions, the incorrect or improper use of our products, our
failure to properly train customers on how to efficiently and
effectively use our products, our failure to properly provide
consulting and implementation services and maintenance to our
customers or our failure to properly provide SOC services may
result in negative publicity or legal claims against us.
In addition, if customer personnel are not well trained in the
use of our products, customers may defer the deployment of our
products, may deploy them in a more limited manner than
originally anticipated or may not deploy them at all. If there
is substantial turnover of the customer personnel responsible
for implementation and use of our products, our product may go
unused and our ability to make additional sales may be
substantially limited.
If we
are unable to maintain effective relationships with our
technology partners, we may not be able to support the
interoperability of our software with a wide variety of security
and other products and our business may be harmed.
A key feature of ArcSight ESM is that it provides
out-of-the-box
support for many third-party devices and applications that the
customer may use in its business and technology infrastructure.
To provide effective interoperability, we work with individual
product vendors to develop our SmartConnectors, which allow our
ESM ArcSight Logger and ArcSight Express products to interface
with third party products. In addition, we are promoting the
adoption of our Common Event Format as a standard way to format
system log events. Some of these technology partners are current
or potential competitors of ours. If we are unable to develop
and maintain effective relationships with a wide variety of
technology partners, if companies adopt more restrictive
policies with respect to, or impose unfavorable terms and
conditions on, access to their products, or if our Common Event
Format is not widely adopted, we may not be able to continue to
provide our customers with a high degree of interoperability
with their existing IT and business infrastructure, which could
reduce our sales and adversely affect our business, operating
results and financial condition.
21
Our
international sales and operations subject us to additional
risks that can adversely affect our operating
results.
In fiscal years ended April 30, 2009, 2008 and 2007, we
derived 27%, 33% and 23% of our revenues, respectively, from
customers outside the United States, and we are continuing to
expand our international operations as part of our growth
strategy. We currently have sales personnel and sales and
support operations in Australia, Austria, Brazil, Canada, China,
France, Germany, Hong Kong, India, Italy, Japan, Singapore,
Spain and the United Kingdom. Our international operations
subject us to a variety of risks, including:
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increased management, travel, infrastructure and legal
compliance costs associated with having multiple international
operations;
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longer payment cycles and difficulties in collecting accounts
receivable, especially in emerging markets, and the likelihood
that revenues from international resellers and customers may
need to be recognized when cash is received, at least until
satisfactory payment history has been established;
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the need to localize our products and licensing programs for
international customers;
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differing regulatory and legal requirements and possible
enactment of additional regulations or restrictions on the use,
import or export of encryption technologies and our
appliance-based products, which could delay or prevent the sale
or use of our products in some jurisdictions;
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weaker protection of intellectual property rights in some
countries; and
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overlapping of different tax regimes.
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Any of these risks could harm our international operations and
reduce our international sales, adversely affecting our
business, operating results and financial condition and growth
prospects.
Our
business in countries with a history of corruption and
transactions with foreign governments increase the risks
associated with our international activities.
As we operate and sell internationally, we are subject to the
U.S. Foreign Corrupt Practices Act, or the FCPA, and other
laws that prohibit improper payments or offers of payments to
foreign governments and their officials and political parties by
U.S. and other business entities for the purpose of
obtaining or retaining business. We have operations, deal with
and make sales to governmental or quasi-governmental customers
in countries known to experience corruption, particularly
certain emerging countries in East Asia, Eastern Europe and the
Middle East, and further expansion of our international selling
efforts may involve additional regions, including Africa, Russia
and South America. Our activities in these countries create the
risk of unauthorized payments or offers of payments by one of
our employees, consultants, sales agents or channel partners
that could be in violation of various laws including the FCPA,
even though these parties are not always subject to our control.
We have implemented safeguards to discourage these practices by
our employees, consultants, sales agents and channel partners.
However, our existing safeguards and any future improvements may
prove to be less than effective, and our employees, consultants,
sales agents or channel partners may engage in conduct for which
we might be held responsible. Violations of the FCPA may result
in severe criminal or civil sanctions, including suspension or
debarment from U.S. government contracting, and we may be
subject to other liabilities, which could negatively affect our
business, operating results and financial condition.
Failure
to protect our intellectual property rights could adversely
affect our business.
Our success depends, in part, on our ability to protect
proprietary methods and technologies that we develop under
patent and other intellectual property laws of the United
States, so that we can prevent others from using our inventions
and proprietary information. If we fail to protect our
intellectual property rights adequately, our competitors might
gain access to our technology, and our business might be harmed.
In addition, defending our intellectual property rights might
entail significant expenses. Any of our patents, copyrights,
trademarks or other intellectual property rights may be
challenged by others or invalidated through administrative
process or litigation. We have seven issued patents and a number
of patent applications pending in the United States,
internationally and in specific foreign countries. Our issued
patents may not provide us with any competitive advantages or
may be
22
challenged by third parties, and our patent applications may
never be granted at all. Additionally, the process of obtaining
patent protection is expensive and time-consuming, and we may
not be able to prosecute all necessary or desirable patent
applications at a reasonable cost or in a timely manner. Even if
issued, there can be no assurance that these patents will
adequately protect our intellectual property, as the legal
standards relating to the validity, enforceability and scope of
protection of patent and other intellectual property rights are
uncertain.
Any patents that are issued may subsequently be invalidated or
otherwise limited, enabling other companies to better develop
products that compete with ours, which could adversely affect
our competitive business position, business prospects and
financial condition. In addition, issuance of a patent does not
guarantee that we have a right to practice the patented
invention. Patent applications in the U.S. are typically
not published until 18 months after filing, or in some
cases not at all, and publications of discoveries in
industry-related literature lag behind actual discoveries. We
cannot be certain that we were the first to make the inventions
claimed in our issued patents or pending patent applications or
otherwise used in our products, that we were the first to file
for protection in our patent applications, or that third parties
do not have blocking patents that could be used to prevent us
from marketing or practicing our patented products or
technology. Effective patent, trademark, copyright and trade
secret protection may not be available to us in every country in
which our products and services are available. The laws of some
foreign countries may not be as protective of intellectual
property rights as those in the United States, and mechanisms
for enforcement of intellectual property rights may be
inadequate. Accordingly, despite our efforts, we may be unable
to prevent third parties from infringing upon or
misappropriating our intellectual property.
We might be required to spend significant resources to monitor
and protect our intellectual property rights. We may initiate
claims or litigation against third parties for infringement of
our proprietary rights or to establish the validity of our
proprietary rights. Any litigation, whether or not it is
resolved in our favor, could result in significant expense to us
and divert the efforts of our technical and management
personnel, which may adversely affect our business, operating
results and financial condition.
Confidentiality
agreements with employees and others may not adequately prevent
disclosure of trade secrets and other proprietary
information.
In order to protect our proprietary technology, processes and
methods, we rely in part on confidentiality agreements with our
corporate partners, employees, consultants, advisors and others.
These agreements may not effectively prevent disclosure of
confidential information and may not provide an adequate remedy
in the event of unauthorized disclosure of confidential
information. In addition, others may independently discover
trade secrets and proprietary information, and in these cases we
would not be able to assert any trade secret rights against
those parties. Costly and time-consuming litigation could be
necessary to enforce and determine the scope of our proprietary
rights, and failure to obtain or maintain trade secret
protection could adversely affect our competitive business
position.
We may
in the future be subject to intellectual property rights claims,
which are extremely costly to defend, could require us to pay
significant damages and could limit our ability to use certain
technologies.
Companies in the software, networking and technology industries,
including some of our current and potential competitors, own
large numbers of patents, copyrights, trademarks and trade
secrets and frequently enter into litigation based on
allegations of infringement or other violations of intellectual
property rights. In addition, many of these companies have the
capability to dedicate substantially greater resources to
enforce their intellectual property rights and to defend claims
that may be brought against them. The litigation may involve
patent holding companies or other adverse patent owners who have
no relevant product revenues and against whom our potential
patents may provide little or no deterrence. We have received,
and may in the future receive, notices that claim we have
misappropriated or misused other parties intellectual
property rights, and, to the extent we gain greater visibility,
we face a higher risk of being the subject of intellectual
property infringement claims, which is not uncommon with respect
to software technologies in general and network security
technology in particular. There may be third-party intellectual
property rights, including issued or pending patents, that cover
significant aspects of our technologies or business methods. Any
intellectual property claims, with or without merit, could be
very time-consuming, could be expensive to settle or litigate
and could divert our managements attention and other
resources.
23
These claims could also subject us to significant liability for
damages, potentially including treble damages if we are found to
have willfully infringed patents or copyrights. These claims
could also result in our having to stop using technology found
to be in violation of a third partys rights. We might be
required to seek a license for the intellectual property, which
may not be available on reasonable terms or at all. Even if a
license were available, we could be required to pay significant
royalties, which would increase our operating expenses. As a
result, we may be required to develop alternative non-infringing
technology, which could require significant effort and expense.
If we cannot license or develop technology for any infringing
aspect of our business, we would be forced to limit or stop
sales of one or more of our products or product features and may
be unable to compete effectively. Any of these results would
harm our business, operating results and financial condition.
We
rely on software licensed from other parties, the loss of which
could increase our costs and delay software
shipments.
We utilize various types of software licensed from unaffiliated
third parties in order to provide certain elements of our
product offering. For example, we license database software from
Oracle that we integrate with our ESM product. Our agreement
with Oracle permits us to distribute Oracle software in our
products to our customers and partners worldwide through May
2011. See the section entitled Item 1.
Business Intellectual Property Oracle
License Agreement. Any errors or defects in this
third-party software could result in errors that could harm our
business. In addition, licensed software may not continue to be
available on commercially reasonable terms, or at all. While we
believe that there are currently adequate replacements for
third-party software, any loss of the right to use any of this
software could result in delays in producing or delivering our
software until equivalent technology is identified and
integrated, which delays could harm our business. Our business
would be disrupted if any of the software we license from others
or functional equivalents of this software were either no longer
available to us or no longer offered to us on commercially
reasonable terms. In either case, we would be required to either
redesign our products to function with software available from
other parties or to develop these components ourselves, which
would result in increased costs and could result in delays in
our product shipments and the release of new product offerings.
Furthermore, we might be forced to limit the features available
in our current or future products. If we fail to maintain or
renegotiate any of these software licenses, we could face
significant delays and diversion of resources in attempting to
license and integrate a functional equivalent of the software.
Some
of our products contain open source software, and
any failure to comply with the terms of one or more of these
open source licenses could negatively affect our
business.
Certain of our products are distributed with software licensed
by its authors or other third parties under open
source licenses. Some of these licenses contain
requirements that we make available source code for
modifications or derivative works we create based upon the open
source software, and that we license these modifications or
derivative works under the terms of a particular open source
license or other license granting third parties certain rights
of further use. If we combine our proprietary software with open
source software in a certain manner, we could, under certain
provisions of the open source licenses, be required to release
the source code of our proprietary software. In addition to
risks related to license requirements, usage of open source
software can lead to greater risks than use of third-party
commercial software, as open source licensors generally do not
provide warranties or controls on origin of the software. We
have established processes to help alleviate these risks,
including a review process for screening requests from our
development organization for the use of open source software,
and we plan to implement the use of software tools to review our
source code for potential inclusion of open source software, but
we cannot be sure that all open source software is submitted for
approval prior to use in our products or that such software
tools will be effective. In addition, open source license terms
may be ambiguous and many of the risks associated with usage of
open source software cannot be eliminated, and could, if not
properly addressed, negatively affect our business. If we were
found to have inappropriately used open source software, we may
be required to re-engineer our products, to release proprietary
source code, to discontinue the sale of our products in the
event re-engineering could not be accomplished on a timely basis
or to take other remedial action that may divert resources away
from our development efforts, any of which could adversely
affect our business, operating results and financial condition.
24
Indemnity
provisions in various agreements potentially expose us to
substantial liability for intellectual property infringement and
other losses.
Our agreements with customers and channel partners include
indemnification provisions, under which we agree to indemnify
them for losses suffered or incurred as a result of claims of
intellectual property infringement and, in some cases, for
damages caused by us to property or persons. The term of these
indemnity provisions is generally perpetual after execution of
the corresponding product sale agreement. Large indemnity
payments could harm our business, operating results and
financial condition.
Changes
or reforms in the law or regulatory landscape could diminish the
demand for our solutions, and could have a negative impact on
our business.
One factor that drives demand for our products and services is
the legal and regulatory framework in which our customers
operate. Laws and regulations are subject to drastic changes,
and these could either help or hurt the demand for our products.
Thus, some changes in the law and regulatory landscape, such as
legislative reforms that limit corporate compliance obligations,
could significantly harm our business.
If we
are unable to attract and retain personnel, our business would
be harmed.
We depend on the continued contributions of our senior
management and other key personnel, in particular Tom Reilly and
Hugh Njemanze, the loss of whom could harm our business. All of
our executive officers and key employees are at-will employees,
which means they may terminate their employment relationship
with us at any time. We do not maintain a key-person life
insurance policy on any of our officers or other employees.
Our future success also depends on our ability to identify,
attract and retain highly skilled technical, managerial, finance
and other personnel, particularly in our sales and marketing,
research and development and professional service departments.
We face intense competition for qualified individuals from
numerous security, software and other technology companies. In
addition, competition for qualified personnel is particularly
intense in the San Francisco Bay Area, where our
headquarters are located. Often, significant amounts of time and
resources are required to train technical, sales and other
personnel. Qualified individuals are in high demand. We may
incur significant costs to attract and retain them, and we may
lose new employees to our competitors or other technology
companies before we realize the benefit of our investment in
recruiting and training them. We may be unable to attract and
retain suitably qualified individuals who are capable of meeting
our growing technical, operational and managerial requirements,
on a timely basis or at all, and we may be required to pay
increased compensation in order to do so. If we are unable to
attract and retain the qualified personnel we need to succeed,
our business would suffer.
Volatility or lack of performance in our stock price may also
affect our ability to attract and retain our key employees. Many
of our senior management personnel and other key employees have
become, or will soon become, vested in a substantial amount of
stock or stock options. Employees may be more likely to leave us
if the shares they own or the shares underlying their vested
options have significantly appreciated in value relative to the
original purchase prices of the shares or the exercise prices of
the options, or if the exercise prices of the options that they
hold are significantly above the market price of our common
stock. If we are unable to retain our employees, our business,
operating results and financial condition would be harmed.
If we
fail to manage future growth effectively, our business would be
harmed.
We operate in an emerging market and have experienced, and may
continue to experience, significant expansion of our operations.
In particular, we grew from 335 employees as of
April 30, 2008 to 400 employees as of April 30,
2009. This growth has placed, and will continue to place, a
strain on our employees, management systems and other resources.
Managing our growth will require significant expenditures and
allocation of valuable management resources. If we fail to
achieve the necessary level of efficiency in our organization as
it grows, our business, operating results and financial
condition would be harmed.
25
Future
acquisitions could disrupt our business and harm our financial
condition and results of operations.
We have expanded by acquisition in the past, and we may pursue
additional acquisitions in the future, any of which could be
material to our business, operating results and financial
condition. Our ability as an organization to successfully
acquire and integrate technologies or businesses on a larger
scale is unproven. Acquisitions involve many risks, including
the following:
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an acquisition may negatively impact our results of operations
because it may require us to incur charges and substantial debt
or liabilities, may cause adverse tax consequences, substantial
depreciation or deferred compensation charges, may result in
acquired in-process research and development expenses or in the
future may require the amortization, write-down or impairment of
amounts related to deferred compensation, goodwill and other
intangible assets, or may not generate sufficient financial
return to offset acquisition costs;
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we may encounter difficulties or unforeseen expenditures in
integrating the business, technologies, products, personnel or
operations of any company that we acquire, particularly if key
personnel of the acquired company decide not to work for us;
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an acquisition may disrupt our ongoing business, divert
resources, increase our expenses and distract our management;
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an acquisition may result in a delay or reduction of customer
purchases for both us and the company acquired due to customer
uncertainty about continuity and effectiveness of service from
either company;
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we may encounter difficulties in, or may be unable to,
successfully sell any acquired products; and
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an acquisition may involve the entry into geographic or business
markets in which we have little or no prior experience.
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If we
fail to maintain an effective system of internal controls, our
ability to produce accurate financial statements or comply with
applicable regulations could be impaired.
As a public company, we are subject to the reporting
requirements of the Exchange Act, the Sarbanes-Oxley Act of
2002, or the Sarbanes-Oxley Act, and the rules and regulations
of The NASDAQ Stock Market. We expect that the requirements of
these rules and regulations will continue to increase our legal,
accounting and financial compliance costs, make some activities
more difficult, time-consuming and costly and place undue strain
on our personnel, systems and resources.
The Sarbanes-Oxley Act requires, among other things, that we
maintain effective disclosure controls and procedures and
internal control over financial reporting. We are continuing to
develop and refine our disclosure controls and other procedures
that are designed to ensure that information required to be
disclosed by us in the reports that we file with the SEC is
recorded, processed, summarized and reported within the time
periods specified in SECs rules and forms. Our current
controls and any new controls that we develop may become
inadequate because of changes in conditions, and the degree of
compliance with the policies or procedures may deteriorate.
Further, weaknesses in our internal controls may be discovered
in the future. Any failure to develop or maintain effective
controls, or any difficulties encountered in their
implementation or improvement, could harm our operating results
or cause us to fail to meet our reporting obligations and may
result in a restatement of our prior period financial
statements. Any failure to implement and maintain effective
internal controls also could adversely affect the results of
periodic management evaluations and annual auditor attestation
reports regarding the effectiveness of our internal control over
financial reporting that we are required to include in our
periodic reports filed with the SEC under Section 404 of
the Sarbanes-Oxley Act. Ineffective disclosure controls and
procedures and internal control over financial reporting could
also cause investors to lose confidence in our reported
financial and other information, which would likely have a
negative effect on the trading price of our common stock.
In order to maintain and improve the effectiveness of our
disclosure controls and procedures and internal control over
financial reporting, we have expended, and anticipate that we
will continue to expend, significant resources and provide
significant management oversight, which involve substantial
accounting-related costs. Any
26
failure to maintain the adequacy of our internal controls, or
consequent inability to produce accurate financial statements on
a timely basis, could increase our operating costs and could
materially impair our ability to operate our business. In the
event that we are not able to continue to demonstrate compliance
with Section 404 of the Sarbanes-Oxley Act in a timely
manner, that our internal controls are perceived as inadequate
or that we are unable to produce timely or accurate financial
statements, investors may lose confidence in our operating
results and our stock price could decline. In addition, if we
are unable to continue to meet these requirements, we may not be
able to remain listed on The NASDAQ Global Market.
We have not yet implemented a complete disaster recovery plan or
business continuity plan for our accounting and related
information technology systems. Any disaster could therefore
materially impair our ability to maintain timely accounting and
reporting.
We may
not be able to utilize a significant portion of our net
operating loss carry-forwards, which could adversely affect our
operating results.
Due to prior period losses, we have generated significant
federal and state net operating loss carry-forwards, which
expire beginning in fiscal 2022 and fiscal 2015, respectively.
U.S. federal and state income tax laws limit the amount of
these carry-forwards we can utilize upon a greater than 50%
cumulative shift of stock ownership over a three-year period,
including shifts due to the issuance of additional shares of our
common stock, or securities convertible into our common stock.
We have previously experienced a greater than 50% shift in our
stock ownership, which has limited our ability to use a portion
of our net operating loss carry-forwards, and we may experience
subsequent shifts in our stock ownership. Accordingly, there is
a risk that our ability to use our existing carry-forwards in
the future could be further limited and that existing
carry-forwards would be unavailable to offset future income tax
liabilities, adversely affecting our operating results.
Governmental
export or import controls could subject us to liability or limit
our ability to compete in foreign markets.
Our products incorporate encryption technology and may be
exported outside the U.S. only if we obtain an export
license or qualify for an export license exception. Compliance
with applicable regulatory requirements regarding the export of
our products, including new releases of our products, may create
delays in the introduction of our products in international
markets, prevent our customers with international operations
from deploying our products throughout their global systems or,
in some cases, prevent the export of our products to some
countries altogether. In addition, various countries regulate
the import of our appliance-based products and have enacted laws
that could limit our ability to distribute products or could
limit our customers ability to implement our products in
those countries. Any new export or import restrictions, new
legislation or shifting approaches in the enforcement or scope
of existing regulations, or in the countries, persons or
technologies targeted by such regulations, could result in
decreased use of our products by existing customers with
international operations, declining adoption of our products by
new customers with international operations and decreased
revenues. If we fail to comply with export and import
regulations, we may be denied export privileges, be subjected to
fines or other penalties and our products may be denied entry
into other countries.
Risks
Related to Ownership of Our Common Stock
Our
stock price may be volatile or may decline regardless of our
operating performance.
The trading prices of the securities of technology companies
have been highly volatile. The market price of our common stock
may fluctuate significantly in response to numerous factors,
many of which are beyond our control, including:
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actual or anticipated fluctuations in our operating results;
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the financial projections we may provide to the public, any
changes in these projections or our failure to meet these
projections;
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failure of securities analysts to initiate or maintain coverage
of us, changes in financial estimates by any securities analysts
who follow our company, or our failure to meet these estimates
or the expectations of investors;
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27
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ratings or other changes by any securities analysts who follow
our company or our industry;
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announcements by us or our competitors of significant technical
innovations, acquisitions, strategic partnerships, joint
ventures or capital commitments;
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changes in operating performance and stock market valuations of
other technology companies generally, or those in our industry
in particular;
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price and volume fluctuations in the overall stock market,
including as a result of trends in the economy as a whole, such
as the recent and continuing unprecedented volatility in the
financial markets;
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lawsuits threatened or filed against us; and
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other events or factors, including those resulting from war,
incidents of terrorism or responses to these events.
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In addition, the stock markets, and in particular The NASDAQ
Global Market on which our common stock is listed, have
experienced extreme price and volume fluctuations that have
affected and continue to affect the market prices of equity
securities of many companies, particularly technology companies.
Broad market fluctuations such as these may have and could
continue to adversely affect the market price of our common
stock. Even prior to the recent unprecedented volatility in the
financial markets, stock prices of many technology companies had
fluctuated in a manner unrelated or disproportionate to the
operating performance of those companies. In the past,
stockholders have instituted securities class action litigation
following periods of market volatility. If we were to become
involved in securities litigation, it could subject us to
substantial costs, divert resources and the attention of
management from our business and adversely affect our business,
operating results and financial condition.
If
securities or industry analysts do not publish research or
publish inaccurate or unfavorable research about our business,
our stock price and trading volume could decline.
The trading market for our common stock will depend in part on
the research and reports that securities or industry analysts
publish about us or our business. We currently have limited, and
may not obtain additional, research coverage by securities
analysts, and industry analysts that currently cover us may
cease to do so. If no securities analysts commence coverage of
our company, or if industry analysts cease coverage of our
company, the trading price for our stock would be negatively
impacted. In the event we obtain securities analyst coverage, if
one or more of the analysts who cover us or our industry
downgrade our stock or the stock of other companies in our
industry, or publish inaccurate or unfavorable research about
our business or industry, our stock price would likely decline.
If one or more of these analysts cease coverage of our company
or fail to publish reports on us regularly, demand for our stock
could decrease, which might cause our stock price and trading
volume to decline.
Delaware
law, provisions in our restated certificate of incorporation and
amended and restated bylaws and the concentration of our
ownership could make a merger, tender offer or proxy contest
difficult, thereby depressing the trading price of our common
stock.
We are a Delaware corporation and the anti-takeover provisions
of the Delaware General Corporation Law may discourage, delay or
prevent a change in control by prohibiting us from engaging in a
business combination with an interested stockholder for a period
of three years after the person becomes an interested
stockholder, even if a change of control would be beneficial to
our existing stockholders. In addition, our restated certificate
of incorporation and amended and restated bylaws contain
provisions that may make the acquisition of our company more
difficult without the approval of our board of directors,
including the following:
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our board of directors is classified into three classes of
directors with staggered three-year terms;
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only our chief executive officer, our president, our lead
independent director, a majority of our board of directors or
our chairman of the board, if any (none currently), is
authorized to call a special meeting of stockholders;
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our stockholders are only able to take action at a meeting of
stockholders and not by written consent;
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vacancies on our board of directors are able to be filled only
by our board of directors and not by stockholders;
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28
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directors may be removed from office only for cause;
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our restated certificate of incorporation authorizes
undesignated preferred stock, the terms of which may be
established, and shares of which may be issued, without
stockholder approval; and
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advance notice procedures will apply for stockholders to
nominate candidates for election as directors or to bring
matters before an annual meeting of stockholders.
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In addition, as of July 1, 2009 (including options
exercisable by those holders within 60 days of that date),
our directors and executive officers, together with their
affiliates, beneficially own in the aggregate 23.7% of our
outstanding common stock. Further, holders that together with
their affiliates hold 5% or more of our common stock, but who
are not affiliated with our directors and executive officers,
beneficially own in the aggregate an additional 26.5% of our
outstanding common stock as of that date. As a result, our
directors and officers and their affiliates, collectively, or
our largest stockholders, acting together, may be able to
practically prevent or impede a merger, consolidation or sale of
all or substantially all of our assets.
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Item 1B.
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Unresolved
Staff Comments
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Not applicable.
Our corporate headquarters and research and development
facilities occupy approximately 80,000 square feet in
Cupertino, California under a lease that expires in October
2013. We have an option to extend this lease for five years and
a right of first offer to lease adjacent space. In addition to
our principal office space in Cupertino, we lease facilities for
use as sales and local support offices in various cities in the
United States and internationally. We believe our facilities are
adequate for our needs for at least the next 12 months. We
also anticipate that suitable additional or alternative space
will be reasonably available to accommodate foreseeable
expansion of our operations.
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Item 3.
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Legal
Proceedings
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We are subject to various claims, complaints and legal actions
that arise in the normal course of business from time to time.
We do not believe we are party to any currently pending legal
proceedings the outcome of which will have a material adverse
effect on our operations or financial position. There can be no
assurance that existing or future legal proceedings arising in
the ordinary course of business or otherwise will not have a
material adverse effect on our business, consolidated financial
position, results of operations or cash flows.
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Item 4.
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Submission
of Matters to a Vote of Security Holders
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No matters were submitted to a vote of our security holders
during the fourth quarter of fiscal 2009.
29
PART II
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Item 5.
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Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
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Market
Information for Common Stock
Our common stock has been listed on The NASDAQ Global Market
under the symbol ARST since our IPO in February
2008. The following table sets forth, for the periods indicated,
the high and low
intra-day
prices for our common stock as reported on The NASDAQ Global
Market.
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Fiscal 2008
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High
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Low
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Fourth Quarter (beginning February 14, 2008)
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$
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9.68
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$
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6.35
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Fiscal 2009
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High
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Low
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First Quarter
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$
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11.74
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$
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7.19
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Second Quarter
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13.00
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5.25
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Third Quarter
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10.00
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4.17
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Fourth Quarter
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16.10
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7.70
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Fiscal 2010
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High
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Low
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First Quarter (through July 6, 2009)
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$
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19.04
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$
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13.52
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Stockholders
As of July 1, 2009, we had approximately 58 record holders
of our common stock.
30
Stock
Price Performance Graph
The following graph shows a comparison from February 14,
2008 (the date our common stock commenced trading on The NASDAQ
Global Market) through April 30, 2009 of the cumulative
total return for an investment of $100 (and the reinvestment of
dividends) in our common stock, the NASDAQ Composite Index and
the NASDAQ Computer and Data Processing Index. Such returns are
based on historical results and are not intended to suggest
future performance.
COMPARISON
OF 14 MONTH CUMULATIVE TOTAL RETURN*
Among
ArcSight, Inc., The NASDAQ Composite Index
And The NASDAQ Computer & Data Processing Index
*$100 invested on 2/14/08 in stock or 1/31/08 in index,
including reinvestment of dividends.
Fiscal year ending April 30.
The above information under the heading Stock Price
Performance Graph shall not be deemed to be
filed for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended, or otherwise
subject to the liabilities of that section or Sections 11
and 12(a)(2) of the Securities Act of 1933, as amended, and
shall not be incorporated by reference into any registration
statement or other document filed by us with the Securities and
Exchange Commission, whether made before or after the date of
this Annual Report on
Form 10-K,
regardless of any general incorporation language in such filing,
except as shall be expressly set forth by specific reference in
such filing.
Dividend
Policy
We have never declared or paid cash dividends on our capital
stock. We currently intend to retain any future earnings and do
not expect to declare or pay any dividends in the foreseeable
future. Any further determination to pay dividends on our
capital stock will be at the discretion of our board of
directors and will depend on our financial condition, results of
operations, capital requirements and other factors that our
board of directors considers relevant.
31
Equity
Compensation Plan Information
The following table summarizes information about our equity
compensation plans as of April 30, 2009. All outstanding
awards relate to our common stock.
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(a) Number of
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(c) Number of Securities
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Securities to be
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Remaining Available for
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Issued Upon
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Future Issuance Under
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Exercise of
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(b) Weighted-Average
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Equity Compensation
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Outstanding
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Exercise Price of
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Plans (Excluding
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Options, Warrants
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Outstanding Options,
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Securities Reflected in
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Plan Category
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and Rights(1)
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Warrants and Rights
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Column (a))
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Equity compensation plans approved by security holders
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6,940,996
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$
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6.10
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4,520,099
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Equity compensation plans not approved by security holders
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Total
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6,940,996
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$
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6.10
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4,520,099
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(1) |
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Prior to our IPO, we issued securities under our 2002 Stock
Plan, as amended, and our 2000 Stock Incentive Plan. Following
our IPO, we issued securities under our 2007 Equity Incentive
Plan (2007 Plan) and our 2007 Employee Stock
Purchase Plan (ESPP). |
Under the 2007 Plan we may issue stock awards, including but not
limited to restricted stock awards, restricted stock units,
stock bonus awards, stock appreciation rights and performance
share awards. The 2007 Plan contains a provision that the number
of shares available for grant and issuance will be increased on
January 1 of each year from 2009 through 2012 by an amount equal
to 4% of our shares outstanding on the immediately preceding
December 31, unless our board of directors, in its
discretion, determines to make a smaller increase. It is the
policy of our board of directors that non-employee directors are
granted options to purchase 11,250 shares of common stock
under the 2007 Plan upon initial election or appointment to the
board. Similarly, on the date of the first board meeting
following each annual stockholder meeting each non-employee
director will automatically be granted options to purchase
10,375 shares of common stock under the 2007 Plan pursuant
to that policy. The board may also make discretionary grants to
purchase common stock to any non-employee director.
Under the 2007 ESPP we may grant options for the purchase of our
common stock. The 2007 ESPP contains a provision that the number
of shares available for grant and issuance will be increased on
January 1 of each of 2009 through 2016, by an amount equal to 1%
of our shares outstanding on the immediately preceding
December 31, unless our board of directors, in its
discretion determines to make a smaller increase.
Recent
Sales of Unregistered Securities
For the fiscal quarter ended April 30, 2009, we did not
sell any unregistered securities.
Use of
Proceeds from Public Offering of Common Stock
The
Form S-1
Registration Statement (Registration
No. 333-145974)
relating to our IPO was declared effective by the SEC on
February 14, 2008, and the offering commenced that day.
Morgan Stanley & Co. Incorporated acted as the sole
book-running manager for the offering, and Lehman Brothers Inc.,
Wachovia Capital Markets, LLC and RBC Capital Markets
Corporation acted as co-managers of the offering.
The net proceeds to us of our IPO after deducting
underwriters discounts and offering expenses were
$45.9 million. Through April 30, 2009, we did not use
any of the net proceeds. We expect to use the net proceeds for
general corporate purposes, including working capital and
potential capital expenditures and acquisitions. Although we may
also use a portion of the net proceeds for the acquisition of,
or investment in, companies, technologies, products or assets
that complement our business, we have no present understandings,
commitments or agreements to enter into any acquisitions or make
any investments.
Our management will retain broad discretion in the allocation
and use of the net proceeds of our IPO, and investors will be
relying on the judgment of our management regarding the
application of the net proceeds. Pending specific utilization of
the net proceeds as described above, we have invested the net
proceeds of the offering in short-term, interest-bearing
obligations. The goal with respect to the investment of the net
proceeds will be capital preservation and liquidity so that such
funds are readily available to fund our operations.
Purchases
of Equity Securities by the Issuer and Affiliated
Purchasers
For the fiscal year ended April 30, 2009, we did not
repurchase any equity securities.
32
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Item 6.
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Selected
Financial Data
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The following selected consolidated financial data should be
read in conjunction with Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations and our consolidated financial statements and
related notes included elsewhere in this Annual Report on
Form 10-K.
The selected financial data in this section is not intended to
replace the financial statements and is qualified in its
entirety by the consolidated financial statements and related
notes thereto included elsewhere in this Annual Report on
Form 10-K.
Our historical results of operations are not necessarily
indicative of results to be expected for any future period.
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Fiscal Year Ended April 30,
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Consolidated Statements of Operations Data:
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2009
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2008
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2007
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2006
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2005
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(In thousands, except per share data)
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Revenues:
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Products
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$
|
80,616
|
|
|
$
|
63,765
|
|
|
$
|
43,989
|
|
|
$
|
22,859
|
|
|
$
|
22,357
|
|
Maintenance
|
|
|
38,521
|
|
|
|
27,607
|
|
|
|
18,762
|
|
|
|
11,473
|
|
|
|
5,947
|
|
Services
|
|
|
17,031
|
|
|
|
10,173
|
|
|
|
7,082
|
|
|
|
5,103
|
|
|
|
4,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
136,168
|
|
|
|
101,545
|
|
|
|
69,833
|
|
|
|
39,435
|
|
|
|
32,822
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
8,595
|
|
|
|
4,767
|
|
|
|
2,569
|
|
|
|
1,769
|
|
|
|
1,084
|
|
Maintenance(1)
|
|
|
6,861
|
|
|
|
5,691
|
|
|
|
3,498
|
|
|
|
2,085
|
|
|
|
851
|
|
Services(1)
|
|
|
9,875
|
|
|
|
5,800
|
|
|
|
3,521
|
|
|
|
2,942
|
|
|
|
2,559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
25,331
|
|
|
|
16,258
|
|
|
|
9,588
|
|
|
|
6,796
|
|
|
|
4,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
110,837
|
|
|
|
85,287
|
|
|
|
60,245
|
|
|
|
32,639
|
|
|
|
28,328
|
|
Operating expenses(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
22,537
|
|
|
|
19,762
|
|
|
|
14,535
|
|
|
|
12,154
|
|
|
|
7,583
|
|
Sales and marketing
|
|
|
56,279
|
|
|
|
53,453
|
|
|
|
36,587
|
|
|
|
24,309
|
|
|
|
14,647
|
|
General and administrative
|
|
|
20,278
|
|
|
|
13,422
|
|
|
|
9,453
|
|
|
|
12,978
|
|
|
|
8,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
99,094
|
|
|
|
86,637
|
|
|
|
60,575
|
|
|
|
49,441
|
|
|
|
30,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
11,743
|
|
|
|
(1,350
|
)
|
|
|
(330
|
)
|
|
|
(16,802
|
)
|
|
|
(2,627
|
)
|
Other income (expense), net
|
|
|
734
|
|
|
|
472
|
|
|
|
462
|
|
|
|
219
|
|
|
|
(49
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for income taxes
|
|
|
12,477
|
|
|
|
(878
|
)
|
|
|
132
|
|
|
|
(16,583
|
)
|
|
|
(2,676
|
)
|
Provision for income taxes
|
|
|
2,564
|
|
|
|
1,131
|
|
|
|
389
|
|
|
|
163
|
|
|
|
137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
9,913
|
|
|
$
|
(2,009
|
)
|
|
$
|
(257
|
)
|
|
$
|
(16,746
|
)
|
|
$
|
(2,813
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share, basic
|
|
$
|
0.32
|
|
|
$
|
(0.08
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(2.24
|
)
|
|
$
|
(0.46
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share, diluted
|
|
$
|
0.30
|
|
|
$
|
(0.08
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(2.24
|
)
|
|
$
|
(0.46
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic net income (loss) per common share
|
|
|
31,233
|
|
|
|
25,936
|
|
|
|
10,042
|
|
|
|
7,469
|
|
|
|
6,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing diluted net income (loss) per common
share
|
|
|
33,550
|
|
|
|
25,936
|
|
|
|
10,042
|
|
|
|
7,469
|
|
|
|
6,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Stock-based compensation expense is included above as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of maintenance revenues
|
|
$
|
216
|
|
|
$
|
106
|
|
|
$
|
3
|
|
|
$
|
5
|
|
|
$
|
4
|
|
Cost of services revenues
|
|
|
142
|
|
|
|
115
|
|
|
|
14
|
|
|
|
5
|
|
|
|
3
|
|
Research and development
|
|
|
1,342
|
|
|
|
1,356
|
|
|
|
501
|
|
|
|
1,950
|
|
|
|
1,642
|
|
Sales and marketing
|
|
|
2,451
|
|
|
|
2,685
|
|
|
|
661
|
|
|
|
210
|
|
|
|
746
|
|
General and administrative
|
|
|
1,994
|
|
|
|
664
|
|
|
|
350
|
|
|
|
5,948
|
|
|
|
4,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
6,145
|
|
|
$
|
4,926
|
|
|
$
|
1,529
|
|
|
$
|
8,118
|
|
|
$
|
7,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
Revenues in fiscal 2007 and prior years were impacted by
revenues related to multiple element sales transactions
consummated for which the revenues were deferred because we did
not have vendor-specific objective evidence of fair value, or
VSOE, for some product elements that were not delivered in the
fiscal year of the transaction. Following identification in
mid-fiscal 2007 of transactions with such undelivered elements,
with respect to some of these transactions, we and our customers
amended the contractual terms to remove the undelivered product
elements and in other instances we have since delivered such
product elements. The net impact of these transactions reduced
revenues in fiscal 2006 by $6.3 million and increased
revenues in fiscal 2009, 2008 and 2007 by $0.9 million,
$2.9 million and $1.8 million, respectively. See
Item 7: Managements Discussion and Analysis of
Financial Condition and Results of Operations
Sources of Revenues, Cost of Revenues and Operating
Expenses for additional details, including the net amounts
involved. While similar multiple element transactions with
undelivered elements for which we lack VSOE may be identified
prospectively in future periods, we expect that in future
periods the comparison of revenues
period-to-period
will not be impacted to the same extent by similar transactions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
90,467
|
|
|
$
|
71,946
|
|
|
$
|
16,917
|
|
|
$
|
16,443
|
|
|
$
|
13,493
|
|
Working capital (deficit)
|
|
|
74,549
|
|
|
|
46,711
|
|
|
|
(3,811
|
)
|
|
|
5,377
|
|
|
|
11,606
|
|
Total assets
|
|
|
141,161
|
|
|
|
118,579
|
|
|
|
48,990
|
|
|
|
32,926
|
|
|
|
26,541
|
|
Current and long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
26,758
|
|
|
|
26,758
|
|
|
|
26,928
|
|
Common stock and additional paid-in capital
|
|
|
113,781
|
|
|
|
101,574
|
|
|
|
23,479
|
|
|
|
19,383
|
|
|
|
11,301
|
|
Total stockholders equity
|
|
|
76,673
|
|
|
|
54,769
|
|
|
|
5,130
|
|
|
|
1,433
|
|
|
|
9,713
|
|
34
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following discussion and analysis should be read in
conjunction with our Selected Consolidated Financial
Data and consolidated financial statements and notes
thereto included elsewhere in this Annual Report on
Form 10-K.
This Annual Report on
Form 10-K
contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as
amended, or the Securities Act, and Section 21E of the
Securities Exchange Act of 1934, as amended, or the Exchange
Act. These statements are often identified by the use of words
such as may, will, expect,
believe, anticipate, intend,
could, estimate, or
continue, and similar expressions or variations.
These statements are based on the beliefs and assumptions of our
management based on information currently available to
management. Such forward-looking statements are subject to
risks, uncertainties and other factors that could cause actual
results and the timing of certain events to differ materially
from future results expressed or implied by such forward-looking
statements. Factors that could cause or contribute to such
differences include, but are not limited to, those identified
herein, and those discussed in the section titled Risk
Factors, set forth in Item 1A of this Annual Report
on
Form 10-K
and in our other SEC filings. You should review these risk
factors for a more complete understanding of the risks
associated with an investment in our securities. We disclaim any
obligation to update any forward-looking statements to reflect
events or circumstances after the date of such statements.
Overview
We are a leading provider of compliance and security management
solutions that protect enterprises and government agencies. Our
products help customers comply with corporate and regulatory
policy, safeguard their assets and processes and control risk.
Our platform collects and correlates user activity and event
data across the enterprise so that businesses can rapidly
identify, prioritize and respond to compliance violations,
policy breaches, cybersecurity attacks and insider threats. Our
ESM products correlate massive numbers of events from thousands
of security point solutions, network and computing devices and
applications, enabling intelligent identification,
prioritization and response to external threats, insider threats
and compliance and corporate policy violations. We also provide
complementary software that delivers pre-packaged analytics and
reports tailored to specific compliance and security
initiatives, as well as appliances that streamline event log
archiving.
We were founded in May 2000 and first sold our initial ESM
product in June 2002. We initially funded our operations
primarily through convertible preferred stock financings that
raised a total of $26.8 million. Our revenues have grown
from $32.8 million in fiscal 2005 to $136.2 million in
fiscal 2009.
In February 2008, we completed our IPO, in which we sold
6,000,000 shares of common stock, at an issue price of
$9.00 per share. We raised a total of $54.0 million in
gross proceeds from our IPO, or $45.9 million in net
proceeds after deducting underwriting discounts of
$3.8 million and offering expenses of $4.3 million.
We achieved positive cash flows from operations in fiscal 2004
through 2009. We generated $16.8 million of cash from our
operating activities during fiscal 2009, and we generally expect
to continue to generate positive cash flows from operating
activities on an annual basis. As of April 30, 2009, we had
cash and cash equivalents and accounts receivable of
$124.7 million, and an aggregate of $17.8 million in
accounts payable and accrued liabilities.
Important
Factors Affecting Our Operating Results and Financial
Condition
We believe that the market for our products is in the early
stages of development. We have identified factors that we expect
to play an important role in our future growth and
profitability. These factors are:
Sales of ESM Products and Appliance Products to New
Customers. The market for compliance and security
management software solutions is growing, with new purchases
often driven by corporate compliance initiatives. We typically
engage in a proof of concept with our customers to demonstrate
the capabilities of our ESM products in their specific
environment. A new sale usually involves the sale of licenses
for one or more ESM Managers, licenses for the number and type
of devices the customer intends to manage with ArcSight ESM,
licenses for our console and web interfaces, installation
services, training and an initial maintenance arrangement. In
many cases, customers will also purchase one of our
complementary software modules which enable them to implement
specific sets of off-the-shelf rules for our event correlation
engine that address
35
specific compliance and security issues and business risks. In
addition, customers may purchase our ArcSight Logger appliances
to address their log archiving needs. Our continued increase in
the number of new customers is partly a result of sales of our
ArcSight Logger products to mid-market companies. A key
component of our growth will depend on our ability to sell our
products to new customers. We also anticipate that a growing
proportion of future new customers will be a result of initial
sales of ArcSight Logger, our new ArcSight Express product and
our other products sold in an appliance form factor.
Continued Sales to Our Installed Base. Many
customers make an initial purchase from us and then decide
whether to use our products with respect to a larger portion of
their business and technology infrastructure or buy additional
complementary products from us. Thus, a key component of our
growth will be our ability to successfully maintain and further
develop the relationships with our existing customers.
Development and Introduction of New
Products. We believe it is important that we
continue to develop or acquire new products and services that
will help us capitalize on opportunities in the compliance and
security management market. Examples of new product
introductions in fiscal 2009 included our Compliance Insight
Package for NERC CIP standards
002-009 and
our ArcSight Express product. We continue the enhancement of our
ESM products and solutions, such as the introduction of ESM
appliances in June 2008, the integration with the Cisco Mobility
Services Engine announced in May 2009, and the introduction of
an
all-in-one
PCI log management appliance in July 2008 and ArcSight Logger
3.0 in September 2008. In addition, we continue to develop and
release appliance versions of our software products and updates
to complementary solution packages for our ArcSight Logger
product.
Development of Our Channel
Network. Historically, we have sold our products
primarily through our direct sales force, with sales to
government or international purchasers through resellers and
systems integrators. We recently expanded our sales channel to
assist us in penetrating the mid-market, particularly as we
expanded our appliance-based offerings. We believe that our
current and any new appliance-based products that we develop
will be sold more effectively through resellers and, if we are
successful in introducing these new products, we will become
more dependent on the development of an effective channel
network. Further training, certification and development of our
existing channel partners will be a key factor in the success of
this strategy.
Sources
of Revenues, Cost of Revenues and Operating Expenses
Our sales transactions typically include the following elements:
a software license fee paid for the use of our products in
perpetuity or, in limited circumstances, for a specified term;
an arrangement for first-year support and maintenance, which
includes unspecified software updates and upgrades; and
professional services for installation, implementation and
training. We derive the majority of our revenues from sales of
software products. We introduced complementary appliance
products in fiscal 2007. We sell our products and services
primarily through our direct sales force. Additionally, we
utilize resellers and systems integrators, particularly in sales
to government agencies and international customers.
We recognize revenues pursuant to American Institute of
Certified Public Accountants, or AICPA, Statement of Position,
or SOP,
No. 97-2,
Software Revenue Recognition, as amended by
SOP No. 98-9,
Software Revenue Recognition with Respect to Certain
Arrangements, or collectively,
SOP 97-2,
which, if revenues are to be recognized upon product delivery,
requires among other things vendor-specific objective evidence
of fair value, or VSOE, for each undelivered element of multiple
element customer contracts.
Revenues in fiscal 2007 and prior years were impacted by
multiple element sales transactions consummated for which the
revenues were deferred because we did not have vendor-specific
objective evidence of fair value, or VSOE, for some product
elements that were not delivered in the fiscal year of the
transaction. Following identification in mid-fiscal 2007 of
transactions with such undelivered elements, with respect to
some of these transactions, we and our customers amended the
contractual terms to remove the undelivered product elements and
in other instances we have since delivered such product
elements. The net impact of these transactions reduced revenues
in fiscal 2006 by $6.3 million and increased revenues in
fiscal 2009, 2008 and 2007 by $0.9 million,
$2.9 million and $1.8 million, respectively. In each
case, the net impact caused our fiscal period-to-period revenue
growth rate to appear lesser or greater, as applicable, than it
otherwise would. See Item 6: Selected Financial
Data
36
and Item 8: Financial Statements and Supplementary
Data Quarterly Results of Operations for
additional discussion and information regarding these
transactions. As of April 30, 2009, 2008 and 2007, deferred
revenues included $1.6 million, $2.5 million and
$5.4 million, respectively, related to transactions such as
these.
In addition, if we determine that collectibility is not
reasonably assured, we defer the revenues until collectibility
becomes reasonably assured, generally upon receipt of cash.
Deferred revenue and accounts receivable are reported net of
adjustments for sales transactions invoiced during the period
that are recognized as revenue in a future period once cash is
received and all other revenue recognition criteria have been
met, which are sometimes referred to as net-down adjustments.
Accordingly, we believe that in order to understand the change
in both deferred revenue and accounts receivable from one period
to another the impact of these net-down adjustments should be
considered.
Historically sales to the U.S. government have represented
a significant portion of our revenues, while international sales
have represented a smaller portion of our revenues. We expect
revenues from sales to agencies of the U.S. government to
continue to grow both in absolute dollars and as a percentage of
revenues. In addition, we expect that sales to customers outside
of the United States will continue to grow in absolute dollars.
Product
Revenues
Product revenues consist of license fees for our software
products and, beginning in fiscal 2007, also includes revenues
for sales of our appliance products. License fees are based on a
number of factors, including the type and number of devices that
a customer intends to monitor using our software as well as the
number of users and locations. In addition to our core solution,
some of our customers purchase additional licenses for optional
extension modules that provide enhanced discovery and analytics
capabilities. Sales of our appliance products consist of sales
of the appliance hardware and associated perpetual licenses to
the embedded software. We introduced our first appliance
products in June 2006 and our first ArcSight Logger product, our
most widely adopted appliance product to date, in December 2006.
Appliance fees are based on the number of appliances purchased
and, in some cases, on the number of network devices with which
our customer intends to use the appliances. We generally
recognize product revenues at the time of product delivery,
provided all other revenue recognition criteria have been met.
Historically, we have engaged in long sales cycles with our
customers, typically three to six months and more than a year
for some sales, and many customers make their purchase decisions
in the last month of a fiscal quarter, following procurement
trends in the industry. Further, average deal size can vary
considerably depending on our customers configuration
requirements, implementation plan and budget availability. As a
result, it is difficult to predict timing or size of product
sales on a quarterly basis. In addition, we may fail to forecast
sufficient production of our appliance products due to our
limited experience with them, or we may be unable to physically
deliver appliances within the quarter, depending on the
proximity of the order to the end of the quarter. These
situations may lead to delay of revenues until we can deliver
products. The loss or delay of one or more large sales
transactions in a quarter could impact our operating results for
that quarter and any future quarters into which revenues from
that transaction are delayed.
In addition, we believe that our product revenue has been
somewhat seasonal historically, with the first quarter of our
fiscal year typically having relatively lower product revenue
and the fourth quarter of our fiscal year typically having
relatively higher product revenue. We believe that this
seasonality results from a number of factors, including:
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the budgeting, procurement and work cycles of our customers,
including customers in the public sector;
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the timing of our annual sales club for top
performers and annual training for our entire sales force in our
first fiscal quarter;
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seasonal reductions in business activity during the summer
months in the United States, Europe and certain other regions;
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sales to customers with a standard December 31 fiscal year end
that may positively impact our license revenue in the third
quarter of our fiscal year; and
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the structure of our direct sales incentive and compensation
program, which may reinforce the tendency of our direct sales
team to book the largest volume of deals toward the end of our
fiscal year.
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37
The timing of our fiscal quarters and the U.S. federal
governments September 30 fiscal year end may impact
product sales to governmental agencies in the second quarter of
our fiscal year, offsetting the otherwise seasonal downturn in
later summer months. We expect these seasonal factors to
continue to impact our business in the future, and any
seasonality that we experience may cause fluctuations in our
operating results. We believe that our rapid historical growth,
the timing of the launch of new products and the timing of large
product sales transactions near period boundaries, may have
overshadowed the nature or magnitude of seasonal or cyclical
factors that might have influenced our business to date. They
may do so again in the future. Seasonal or cyclical variations
in our operations may become more pronounced over time and may
materially adversely affect our results of operations in the
future.
As of April 30, 2009, 2008 and 2007, deferred product
revenues were $9.8 million, $13.6 million and
$10.3 million, respectively. Included in deferred product
revenues as of April 30, 2009, 2008 and 2007 were
$1.3 million, $2.2 million and $4.9 million,
respectively, related to multiple element arrangements where one
or more product elements for which we did not have VSOE remained
undelivered. The remainder of deferred product revenues as of
April 30, 2009, 2008 and 2007 were $8.5 million,
$11.4 million and $5.4 million, respectively, and
primarily related to product revenues to be recognized ratably
over the term of the maintenance arrangements, prepayments in
advance of delivery and other delivery deferrals. Deferred
revenue and accounts receivable are reported net of adjustments
for sales transactions invoiced during the period that are
recognized as revenue in a future period once cash is received
and all other revenue recognition criteria have been met. These
net-down adjustments decrease both accounts receivable and
deferred revenue. Accordingly, we believe that in order to
understand the change in both deferred revenue and accounts
receivable from one period to another the impact of these
net-down adjustments should be considered. As of April 30,
2009, 2008 and 2007, deferred product revenues of
$9.8 million, $13.6 million and $10.3 million,
respectively, were reduced by net-down adjustments of
$5.4 million, $3.3 million and $2.6 million,
respectively. Our operating results in any particular quarterly
period in fiscal 2010 may be similarly impacted by the
recognition of previously deferred revenue, where the associated
costs were recorded in prior periods. See Critical
Accounting Policies, Significant Judgments and
Estimates Revenue Recognition and Note 2
to our Consolidated Financial Statements (Significant
Accounting Policies Revenue Recognition)
elsewhere in this report.
Maintenance
Revenues
Maintenance includes rights to unspecified software product
updates and upgrades, maintenance releases and patches released
during the term of the support period, and internet and
telephone access to maintenance personnel and content.
Maintenance revenues are generated both from maintenance that we
agree to provide in connection with initial sales of software
and hardware products and from maintenance renewals. We
generally sell maintenance on an annual basis. We offer two
levels of maintenance standard and premium. The
premium level is for customers that require
24-hour
coverage seven days a week. In most cases, we provide
maintenance for sales made through channel partners. In
addition, we sell an enhanced maintenance offering that provides
frequent security content updates for our software. Maintenance
fees are treated as deferred revenue at the time the maintenance
agreement is initiated and recognized ratably over the term of
the maintenance agreement. As our customer base expands, we
expect maintenance revenues to continue to grow, as maintenance
is sold to new customers and existing customers renew.
As of April 30, 2009, deferred maintenance revenues were
$32.4 million, of which $26.7 million represented
current deferred maintenance revenues. As of April 30,
2008, deferred maintenance revenues were $24.3 million, of
which $20.0 million represented current deferred
maintenance revenues. As of April 30, 2007, deferred
maintenance revenues were $17.1 million, of which
$14.5 million represented current deferred maintenance
revenues. Deferred maintenance revenues relate to advanced
payments for support contracts that are recognized ratably. As
of April 30, 2009, 2008 and 2007, the deferred maintenance
revenues of $32.4 million, $24.3 million and
$17.1 million, respectively, were reduced by net-down
adjustments of $2.6 million, $1.5 million and
$0.9 million, respectively. Net-down adjustments decrease
both accounts receivable and deferred revenue and typically
relate to billed but unpaid customer transactions for
maintenance renewal support terms where services have not yet
been provided, or where revenue from the customer is only
recognized when cash has been paid and all other revenue
recognition criteria have been met. See Critical
Accounting Policies, Significant Judgments and
Estimates
38
Revenue Recognition and Note 2 to our Consolidated
Financial Statements (Significant Accounting
Policies Revenue Recognition) elsewhere in
this report.
Services
Revenues
Services revenues are generated from sales of services to our
customers, including installation and implementation of our
software, consulting and training. Professional services are not
essential to the functionality of the associated software
products. During fiscal 2009, we entered into an increasing
number of service engagements to staff and manage the security
operation centers, or SOCs, of certain large customers. These
SOC engagements are typically longer in duration than other
services engagements and support the day-to-day monitoring of
customer SOC environments. We generally sell our services on a
time-and-materials
basis and recognize revenues as the services are performed.
Services revenues have generally increased over time as we have
sold and delivered installation and training services to our new
customers and continued to sell training and consulting services
to our existing customers, including our new SOC services.
As of April 30, 2009, 2008 and 2007, deferred service
revenues were $2.9 million, $3.4 million and
$2.2 million, respectively, in each case all of which
represented current deferred services revenues. Deferred
services revenues relate to customer payments in advance of
services being performed. As of April 30, 2009, 2008 and
2007, the deferred service revenues of $2.9 million,
$3.4 million and $2.2 million, respectively were
reduced by net-down adjustments of $1.0 million,
$0.7 million and $0.9 million, respectively. Net-down
adjustments decrease both accounts receivable and deferred
revenue and typically relate to billed but unpaid customer
transactions for service engagements where services have not yet
been provided, or where revenue from the customer is only
recognized when cash has been paid and all other revenue
recognition criteria have been met. See Critical
Accounting Policies, Significant Judgments and
Estimates Revenue Recognition and Note 2
to our Consolidated Financial Statements (Significant
Accounting Policies Revenue Recognition)
elsewhere in this report.
Cost
of Revenues
Cost of revenues for our software products consists of
third-party royalties and license fees for licensed technology
incorporated into our software product offerings. Cost of
revenues for appliance products consists of the hardware costs
of the appliances and third-party royalties for licensed
technology. The cost of product revenues is primarily impacted
by the mix of software and appliance products as well as the
relative ratio of third-party royalty bearing products included
in software sales transactions. Sales of our appliance products
are generally at a lower gross margin than sales of our software
products.
Cost of maintenance revenues consists primarily of salaries and
benefits related to maintenance personnel, royalties and other
out-of-pocket expenses, and facilities and other related
overhead.
Cost of services revenues consists primarily of the salaries and
benefits of personnel, travel and other out-of-pocket expenses,
facilities and other related overhead that are allocated based
on the portion of the efforts of such personnel that are related
to performance of professional services, and cost of services
provided by subcontractors for professional services. Services
gross margin may fluctuate as a result of periodic changes in
our use of third party service providers, resulting in lower or
higher gross margins for these services.
We intend to increase sales to the mid-market, a goal that we
believe will be aided by our recent introduction of additional
appliance products. We expect the percentage of our mid-market
sales made through our distribution channel will be greater than
it has been to date. We also expect a high percentage of our
international sales to continue to be made through our
distribution channel. Sales through the channel tend to be at a
lower gross margin than direct sales. As a result, we may report
lower gross margins in future periods than has been the case for
prior periods.
Operating
and Non-Operating Expenses
Research and Development Expenses. Research
and development expenses consist primarily of salaries and
benefits of personnel engaged in the development of new
products, the enhancement of existing products, quality
assurance activities and, to a lesser extent, facilities costs
and other related overhead. We expense all of our research
39
and development costs as they are incurred. We expect research
and development expenses to increase in absolute dollars for the
foreseeable future as we continue to invest in the development
of our products.
Sales and Marketing Expenses. Sales and
marketing expenses consist primarily of salaries, commissions
and benefits related to sales and marketing personnel and
consultants; travel and other out-of-pocket expenses; expenses
for marketing programs, such as for trade shows and our annual
users conference, marketing materials and corporate
communications; and facilities costs and other related overhead.
Commissions on sales of products and maintenance are typically
accrued and expensed when the respective revenue elements are
ordered. During fiscal 2007, commissions on sales of services
were typically accrued and expensed when the services were
delivered, and during fiscal 2008 and 2009, as a result of
changes in our commission plan structure, commissions on sales
of services were typically accrued and expensed when the
services were ordered. We also pay commissions for channel sales
not only to our channel sales force but also to our direct sales
force in an effort to minimize channel conflicts as we develop
our channel network. We intend to hire additional sales
personnel, initiate additional marketing programs and build
additional relationships with resellers and systems integrators
on a global basis. Accordingly, we expect that our sales and
marketing expenses will continue to increase for the foreseeable
future in absolute dollars.
General and Administrative Expenses. General
and administrative expenses consist primarily of salaries and
benefits related to general and administrative personnel and
consultants; accounting and legal fees; insurance costs and
facilities costs and other related overhead. We expect that, in
the future, general and administrative expenses will increase in
absolute dollars as we add personnel and incur additional costs
related to the growth of our business and additional legal,
accounting and other expenses in connection with our reporting
and compliance obligations as a public company.
Other Income (Expense), Net. Other income
(expense), net consists of interest earned on our cash
investments and foreign currency-related gains and losses. Our
interest income will vary each reporting period depending on our
average cash balances during the period and the current level of
interest rates. Our foreign currency-related gains and losses
will also vary depending upon movements in underlying exchange
rates.
Accounting for Income Taxes. Our provision for
income taxes is calculated in compliance with
SFAS No. 109, Accounting for Income Taxes, or
SFAS 109, and other related guidance, and generally
consists of tax expense related to current period earnings. We
estimate income taxes in each of the jurisdictions in which we
operate. This process involves determining income tax expense
together with calculating the deferred income tax expense
related to temporary differences resulting from the differing
treatment of items for tax and accounting purposes. Deferred tax
assets are recognized for deductible temporary differences,
along with net operating loss carry-forwards, if it is more
likely than not that the tax benefits will be realized. Deferred
tax assets and liabilities are measured using enacted tax rates
in effect for the year in which those temporary differences are
expected to be recovered or settled. These temporary differences
result in deferred tax assets and liabilities, which are
included within the consolidated balance sheets.
To the extent a deferred tax asset cannot be recognized a
valuation allowance is established to reduce our deferred tax
assets to the amount that is more likely than not to be
realized. A valuation allowance is maintained until sufficient
evidence exists to support the reversal of all or some portion
of these allowances. Should the actual amounts differ from our
estimates, the amount of our valuation allowance could be
materially impacted.
We have previously experienced a greater than 50% shift in our
stock ownership, which creates annual limitations on our ability
to use a portion of our net operating loss carry-forwards. As a
result, our provision for income taxes and our resulting
effective tax rate may be greater than if our net operating loss
carry-forwards were available without limitation. In addition,
our net operating loss carry-forwards may expire before we fully
utilize them.
Critical
Accounting Policies, Significant Judgments and
Estimates
Our consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the
United States, which requires us to make estimates and judgments
that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date
of the financial statements as
40
well as the reported amounts of revenues and expenses during the
reporting period. We base our estimates and judgments on our
historical experience, knowledge of current conditions and our
beliefs regarding likely occurrences in the future, given
available information. Estimates are used for, but are not
limited to, revenue recognition, determination of fair value of
stock and stock-based awards, valuation of goodwill and
intangible assets acquired in business combinations, impairment
of goodwill and other intangible assets, amortization of
intangible assets, accounting for income taxes, accounting for
uncertainties in income taxes, contingencies and litigation,
allowances for doubtful accounts, and accrued liabilities.
Actual results may differ from those estimates, and any
differences may be material to our financial statements.
Further, if we apply different factors, or change the method by
which we apply the various factors that are used, in making our
critical estimates and judgments, our reported operating results
and financial condition could be materially affected.
Revenue
Recognition
We recognize revenues in accordance with
SOP 97-2.
Accordingly, we exercise judgment and use estimates in
connection with the determination of the amount of product,
maintenance and services revenues to be recognized in each
accounting period.
We derive revenues primarily from three sources: (i) sales
of our software and hardware products, (ii) fees for
maintenance to provide unspecified upgrades and customer
technical support, and (iii) fees for services, including
professional services for product installation, implementation,
staffing and management services for SOCs and training. Our
appliance products contain software that is more than incidental
to the functionality of the product. In accordance with
SOP 97-2,
we recognize revenues when the following conditions have been
met:
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persuasive evidence of an arrangement exists;
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the fee is fixed or determinable;
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product delivery has occurred or services have been
rendered; and
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collection is considered probable.
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We typically use a binding purchase order in conjunction with
either a signed contract or reference on the purchase order to
the terms and conditions of our shrinkwrap or end-user license
agreement as evidence of an arrangement. We assess whether the
fee is fixed or determinable based on the payment terms
associated with the transaction and whether the sales price is
subject to refund or forfeiture, concession or other adjustment.
We do not generally grant rights of return or price protection
to our distribution partners or end users, other than limited
rights of return during the warranty period in some cases. We
use shipping documents, contractual terms and conditions and
customer acceptance, when applicable, to verify product delivery
to the customer. For perpetual software license fees in
arrangements that do not include customization, or services that
are not considered essential to the functionality of the
licenses, delivery is deemed to occur when the product is
delivered to the customer. Services and consulting arrangements
that are not essential to the functionality of the licensed
product are recognized as revenues as these services are
provided. Delivery of maintenance is considered to occur on a
straight-line basis ratably over the life of the contract. We
consider probability of collection based on a number of factors,
such as creditworthiness of the customer as determined by credit
checks and analysis, past transaction history, the geographic
location and financial viability. We do not require, nor do we
request, collateral from customers. If we determine that
collectibility is not reasonably assured, we defer the revenues
until collectibility becomes reasonably assured, generally upon
receipt of cash. A net-down adjustment may be recorded in cases
where sales transactions have been invoiced but are recognized
on cash receipt, for invoiced but unpaid sales transactions
related to post-contract customer support obligations for which
the term has not commenced, or for invoiced but unpaid service
engagements where services have not yet been provided. Net-down
adjustments decrease both accounts receivable and deferred
revenue. Any such transactions included in accounts receivable
and deferred revenue at period end are reflected on the balance
sheet on a net basis.
Our sales of software products to date have typically been
multiple element arrangements, which have included software
licenses and corresponding maintenance, and have also generally
included some amount of professional services. Our sales of
appliance products to date have been multiple element
arrangements as well, which included hardware, software licenses
and corresponding maintenance, and have also generally included
41
some amount of professional services. We allocate the total
arrangement fee among these multiple elements based upon their
respective fair values as determined by VSOE or, if applicable,
by the residual method under
SOP 97-2.
VSOE for maintenance and support services is based on separate
sales and/or
renewals to other customers or upon renewal rates quoted in
contracts when the quoted renewal rates are deemed substantive
in both rate and term. VSOE for professional services is
established based on prices charged to customers when those
services are sold separately. If we cannot objectively determine
the fair value of any undelivered element in a multiple element
arrangement, we defer revenues for each element until all
elements have been delivered, or until VSOE can objectively be
determined for any remaining undelivered element. If VSOE for
maintenance does not exist, and this represents the only
undelivered element, then revenues for the entire arrangement
are recognized ratably over the performance period. When VSOE of
a delivered element has not been determined, but the fair value
for all undelivered elements has, we use the residual method to
record revenues for the delivered element. Under the residual
method, the fair value of the undelivered elements is deferred
and the remaining portion of the arrangement fee is allocated to
the delivered element and recognized immediately as revenues.
Revenues from time-based (term) license sales that include
ongoing delivery obligations throughout the term of the
arrangement are recognized ratably over the term.
Our agreements generally do not include acceptance provisions.
However, if acceptance provisions exist, we deem delivery to
have occurred upon customer acceptance.
For sales to direct end-users and channel partners, we recognize
product revenue once either we or our channel partner has a
contractual agreement in place and upon transfer of title and
risk of loss, which is generally upon shipment, provided all
other criteria for revenue recognition have been met. Where
sales are made through resellers, revenue is generally recorded
upon shipment to the end-users, when all other criteria for
revenue recognition have been met. In a limited number of
instances, when delivery is to be made to a reseller upon the
request of either the end-user or the reseller, and when all
other criteria for revenue recognition have been met, it is our
practice to recognize revenue on shipment to a reseller but only
where an end-user has been identified prior to shipment. For
end-users, resellers and systems integrators, we generally have
no significant obligations for future performance such as rights
of return or pricing credits.
We assess whether fees are collectible and fixed or determinable
at the time of the sale, and recognize revenues if all other
revenue recognition criteria have been met. Our standard payment
terms are net 30 days and are considered normal up to
net three months, while payment terms beyond three months are
considered to be extended terms. Payments that are due within
three months are generally deemed to be fixed or determinable
based on our successful collection history on these agreements.
Stock-Based
Compensation
Prior to May 1, 2006, we accounted for our stock-based
awards to employees using the intrinsic value method prescribed
in Accounting Principles Board, or APB, Opinion No. 25,
Accounting for Stock Issued to Employees, or APB 25 and
related interpretations. Under the intrinsic value method,
compensation expense is measured on the date of the grant as the
difference between the fair value of our common stock and the
exercise or purchase price multiplied by the number of stock
options or restricted stock awards granted. We amortize deferred
stock-based compensation using the multiple option method as
prescribed by Financial Accounting Standards Board, or FASB,
Interpretation No. 28, Accounting for Stock Appreciation
Rights and Other Variable Stock Option or Award Plans, or
FIN 28, over the option vesting period using an accelerated
amortization schedule. We amortized employee stock-based
compensation of $19,000, $0.1 million and $0.3 million
for fiscal 2009, 2008 and 2007, respectively.
Effective May 1, 2006, we adopted SFAS 123R, which
requires companies to expense the fair value of employee stock
options and other forms of stock-based compensation.
SFAS 123R requires nonpublic companies that used the
minimum value method under SFAS No. 123, Accounting
for Stock-Based Compensation, or SFAS 123, for either
recognition or pro forma disclosures to apply SFAS 123R
using the prospective-transition method. As such, we continued
to apply APB 25 in future periods to unvested equity awards
outstanding at the date of adoption of SFAS 123R that were
measured using the minimum value method. In addition, we
continued to amortize those awards granted prior to May 1,
2006 utilizing an accelerated amortization schedule. As of
April 30, 2009, amortization under the APB 25 minimum value
method is considered complete. In accordance with
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SFAS 123R, we will recognize the compensation cost of
employee stock-based awards granted subsequent to April 30,
2006 in the statement of operations using the straight-line
method over the vesting period of the award.
To determine the fair value of stock options granted after
May 1, 2006, we have elected to use the Black-Scholes
option pricing model, which requires, among other inputs, an
estimate of the fair value of the underlying common stock on the
date of grant and assumptions as to volatility of our stock over
the expected term of the related options, the expected term of
the options, the risk-free interest rate and the option
forfeiture rate. As there had been no public market for our
common stock prior to our IPO in February 2008, we have
determined the volatility for options granted for fiscal 2008
and fiscal 2007 based on an analysis of reported data for a peer
group of companies that issued options with substantially
similar terms. The expected volatility of options granted has
been determined using weighted-average measures of the implied
volatility and the historical volatility for this peer group of
companies for a period equal to the expected life of the option.
The weighted-average expected volatility for options granted
during fiscal 2009, 2008 and 2007, was 52%, 55% and 66%,
respectively. The expected life of options has been determined
considering the expected life of options granted by a group of
peer companies and the average vesting and contractual terms of
options granted to our employees. The weighted-average expected
life of options granted for fiscal 2009, 2008 and 2007 was 5.74,
5.25 and 5.25 years. For fiscal 2009, 2008 and 2007, the
weighted-average risk-free interest rate used was 3.13%, 4.22%
and 5.00%, respectively. The risk-free interest rate is based on
a zero coupon United States treasury instrument whose term is
consistent with the expected life of the stock options. We have
not paid and do not anticipate paying cash dividends on our
shares of common stock; therefore, the expected dividend yield
is assumed to be zero. In addition, SFAS 123R requires
companies to utilize an estimated forfeiture rate when
calculating the expense for the period, whereas SFAS 123
permitted companies to record forfeitures based on actual
forfeitures, which was our historical policy under
SFAS 123. As a result, we applied an estimated annual
forfeiture rate of 5% for fiscal 2009, 2008 and 2007, in
determining the expense recorded in our consolidated statement
of operations.
We recorded expense of $5.1 million, $4.2 million and
$0.9 million for fiscal 2009, 2008 and 2007, respectively,
in connection with stock-based awards accounted for under
SFAS 123R. As of April 30, 2009, unrecognized
stock-based compensation expense of non-vested stock options was
$11.1 million. As of April 30, 2009, the unrecognized
stock-based compensation expense is expected to be recognized
using the straight-line method over the required service period
of the options. The actual amount of stock-based compensation
expense we record in any fiscal period will depend on a number
of factors, including the number of stock options issued and the
volatility of our stock price over time. In future periods,
stock-based compensation expense may increase as we issue
additional equity-based awards to continue to attract and retain
key employees. Additionally, SFAS 123R requires that we
recognize compensation expense only for the portion of stock
options that are expected to vest. If the actual number of
forfeitures differs from that estimated by management, we will
be required to record adjustments to stock-based compensation
expense in future periods.
Our 2007 Employee Stock Purchase Plan, or ESPP, became effective
on the effectiveness of our IPO on February 14, 2008. The
ESPP provides for consecutive six-month offering periods, except
for the first offering period, which commenced on
February 14, 2008 and ended on September 15, 2008. The
ESPP is compensatory and results in compensation cost accounted
for under SFAS 123R. We use the Black-Scholes option
pricing model to estimate the fair value of rights to acquire
stock granted under the ESPP. For the fiscal year ended
April 30, 2009 and 2008, we recorded stock-based
compensation expense associated with the ESPP of
$1.0 million and $0.2 million, respectively. As of
April 30, 2009, unrecognized stock-based compensation
expense associated with rights to acquire shares of common stock
under the ESPP was $0.4 million.
Business
Combinations
We account for business combinations in accordance with
SFAS No. 141, Business Combinations, or
SFAS 141, which requires the purchase method of accounting
for business combinations. In accordance with SFAS 141, we
determine the recognition of intangible assets based on the
following criteria: (i) the intangible asset arises from
contractual or other rights; or (ii) the intangible asset
is separable or divisible from the acquired entity and capable
of being sold, transferred, licensed, returned or exchanged. In
accordance with SFAS 141, we allocate the purchase price of
our business combinations to the tangible assets, intangible
assets and liabilities acquired
43
based on their estimated fair values. We record the excess of
the purchase price over the total of those fair values as
goodwill.
Our valuations require significant estimates, especially with
respect to intangible assets. Critical estimates in valuing
certain intangible assets include, but are not limited to,
future expected cash flows from customer contracts, customer
lists and distribution agreements and discount rates. We
estimate fair value based upon assumptions we believe to be
reasonable, but which are inherently uncertain and
unpredictable, and, as a result, actual results may differ from
our estimates.
Goodwill
and Intangible Assets
In accordance with SFAS No. 142, Goodwill and Other
Intangible Assets, or SFAS 142, we do not amortize
goodwill or other intangible assets with indefinite lives but
rather test them for impairment. SFAS 142 requires us to
perform an impairment review of our goodwill balance at least
annually, which we intend to perform on November 1 of each
fiscal year, and also whenever events or changes in
circumstances indicate that the carrying amount of these assets
may not be recoverable. The allocation of the acquisition cost
to intangible assets and goodwill requires the extensive use of
estimates and assumptions, including estimates of future cash
flows expected to be generated by the acquired assets and
amortization of intangible assets, other than goodwill. Further,
when impairment indicators are identified with respect to
previously recorded intangible assets, the values of the assets
are determined using discounted future cash flow techniques.
Significant management judgment is required in the forecasting
of future operating results that are used in the preparation of
the projected discounted cash flows, and should different
conditions prevail, material write-downs of net intangible
assets could occur. We review periodically the estimated
remaining useful lives of our acquired intangible assets. A
reduction in our estimate of remaining useful lives, if any,
could result in increased amortization expense in future
periods. Future goodwill impairment tests could result in a
charge to earnings.
Allowance
for Doubtful Accounts
We maintain an allowance for doubtful accounts based on a
periodic review of customer accounts, payment patterns and
specific collection issues. Where account-specific collection
issues are identified, we record a specific allowance based on
the amount that we believe will not be collected. For accounts
where specific collection issues are not identified, we record a
reserve based on the age of the receivables. As of
April 30, 2009, we had two customers that accounted for 17%
and 11%, respectively, of our net accounts receivable, which
receivables were fully paid subsequent to the end of fiscal
2009. As of April 30, 2008, we had two customers that
accounted for 25% and 15%, respectively, of our net accounts
receivable, which receivables were fully paid subsequent to the
end of fiscal 2008.
Accounting
for Income Taxes
Management judgment is required in determining our provision for
income taxes, our deferred tax assets and liabilities and any
valuation allowance recorded against our net deferred tax assets.
Our provision for income taxes is calculated in compliance with
SFAS No. 109, Accounting for Income Taxes, or
SFAS 109, and other related guidance, and generally
consists of tax expense related to current period earnings. As
part of the process of preparing our consolidated financial
statements, we are required to estimate income taxes in each of
the jurisdictions in which we operate. This process involves
determining our income tax expense together with calculating the
deferred income tax expense or benefit related to temporary
differences resulting from the differing treatment of items for
tax and accounting purposes, such as deferred revenue or
deductibility of certain intangible assets. These temporary
differences result in deferred tax assets and liabilities. We
must then assess the likelihood that the deferred tax assets may
be recovered through carry back to prior years income or
through the generation of future taxable income after
consideration of tax planning strategies and then record a
valuation allowance to reduce deferred tax assets to an amount
we believe more likely than not will be realized. Changes in
these estimates may result in significant increases or decreases
to our tax provision in a period in which such estimates are
changed which in turn would affect net income.
44
We recorded a full valuation allowance as of April 30, 2009
because, based on the available evidence, we assessed that it
was more likely than not that we would not be able to utilize
all of our deferred tax assets in the future. We intend to
maintain the full valuation allowances until sufficient evidence
exists to support the reversal of all or some portion of these
allowances. Should the actual amounts differ from our estimates,
the amount of our valuation allowance could be materially
impacted.
We have previously experienced a greater than 50% shift in our
stock ownership, which creates annual limitations on our ability
to use a portion of our net operating loss carry-forwards.
We adopted FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, an Interpretation of
SFAS 109, or FIN 48, on May 1, 2007.
FIN 48 prescribes a recognition threshold and measurement
attributes for the financial statement recognition and
measurement of uncertain tax positions taken or expected to be
taken in a companys income tax return. FIN 48 also
provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and
transition with respect to income tax uncertainty. Management
judgment is required to determine if the weight of available
evidence indicates that a tax position is more likely than not
to be sustained, as well as the largest amount of benefit from
each sustained position that is more likely than not to be
realized.
As a result of the implementation of FIN 48 in fiscal 2008,
we recognized a liability for uncertain tax positions and a
cumulative effect adjustment to the beginning balance of
accumulated deficit on the balance sheet of $0.1 million.
As of April 30, 2009, the liability for uncertain tax
positions was increased to $0.3 million. In addition, as of
April 30, 2008, we recorded a $1.8 million reduction
to deferred tax assets for unrecognized tax benefits, all of
which is currently offset by a full valuation allowance that had
no affect on the beginning balance of accumulated deficit or the
net balance sheet. As of April 30, 2009, the unrecognized
tax benefit of $1.8 million increased to $2.5 million,
all of which is offset by a full valuation allowance.
Our total unrecognized tax benefit as of April 30, 2008 and
2009 was $2.1 million and $2.7 million, respectively.
As of April 30, 2009, we had $0.2 million of
unrealized tax benefits that, if recognized, would affect our
effective tax rate for fiscal 2009. In addition, we do not
expect any material changes to the estimated amount of liability
associated with our uncertain tax positions within the next
12 months. Our policy is that we recognize interest and
penalties accrued on any unrecognized tax benefits as a
component of income tax expense. As of April 30, 2008 and
2009, we had approximately $23,000 and $37,000, respectively of
accrued interest or penalties associated with unrecognized tax
benefits.
We file income tax returns in the U.S. federal
jurisdiction, California and various state and foreign tax
jurisdictions in which we have a subsidiary or branch operation.
The tax years 2002 to 2008 remain open to examination by the
U.S. federal and state tax authorities, and the tax years
2005 and 2008 remain open to examination by the foreign tax
authorities.
45
Results
of Operations
The following table presents our results of operations as a
percentage of total revenues for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
59.2
|
%
|
|
|
62.8
|
%
|
|
|
63.0
|
%
|
Maintenance
|
|
|
28.3
|
|
|
|
27.2
|
|
|
|
26.9
|
|
Services
|
|
|
12.5
|
|
|
|
10.0
|
|
|
|
10.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
6.3
|
|
|
|
4.7
|
|
|
|
3.7
|
|
Maintenance
|
|
|
5.0
|
|
|
|
5.6
|
|
|
|
5.0
|
|
Services
|
|
|
7.3
|
|
|
|
5.7
|
|
|
|
5.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
18.6
|
|
|
|
16.0
|
|
|
|
13.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
81.4
|
|
|
|
84.0
|
|
|
|
86.3
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
16.6
|
|
|
|
19.5
|
|
|
|
20.8
|
|
Sales and marketing
|
|
|
41.3
|
|
|
|
52.6
|
|
|
|
52.4
|
|
General and administrative
|
|
|
14.9
|
|
|
|
13.2
|
|
|
|
13.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
72.8
|
|
|
|
85.3
|
|
|
|
86.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
8.6
|
%
|
|
|
(1.3
|
)%
|
|
|
(0.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison
of Fiscal 2009 and Fiscal 2008
Revenues
Revenues for 2009 and 2008 were as follows (in thousands, except
percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
Change in
|
|
|
Change in
|
|
|
|
2009
|
|
|
2008
|
|
|
Dollars
|
|
|
Percent
|
|
|
Products
|
|
$
|
80,616
|
|
|
$
|
63,765
|
|
|
$
|
16,851
|
|
|
|
26.4
|
%
|
Percentage of total revenues
|
|
|
59.2
|
%
|
|
|
62.8
|
%
|
|
|
|
|
|
|
|
|
Maintenance
|
|
|
38,521
|
|
|
|
27,607
|
|
|
|
10,914
|
|
|
|
39.5
|
%
|
Percentage of total revenues
|
|
|
28.3
|
%
|
|
|
27.2
|
%
|
|
|
|
|
|
|
|
|
Services
|
|
|
17,031
|
|
|
|
10,173
|
|
|
|
6,858
|
|
|
|
67.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total revenues
|
|
|
12.5
|
%
|
|
|
10.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
136,168
|
|
|
$
|
101,545
|
|
|
$
|
34,623
|
|
|
|
34.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product Revenues. Product revenues in fiscal
2009 included revenues of $31.7 million from 217 new
customers and revenues of $48.9 million from existing
customers. New customer revenues in fiscal 2009 increased by
$0.8 million compared to new customer revenues in fiscal
2008. Despite the increase of 53 new customers in fiscal 2009
compared to fiscal 2008, the marginal increase of product
revenue from new customers was a result of a decline in average
sales price of new customer sales transactions. This was
primarily attributable to an increase in the number of new
mid-market customers purchasing our ArcSight Logger product on a
stand alone basis during fiscal 2009 compared to fiscal 2008, as
well pricing pressure resulting from the poor economic
environment. Existing customer revenues in fiscal 2009 increased
by $16.1 million compared to existing customer revenues in
46
fiscal 2008. The increase was primarily attributable to
follow-on sales of our ESM and appliance products from a larger
installed base. We anticipate that the mix of product revenues
from new and existing customers could fluctuate from period to
period as a result of the transaction size, product mix, impact
of the poor economic environment and related geography of each
revenue transaction. In addition, there was a net recognition of
$0.9 million of product revenues in fiscal 2009 related to
sales transactions executed in prior years that included
undelivered product elements for which we did not have VSOE,
while in fiscal 2008 there was a net recognition of product
revenues of $2.7 million from such transactions. As of
April 30, 2009, deferred product revenues included
$1.3 million related to similar transactions. See the
related discussion in Sources of Revenues,
Cost of Revenues and Operating Expenses.
Maintenance Revenues. Maintenance revenues
increased by $10.9 million in fiscal 2009 as a result of
providing support services to a larger installed base as well as
the incremental maintenance revenues from increased product
sales. As a result of the timing of revenue recognition for
sales transactions that included an undelivered product element
for which we did not have VSOE, there was no recognition of such
maintenance revenues in fiscal 2009, and a net recognition of
$0.2 million of maintenance revenues in fiscal 2008. See
the related discussion in Sources of Revenues,
Cost of Revenues and Operating Expenses.
Services Revenues. Services revenues increased
by $6.9 million in fiscal 2009 primarily due to service
engagements to staff and manage the Security Operations Centers,
or SOCs, of certain large customers.
Geographic Regions. We sell our product in
three geographic regions: Americas; Europe-Middle East, or EMEA;
and Asia Pacific. Revenues, which include product, maintenance
and service revenues in absolute amounts and as a percentage of
total revenues for each region are summarized in the following
table (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
Change in
|
|
|
Change in
|
|
|
|
2009
|
|
|
2008
|
|
|
Dollars
|
|
|
Percent
|
|
|
Americas
|
|
$
|
109,812
|
|
|
$
|
77,621
|
|
|
$
|
32,191
|
|
|
|
41.5
|
%
|
Percentage of total revenues
|
|
|
80.6
|
%
|
|
|
76.4
|
%
|
|
|
|
|
|
|
|
|
EMEA
|
|
|
19,409
|
|
|
|
18,447
|
|
|
|
962
|
|
|
|
5.2
|
%
|
Percentage of total revenues
|
|
|
14.3
|
%
|
|
|
18.2
|
%
|
|
|
|
|
|
|
|
|
Asia Pacific
|
|
|
6,947
|
|
|
|
5,477
|
|
|
|
1,470
|
|
|
|
26.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total revenues
|
|
|
5.1
|
%
|
|
|
5.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
136,168
|
|
|
$
|
101,545
|
|
|
$
|
34,623
|
|
|
|
34.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues for fiscal 2009 as compared to fiscal 2008
increased due to the strength of the Americas region. The
Americas region during fiscal 2009 increased in both absolute
dollars and as a percentage of revenues. We experienced an
increase in revenues of the EMEA region in absolute dollars, but
a decrease in percentage of total revenues year over year. This
percentage decrease was caused by a more significant impact on
IT spending in this region due to the weak economic environment.
The Asia Pacific regions revenue remained constant in
fiscal 2009 as compared to fiscal 2008. We expect the rate of
growth of revenues from the EMEA and Asia Pacific regions to
continue to trail growth in the Americas in the near term as a
result of the varying impact that the recent and continuing
severe deterioration in global economic and financial market
conditions are having on capital spending and the differences in
compliance mandates in these regions.
47
Cost
of Revenues and Gross Margin
The following table is a summary of cost of product, maintenance
and services revenues in absolute amounts (in thousands, except
percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
Change in
|
|
|
Change in
|
|
|
|
2009
|
|
|
2008
|
|
|
Dollars
|
|
|
Percent
|
|
|
Products
|
|
$
|
8,595
|
|
|
$
|
4,767
|
|
|
$
|
3,828
|
|
|
|
80.3
|
%
|
Maintenance
|
|
|
6,861
|
|
|
|
5,691
|
|
|
|
1,170
|
|
|
|
20.6
|
%
|
Services
|
|
|
9,875
|
|
|
|
5,800
|
|
|
|
4,075
|
|
|
|
70.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
$
|
25,331
|
|
|
$
|
16,258
|
|
|
$
|
9,073
|
|
|
|
55.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table is a summary of gross profit for products,
maintenance and services and their respective gross margins (in
thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Gross margin
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
72,021
|
|
|
$
|
58,998
|
|
Percentage of product revenues
|
|
|
89.3
|
%
|
|
|
92.5
|
%
|
Maintenance
|
|
$
|
31,660
|
|
|
$
|
21,916
|
|
Percentage of maintenance revenues
|
|
|
82.2
|
%
|
|
|
79.4
|
%
|
Services
|
|
$
|
7,156
|
|
|
$
|
4,373
|
|
Percentage of services revenues
|
|
|
42.0
|
%
|
|
|
43.0
|
%
|
|
|
|
|
|
|
|
|
|
Total gross margin
|
|
$
|
110,837
|
|
|
$
|
85,287
|
|
Percentage of total revenues
|
|
|
81.4
|
%
|
|
|
84.0
|
%
|
|
|
|
|
|
|
|
|
|
Cost of Product Revenues and Gross
Margin. Cost of product revenues increased by
$3.8 million in fiscal 2009, primarily due to increased
ArcSight Logger appliance cost of goods related to increased
ArcSight Logger appliance sales, as well as an increase related
to royalty obligations. Product gross margin decreased by 3.2%
as a percentage of product revenues to 89.3% in fiscal 2009,
compared to 92.5% in fiscal 2008 due in part to increased sales
of lower margin ArcSight Logger and Connector appliance products
and due in part to an increase in royalty fees related to
increased sales of products that include licensed technology. To
the extent revenues from our appliance products continue to
increase as a percentage of product mix, gross product margin
will decline. We believe that aggregate gross margins will
remain stable going forward.
Cost of Maintenance Revenues and Gross
Margin. Cost of maintenance revenues increased by
$1.2 million in fiscal 2009, due primarily to increased
compensation related expenses of $1.0 million related to
increased head count in our technical support organization and
increases in third-party royalty support and maintenance
expenses of $0.4 million, offset by a decrease in
recruiting expenses of $0.1 million. Maintenance gross
margin increased by 2.8% as a percentage of maintenance revenues
to 82.2% in fiscal 2009 compared to 79.4% in fiscal 2008 due
primarily to our installed base growing more quickly than
corresponding growth in our support organization and associated
costs.
Cost of Services Revenues and Gross
Margin. Cost of service revenues increased by
$4.1 million in fiscal 2009 primarily due to a
$1.9 million increase in compensation related-expenses
related to increased head count and cost per employee, a
$1.9 million increase related to the use of third party
contractors and external consultants and a $0.3 million
increase related to training and materials expense. Services
gross margin decreased by 1.0% as a percentage of services
revenues to 42.0% for fiscal 2009 compared to 43.0% in fiscal
2008, due primarily to an increase in headcount and related cost
per employee, partially offset by increased employee
productivity in relation to revenue growth.
48
We believe that total gross margin as a percentage of revenues
will remain relatively stable in future periods.
Operating
Expenses
The following table is a summary of research and development,
sales and marketing, and general and administrative expenses in
absolute amounts and as a percentage of total revenues (in
thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
Change in
|
|
|
Change in
|
|
|
|
2009
|
|
|
2008
|
|
|
Dollars
|
|
|
Percent
|
|
|
Research and development
|
|
$
|
22,537
|
|
|
$
|
19,762
|
|
|
$
|
2,775
|
|
|
|
14.0
|
%
|
Percentage of total revenues
|
|
|
16.6
|
%
|
|
|
19.5
|
%
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
56,279
|
|
|
|
53,453
|
|
|
|
2,826
|
|
|
|
5.3
|
%
|
Percentage of total revenues
|
|
|
41.3
|
%
|
|
|
52.6
|
%
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
20,278
|
|
|
|
13,422
|
|
|
|
6,856
|
|
|
|
51.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total revenues
|
|
|
14.9
|
%
|
|
|
13.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
99,094
|
|
|
$
|
86,637
|
|
|
$
|
12,457
|
|
|
|
14.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total revenues
|
|
|
72.8
|
%
|
|
|
85.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and Development Expenses. The
increase in research and development expenses in fiscal 2009 of
$2.8 million compared to fiscal 2008 was primarily
attributable to an increase of $2.6 million in
compensation-related expenses associated with an increase in
research and development personnel from 101 to 109 at the
respective period ends. In addition, there was an increase in
facilities-related expense of $0.2 million as a result of
the expansion of our headquarters in Cupertino, California to
accommodate the increase in our personnel.
Sales and Marketing Expenses. The increase in
sales and marketing expenses in fiscal 2009 of $2.8 million
compared to fiscal 2008 was primarily attributable to an
increase of $2.0 million in compensation-related expense
associated with an increase in sales and marketing personnel
from 123 to 141 at the respective period ends. The increase also
included an increase of $0.5 million in marketing program
expense, an increase of $0.4 million in travel and
entertainment expenses, and an increase in facilities expense of
$0.2 million, offset by a decrease of $0.2 million in
outside consulting fees. Sales and marketing expense as a
percentage of total revenue decreased by 11.3% to 41.3% for
fiscal 2009 as compared to 52.6% in fiscal 2008, due primarily
to lower sales commissions as a result of changes in
compensation plan structure, and as a result of a greater
percentage of sales to existing customers, which are at a lower
cost than sales to new customers.
General and Administrative Expenses. The
increase in general and administrative expenses of
$6.9 million in fiscal 2009 compared to fiscal 2008 was
primarily attributable to an increase of $3.3 million
associated with compensation-related expense partially due to an
increase in general and administrative personnel from 41 to 54
at the respective period ends. The increase also included an
increase in professional service expenses for legal and
accounting of $2.1 million, an increase of
$0.3 million in liability insurance premium expense
associated with increasing our coverage level in connection with
our becoming a public company, an increase of $0.4 million
in other service and miscellaneous expenses, an increase of
$0.2 million in depreciation expense, an increase of
$0.1 million in bad debt expense, and an increase of
$0.2 million related to an investor relations program.
49
Non-Operating
Expenses
The following table is a summary of interest income and other
expenses, net, in absolute amounts and as a percentage of total
revenues (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
Change in
|
|
|
Change in
|
|
|
|
2009
|
|
|
2008
|
|
|
Dollars
|
|
|
Percent
|
|
|
Interest income
|
|
$
|
991
|
|
|
$
|
857
|
|
|
$
|
134
|
|
|
|
15.6
|
%
|
Percentage of total revenues
|
|
|
0.7
|
%
|
|
|
0.8
|
%
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
|
(257
|
)
|
|
|
(385
|
)
|
|
|
128
|
|
|
|
(33.2
|
)%
|
Percentage of total revenues
|
|
|
(0.2
|
)%
|
|
|
(0.4
|
)%
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
(2,564
|
)
|
|
|
(1,131
|
)
|
|
|
(1,433
|
)
|
|
|
(126.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total revenues
|
|
|
(1.9
|
)%
|
|
|
(1.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-operating expenses
|
|
$
|
(1,830
|
)
|
|
$
|
(659
|
)
|
|
$
|
(1,171
|
)
|
|
|
(177.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total revenues
|
|
|
(1.3
|
)%
|
|
|
(0.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income. The increase in interest
income of $0.1 million for fiscal 2009 compared to fiscal
2008 was primarily attributable to increased cash and cash
equivalents related to net proceeds received from our IPO. The
increase was offset by lower interest rates during fiscal 2009.
Other Income (Expense), Net. The increase in
other income (expense) of $0.1 million, net for fiscal 2009
compared to fiscal 2008 was primarily a result of a reduction in
interest expense related to capitalized software licenses.
Provision for Income Taxes. For fiscal 2009,
we recorded a provision for income taxes of $2.6 million.
The effective tax rate for fiscal 2009 is 20.6%, and is based on
our estimated taxable income for the year. The difference
between the provision for income taxes that would be derived by
applying the statutory rate to our income before tax and the
income tax provision actually recorded is primarily due to the
impact of nondeductible SFAS 123R stock-based compensation
expenses, offset by the use of net operating loss carry-forwards
and tax credits previously not benefited. For fiscal 2008, we
recorded a provision for income taxes of $1.1 million,
primarily related to foreign corporate income taxes, federal and
state alternative minimum taxes currently due, and a charge of
$0.1 million to establish a deferred tax liability related
to the temporary timing differences between the tax deductible
amortization of goodwill related to the acquisition of Enira
Technologies, LLC in June 2006 under applicable tax rules and
SFAS No. 142 under which goodwill must be analyzed
annually for impairment rather than amortized for financial
reporting purposes (See Note 11 Income
Taxes for more detailed discussion). The effective tax
rate for fiscal 2008 was (128.8%). The effective tax rate for
fiscal 2008 differs from the U.S. federal statutory rate
primarily due to our inability during this period to record a
tax benefit for all or a portion of the domestic tax loss as a
result of the valuation allowance on our deferred tax assets,
and to a lesser extent other non-deductible items such as
non-deductible SFAS 123R stock-based compensation expense.
50
Comparison
of Fiscal 2008 and Fiscal 2007
Revenues
Revenues for 2008 and 2007 were as follows (in thousands, except
percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
Change in
|
|
|
Change in
|
|
|
|
2008
|
|
|
2007
|
|
|
Dollars
|
|
|
Percent
|
|
|
Products
|
|
$
|
63,765
|
|
|
$
|
43,989
|
|
|
$
|
19,776
|
|
|
|
45.0
|
%
|
Percentage of total revenues
|
|
|
62.8
|
%
|
|
|
63.0
|
%
|
|
|
|
|
|
|
|
|
Maintenance
|
|
|
27,607
|
|
|
|
18,762
|
|
|
|
8,845
|
|
|
|
47.1
|
%
|
Percentage of total revenues
|
|
|
27.2
|
%
|
|
|
26.9
|
%
|
|
|
|
|
|
|
|
|
Services
|
|
|
10,173
|
|
|
|
7,082
|
|
|
|
3,091
|
|
|
|
43.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total revenues
|
|
|
10.0
|
%
|
|
|
10.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
101,545
|
|
|
$
|
69,833
|
|
|
$
|
31,712
|
|
|
|
45.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product Revenues. Product revenues in fiscal
2008 included revenues of $31.0 million from 164 new
customers and revenues of $32.8 million from existing
customers. New customer revenues in fiscal 2008 increased by
$5.5 million compared to new customer revenues in fiscal
2007. Existing customer revenues in fiscal 2008 increased by
$14.3 million compared to existing customer revenues in
fiscal 2007. There was a net recognition of $1.7 million of
product revenues in fiscal 2007 related to sales transactions
that included undelivered product elements for which we did not
have VSOE, while in fiscal 2008 there was a net recognition of
product revenues of $2.7 million from such transactions. As
of April 30, 2008, deferred product revenues included
$2.2 million related to similar transactions. See the
related discussion in Sources of Revenues,
Cost of Revenues and Operating Expenses.
Maintenance Revenues. Maintenance revenues
increased by $8.8 million in fiscal 2008 as a result of
providing support services to a larger installed base as well as
the incremental maintenance revenues from increased product
sales. As a result of the timing of revenue recognition for
sales transactions that included an undelivered product element
for which we did not have VSOE, there was a net recognition of
$0.1 million of maintenance revenues in fiscal 2007, and a
net recognition of $0.2 million of maintenance revenues in
fiscal 2008. See the related discussion in
Sources of Revenues, Cost of Revenues and
Operating Expenses.
Services Revenues. Services revenues increased
by $3.1 million in fiscal 2008, as a result of increased
service transactions and providing services to a larger
installed base.
Geographic Regions. We sell our product in
three geographic regions: Americas; Europe-Middle East; and Asia
Pacific. Revenues, which include product, maintenance and
service revenues in absolute amounts and as a percentage of
total revenues for each region are summarized in the following
table (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
Change in
|
|
|
Change in
|
|
|
|
2008
|
|
|
2007
|
|
|
Dollars
|
|
|
Percent
|
|
|
Americas
|
|
$
|
77,621
|
|
|
$
|
55,704
|
|
|
$
|
21,917
|
|
|
|
39.3
|
%
|
Percentage of total revenues
|
|
|
76.4
|
%
|
|
|
79.8
|
%
|
|
|
|
|
|
|
|
|
EMEA
|
|
|
18,447
|
|
|
|
9,408
|
|
|
|
9,039
|
|
|
|
96.1
|
%
|
Percentage of total revenues
|
|
|
18.2
|
%
|
|
|
13.5
|
%
|
|
|
|
|
|
|
|
|
Asia Pacific
|
|
|
5,477
|
|
|
|
4,721
|
|
|
|
756
|
|
|
|
16.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total revenues
|
|
|
5.4
|
%
|
|
|
6.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
101,545
|
|
|
$
|
69,833
|
|
|
$
|
31,712
|
|
|
|
45.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51
Cost
of Revenues and Gross Margin
The following table is a summary of cost of product, maintenance
and services revenues in absolute amounts (in thousands, except
percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
Change in
|
|
|
Change in
|
|
|
|
2008
|
|
|
2007
|
|
|
Dollars
|
|
|
Percent
|
|
|
Products
|
|
$
|
4,767
|
|
|
$
|
2,569
|
|
|
$
|
2,198
|
|
|
|
85.6
|
%
|
Maintenance
|
|
|
5,691
|
|
|
|
3,498
|
|
|
|
2,193
|
|
|
|
62.7
|
%
|
Services
|
|
|
5,800
|
|
|
|
3,521
|
|
|
|
2,279
|
|
|
|
64.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
$
|
16,258
|
|
|
$
|
9,588
|
|
|
$
|
6,670
|
|
|
|
69.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table is a summary of gross profit for products,
maintenance and services and their respective gross margins (in
thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
April 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
Gross margin
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
58,998
|
|
|
$
|
41,420
|
|
Percentage of product revenues
|
|
|
92.5
|
%
|
|
|
94.2
|
%
|
Maintenance
|
|
$
|
21,916
|
|
|
$
|
15,264
|
|
Percentage of maintenance revenues
|
|
|
79.4
|
%
|
|
|
81.4
|
%
|
Services
|
|
$
|
4,373
|
|
|
$
|
3,561
|
|
Percentage of services revenues
|
|
|
43.0
|
%
|
|
|
50.3
|
%
|
|
|
|
|
|
|
|
|
|
Total gross margin
|
|
$
|
85,287
|
|
|
$
|
60,245
|
|
Percentage of total revenues
|
|
|
84.0
|
%
|
|
|
86.3
|
%
|
|
|
|
|
|
|
|
|
|
Cost of Product Revenues and Gross
Margin. Cost of product revenues increased by
$2.2 million in fiscal 2008, primarily due to increased
appliance cost of goods of $1.9 million related to
increased appliance sales, as well as a $0.3 million
increase in license expense for third party software used in our
products. Product gross margin fell by 1.7% as a percentage of
product revenues to 92.5% in fiscal 2008, compared to 94.2% in
fiscal 2007. This drop was primarily attributable to increased
appliance sales where product costs are higher creating lower
gross margin for product revenues. In future periods, we expect
the appliance portion of our product revenues to continue to
increase as a percentage of total revenues and, accordingly, we
expect cost of product revenues to increase and product gross
margin as a percentage of product revenues to decrease slightly.
Cost of Maintenance Revenues and Gross
Margin. Cost of maintenance revenues increased by
$2.2 million in fiscal 2008, primarily due to increased
compensation related expenses of $1.1 million related to
increased head count, an increase in third-party royalty
maintenance expenses of $0.5 million, and an increase in
facilities expenses of $0.2 million. Maintenance gross
margin fell by 2.0% as a percentage of maintenance revenues to
79.4% in fiscal 2008 compared to 81.4% in fiscal 2007. This
decrease in maintenance gross margin is primarily attributable
to increased head count in our technical support organization
and increases in third-party royalty maintenance expenses.
Cost of Services Revenues and Gross
Margin. Cost of service revenues increased by
$2.3 million in fiscal 2008, primarily due to increased
compensation related-expenses of $1.5 million related to
increased head count and cost per employee. Additionally,
billable travel expense and use of third party contractors
increased by $0.3 million and $0.2 million,
respectively. Services gross margin as a percentage of services
revenues decreased to 43.0% for fiscal 2008 compared to 50.3% in
fiscal 2007, due primarily to an increase in cost per employee
without a corresponding increase in revenue billing rates and a
decrease in productivity due to training of employees.
52
Operating
Expenses
The following table is a summary of research and development,
sales and marketing, and general and administrative expenses in
absolute amounts and as a percentage of total revenues (in
thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
Change in
|
|
|
Change in
|
|
|
|
2008
|
|
|
2007
|
|
|
Dollars
|
|
|
Percent
|
|
|
Research and development
|
|
$
|
19,762
|
|
|
$
|
14,535
|
|
|
$
|
5,227
|
|
|
|
36.0
|
%
|
Percentage of total revenues
|
|
|
19.5
|
%
|
|
|
20.8
|
%
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
53,453
|
|
|
|
36,587
|
|
|
|
16,866
|
|
|
|
46.1
|
%
|
Percentage of total revenues
|
|
|
52.6
|
%
|
|
|
52.4
|
%
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
13,422
|
|
|
|
9,453
|
|
|
|
3,969
|
|
|
|
42.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total revenues
|
|
|
13.2
|
%
|
|
|
13.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
86,637
|
|
|
$
|
60,575
|
|
|
$
|
26,062
|
|
|
|
43.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total revenues
|
|
|
85.3
|
%
|
|
|
86.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and Development Expenses. The
increase in research and development expenses in fiscal 2008 of
$5.2 million compared to fiscal 2007 was primarily
attributable to an increase of $3.0 million in
compensation-related expenses and an increase of
$0.9 million in stock-based compensation expense, in each
case associated with an increase in research and development
personnel from 89 to 101 at the respective period ends. In
addition, there was an increase in facilities-related expense of
$0.9 million as a result of the expansion of our
headquarters in Cupertino, California to accommodate the
increase in our personnel. Research and development expense as a
percentage of revenues was 19.5% in fiscal 2008 compared to
20.8% in fiscal 2007.
Sales and Marketing Expenses. The increase in
sales and marketing expenses in fiscal 2008 of
$16.9 million compared to fiscal 2007 was primarily
attributable to an increase of $10.2 million in
compensation-related expense and $2.0 million in
stock-based compensation expense, in each case associated with
an increase in sales and marketing personnel from 104 to 123 at
the respective period ends. In addition, travel and
entertainment expenses increased by $1.6 million,
overhead-related expenses such as employee relations and network
communications, increased by $1.3 million, marketing
program expenses increased by $0.6 million, and facilities
expenses increased $0.4 million. Sales and marketing
expense as a percentage of revenues remained essentially the
same at 52.6% in fiscal 2008 compared to 52.4% in fiscal 2007.
General and Administrative Expenses. The
increase in general and administrative expenses of
$4.0 million in fiscal 2008 compared to fiscal 2007 was
primarily attributable to an increase of $2.3 million
associated with compensation-related expense and an increase of
$0.3 million in stock-based compensation expense, in each
case associated with an increase in personnel from 32 to 41 at
the respective period ends. In addition, there was an increase
of $0.7 million in accounting, audit and tax expense, an
increase in facilities expense of $0.4 million and an
increase of $0.2 million in liability insurance expense
associated with increasing our coverage level in connection with
our becoming a public company. General and administrative
expense as a percentage of revenues remained essentially the
same at 13.2% in fiscal 2008 compared to 13.5% in fiscal 2007.
53
Non-Operating
Expenses
The following table is a summary of interest income and other
expenses, net, in absolute amounts and as a percentage of total
revenues (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
Change in
|
|
|
Change in
|
|
|
|
2008
|
|
|
2007
|
|
|
Dollars
|
|
|
Percent
|
|
|
Interest income
|
|
$
|
857
|
|
|
$
|
637
|
|
|
$
|
220
|
|
|
|
34.5
|
%
|
Percentage of total revenues
|
|
|
0.8
|
%
|
|
|
0.9
|
%
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
|
(385
|
)
|
|
|
(175
|
)
|
|
|
(210
|
)
|
|
|
(120.0
|
)%
|
Percentage of total revenues
|
|
|
(0.4
|
)%
|
|
|
(0.2
|
)%
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
(1,131
|
)
|
|
|
(389
|
)
|
|
|
(742
|
)
|
|
|
(190.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total revenues
|
|
|
(1.1
|
)%
|
|
|
(0.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-operating expenses
|
|
$
|
(659
|
)
|
|
$
|
73
|
|
|
$
|
(732
|
)
|
|
|
(1002.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total revenues
|
|
|
(0.6
|
)%
|
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income. The increase in interest
income was primarily attributable to increased cash and cash
equivalents related to net proceeds received from our IPO.
Other Income (Expense), Net. The decrease in
other income (expense), net in fiscal 2008 is primarily a result
of higher interest expense related to capitalized software
licenses and, to a lesser extent, foreign currency losses.
Provision for Income Taxes. The provision for
income taxes of $1.1 million for the year ended
April 30, 2008, is primarily related to foreign corporate
income taxes, federal and state alternative minimum taxes
currently due, and a charge of $0.3 million to establish a
deferred tax liability related to the temporary timing
difference between the tax deductible amortization of goodwill
related to the acquisition of Enira Technologies, LLC in June
2006 under applicable tax rules and SFAS No. 142 under
which goodwill must be analyzed annually for impairment rather
than amortized for financial reporting purposes (see
Note 11 Income Taxes for more
detail discussion). The provision for income taxes of
$0.4 million for the fiscal year ended April 30, 2007,
was primarily for foreign corporate income taxes.
Liquidity
and Capital Resources
From our inception in May 2000 through October 2002, we funded
our operations primarily through convertible preferred stock
financings that raised a total of $26.8 million. We
achieved positive cash flows from operations in fiscal 2004
through 2008, and generated $16.8 million of cash from our
operating activities during fiscal 2009. We generally expect to
continue generating positive operating cash flows on an annual
basis. There may be individual quarters in which we use cash as
a result of the timing of receipts or payments such as receipt
of a large receivable from a customer whose revenue is
recognized on a cash basis or payment of annual bonuses in the
first quarter of a fiscal year. Additionally in February 2008,
we completed our IPO in which we sold 6,000,000 shares of
common stock at an issue price of $9.00 per share, raising a
total of $45.9 million in net proceeds after deducting
underwriting discounts and offering expenses.
At April 30, 2009, we had cash and cash equivalents
totaling $90.5 million and accounts receivable of
$34.2 million, compared to $71.9 million of cash and
cash equivalents and $26.7 million of accounts receivable
at April 30, 2008.
Historically our principal uses of cash have consisted of
payroll and other operating expenses and purchases of property
and equipment to support our growth. In fiscal 2007, we used
$7.2 million in cash to purchase the assets of Enira
Technologies, LLC and pay acquisition costs.
54
The following table shows our cash flows from operating
activities, investing activities and financing activities for
the stated periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Net cash provided by operating activities
|
|
$
|
16,841
|
|
|
$
|
13,532
|
|
|
$
|
11,050
|
|
Net cash used in investing activities
|
|
|
(2,007
|
)
|
|
|
(4,012
|
)
|
|
|
(10,233
|
)
|
Net cash provided by (used in) financing activities
|
|
$
|
3,948
|
|
|
$
|
45,567
|
|
|
$
|
(359
|
)
|
Operating
Activities
We have reported net income for fiscal 2009 and although we
reported a net loss in fiscal 2008 and 2007, our operating
activities have provided positive cash flows for each fiscal
year presented, primarily due to the significant non-cash
charges associated with stock-based compensation and
depreciation and amortization reflected in operating expenses
and cash received from collections from customers. Our cash
flows from operating activities in any period will continue to
be significantly influenced by our results of operations, these
non-cash charges and changes in deferred revenues, as well as
changes in other components of our working capital.
While we may report negative cash flows from operating
activities from time to time in particular quarterly periods, we
generally expect to continue to generate positive cash flows
from operating activities on an annual basis. Future cash from
operations will depend on many factors, including:
|
|
|
|
|
the growth in our sales transactions and associated cash
collections or growth in receivables;
|
|
|
|
the level of our sales and marketing activities, including
expansion into new territories;
|
|
|
|
the timing and extent of spending to support product development
efforts; and
|
|
|
|
the timing of the growth in general and administrative expenses
as we further develop our administrative infrastructure to
support the business as a public company.
|
We generated $16.8 million of cash from operating
activities during fiscal 2009, primarily as a result of
generated net income of $9.9 million for this period, which
included non-cash charges of $6.1 million for stock-based
compensation expense, $3.3 million of depreciation and
amortization and a $1.3 million non-cash benefit from
excess tax benefits from stock-based compensation expense, a
$3.8 million increase in deferred revenues, a
$2.2 million decrease in prepaid expenses, a
$2.2 million increase in other accrued liabilities. These
amounts were offset in part by a $7.7 million increase in
accounts receivable associated with the growth in revenue and
timing of sales, a decrease in accounts payable of
$1.7 million and a $0.2 million decrease in our
accrued compensation and benefits due to changes in our
compensation plan structures.
We generated $13.5 million of cash from operating
activities during fiscal 2008, primarily as a result of a
$11.7 million increase in deferred revenues, a
$5.2 million increase in our accrued compensation and
benefits because sales commissions and performance bonus accrued
under our fiscal 2008 bonus plan were not paid until the first
quarter of fiscal 2009, a $0.6 million decrease in prepaid
expenses, offset in part by a $11.1 million increase in
accounts receivable associated with the growth in revenue and
timing of sales. In addition, we had a net loss of
$2.0 million for this period, which included non-cash
charges of $4.9 million for stock-based compensation
expense and $2.5 million of depreciation and amortization.
We generated $11.1 million of cash from operating
activities during fiscal 2007, primarily as a result of a
$5.0 million increase in deferred revenues, a
$3.3 million increase in our accrued compensation and
benefits because sales commissions and performance bonuses
accrued under our fiscal 2007 bonus plan were not paid until the
first quarter of fiscal 2008, a $2.2 million increase in
accounts payable resulting from the timing of payment
obligations and a $1.4 million increase in other accrued
liabilities, offset in part by a $3.4 million increase in
accounts receivable associated with the growth in our revenues
and a $1.0 million increase in prepaid expenses. In
addition, we generated cash from operations in fiscal 2007
because our reported net loss of $0.3 million included
$1.5 million of non-cash stock-based compensation expense
and $1.9 million of non-cash depreciation and amortization
charges.
55
Investing
Activities
During fiscal 2009, we used $2.0 million in cash for
investing activities, all of which was related to capital
expenditures associated with computer equipment, furniture and
fixtures and software in support of the expansion of our
infrastructure and work force. During fiscal 2008, we used
$4.0 million in cash for investing activities, of which
$2.0 million was related to capital expenditures associated
with computer equipment, furniture and fixtures and software,
and $1.4 million related to leasehold improvements, all in
support of the expansion of our infrastructure and work force.
During fiscal 2007, we used $10.2 million in cash for
investing activities, primarily as a result of $7.2 million
of cash consideration and acquisition costs, for the purchase of
the assets of Enira Technologies, LLC, $2.2 million in
purchases of property and equipment and $0.8 million in a
restricted cash account used to secure a standby letter of
credit.
Financing
Activities
During fiscal 2009, we generated $3.9 million of cash from
financing activities, comprised primarily of $4.8 million
from net proceeds from the exercise of stock options and
$1.3 million from tax benefits associated with
disqualifying dispositions of awards associated with stock-based
compensation, offset by $2.1 million in payments for
prepaid software licenses used as a component in our product
sales. During fiscal 2008, we generated $45.6 million of
cash from financing activities, comprised primarily of
$50.2 million in proceeds from our IPO (after underwriting
discounts and commissions) and $0.9 million of net proceeds
from the exercise of stock options, offset by payments of
$3.7 million in IPO preparation costs, $1.9 million in
payments for capital lease obligations and capitalized software
licenses used as a component in our product sales. During fiscal
2007, cash used in financing activities was $0.4 million,
and consisted of $0.6 million of costs incurred in
conjunction with our IPO and $0.3 million in payments for
capital lease obligations and capitalized software licenses,
offset by proceeds from the exercise of stock options.
Other
Factors Affecting Liquidity and Capital Resources
We believe that our cash and cash equivalents and any cash flow
from operations will be sufficient to meet our anticipated cash
needs, including for working capital purposes, capital
expenditures and various contractual obligations, for at least
the next 12 months. We may, however, require additional
cash resources due to changed business conditions or other
future developments, including any investments or acquisitions
we may decide to pursue. If these sources are insufficient to
satisfy our cash requirements, we may seek to sell debt
securities or additional equity securities or to obtain a credit
facility. The sale of additional equity securities could result
in additional dilution to our stockholders. The incurrence of
indebtedness would result in debt service obligations and could
result in operating and financial covenants that would restrict
our operations. In addition, there can be no assurance that any
additional financing will be available on acceptable terms, if
at all. We anticipate that, from time to time, we may evaluate
acquisitions of complementary businesses, technologies or
assets. However, there are no current understandings,
commitments or agreements with respect to any acquisitions.
Off-Balance
Sheet Arrangements
As of April 30, 2009, we had no off-balance sheet
arrangements as defined in Item 303(a)(4) of the SECs
Regulation S-K.
Contractual
Obligations and Commitments
We lease facilities for our corporate headquarters, subsidiaries
and regional sales offices. We lease our principal facility in
Cupertino, California under a non-cancelable operating lease
agreement that expires in October 2013. We also have leases for
our regional sales offices that are for 13 months or less.
56
The following table is a summary of our contractual obligations
as of April 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
Total
|
|
|
FY 2010
|
|
|
FY 2011
|
|
|
FY 2012
|
|
|
FY 2013
|
|
|
Thereafter
|
|
|
|
(In thousands)
|
|
|
Operating lease obligations
|
|
$
|
9,521
|
|
|
$
|
2,196
|
|
|
$
|
1,988
|
|
|
$
|
2,068
|
|
|
$
|
2,151
|
|
|
$
|
1,118
|
|
Accrued contractual obligations
|
|
$
|
106
|
|
|
|
33
|
|
|
|
33
|
|
|
|
33
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,627
|
|
|
$
|
2,229
|
|
|
$
|
2,021
|
|
|
$
|
2,101
|
|
|
$
|
2,158
|
|
|
$
|
1,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On May 20, 2009, we entered into a software license
agreement with Oracle USA, Inc that authorizes us to integrate
Oracle database software with our ArcSight ESM products and
distribute ArcSight ESM products with the embedded database
software. Under the agreement, which has a two year term that
commenced on May 31, 2009 when our prior agreement with
Oracle expired, we have agreed to make royalty payments totaling
$4.8 million over the license term. Under the prior
agreement with Oracle, we made payments totaling
$1.9 million during fiscal 2009.
Recent
Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations, or SFAS 141R, which replaces
SFAS No. 141. SFAS 141R establishes principles
and requirements for how an acquirer recognizes and measures in
its financial statements the identifiable assets acquired, the
liabilities assumed, and non-controlling interests in the
acquiree and the goodwill acquired, in connection with a
business combination. SFAS 141R also establishes disclosure
requirements. SFAS 141R is effective for fiscal years
beginning after December 15, 2008. We will adopt
SFAS 141R at the beginning of our 2010 fiscal year which is
May 1, 2009. The impact of SFAS 141R will depend on
the nature, terms, and size of any acquisition we may consummate
after the effective date.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities an amendment of FASB Statement
No. 133, or SFAS 161. SFAS 161 changes the
disclosure requirements for derivative instruments and hedging
activities. Entities are required to provide enhanced
disclosures about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related
hedge items are accounted for under Statement 133 and its
related interpretations, and (c) how derivative instruments
and related hedged items affect an entitys financial
position, financial performance, and cash flows. SFAS 161
is effective for financial statements issued for fiscal years
and interim periods beginning after November 15, 2008. We
are currently evaluating the potential impact, if any, of the
adoption of SFAS 161, on our consolidated results of
operations, financial condition or cash flows.
In April 2008, the FASB issued a Staff Position, or FSP,
No. 142-3,
Determination of the Useful Life of Intangible Assets, or
FSP 142-3.
FSP 142-3
amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful
life of a recognized intangible asset under SFAS 142. The
intent of
FSP 142-3
is to improve the consistency between the useful life of a
recognized intangible asset under SFAS 142 and the period
of expected cash flows used to measure the fair value of the
asset under SFAS 141R, and other U.S. generally
accepted accounting principles.
FSP 142-3
is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and early adoption is
not permitted. We are currently evaluating the potential impact,
if any, of the adoption of
SFAS 142-3
on our consolidated results of operations, financial condition
or cash flows.
In May 2008, the FASB issued SFAS No. 162, The
Hierarchy of Generally Accepted Accounting Principles, or
SFAS 162. SFAS 162 identifies the sources of
accounting principles and the framework for selecting the
principles used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with
generally accepted accounting principles (the GAAP hierarchy).
SFAS 162 became effective for financial statements issued
for fiscal years and interim periods beginning after November
15, 2008. The adoption of SFAS 162 did not have a material
effect on our consolidated results of operations, financial
condition or cash flows.
In February 2009, the FASB issued an FSP on
SFAS No. 141(R)-a, Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination, or
FSP 141R-a. FSP 141R-a amends the provisions related
to the initial recognition and measurement, subsequent
measurement and disclosure of assets and liabilities arising
from
57
contingencies in a business combination under SFAS 141R.
FSP 141R-a establishes principles and requirements for
pre-acquisition contingencies and an acquirees
pre-existing contingent consideration arrangement in a business
combination measured under SFAS 141R. In addition,
FSP 141R-a requires separate disclosure of recognized and
unrecognized contingencies. FSP 141R-a has the same
effective date as SFAS 141R, and is effective for fiscal
years beginning after December 15, 2008. We adopted
FSP 141R-a May 1, 2009, the beginning of fiscal 2010.
The impact of FSP 141R-a will depend on the nature, terms,
and size of any acquisition we may consummate after the
effective date.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
Market Risk. Market risk represents the risk
of loss that may impact our financial position due to adverse
changes in financial market prices and rates. Our market risk
exposure is primarily a result of fluctuations in foreign
exchange rates, interest rates and credit risk. We do not hold
or issue financial instruments for trading purposes.
Foreign Currency Exchange Risk. To date,
substantially all of our international sales have been
denominated in U.S. dollars, and therefore the majority of
our net revenues are not subject to foreign currency risk. Our
operating expenses and cash flows are subject to fluctuations
due to changes in foreign currency exchange rates, but
historically have had relatively little impact on our operating
results and cash flows. We utilize foreign currency forward and
option contracts to manage our currency exposures as part of our
ongoing business operations. We do not expect to enter into
foreign currency exchange contracts for trading or speculative
purposes.
Interest Rate Risk. Our investment policy is
intended to preserve principal, provide liquidity and maximize
income by limiting default risk, market risk and reinvestment
risk. To minimize these risks, we primarily invest in money
market funds. We had cash and cash equivalents totaling
$90.5 million as of April 30, 2009, including the
$45.9 million net proceeds from our IPO, which are
primarily held for working capital and general corporate
purposes. The fair value of our investment portfolio would not
be significantly impacted by either a 100 basis point
increase or decrease in market interest rates due mainly to the
short-term nature of the majority of our investment portfolio.
As a result, we do not believe that we have any material
exposure to changes in the fair value of our investment
portfolio as a result of changes in interest rates. Declines in
interest rates, however, will reduce future interest income. We
do not enter into investments for trading or speculative
purposes.
58
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
Quarterly
Results of Operations
The following table sets forth unaudited quarterly consolidated
statements of operations data for each of the years in the
two-year period ended April 30, 2009, (in thousands, except
per share data). We derived this information from our unaudited
consolidated financial statements, which we prepared on the same
basis as our audited consolidated financial statements contained
in this Annual Report on
Form 10-K.
In our opinion, these unaudited statements include all
adjustments, consisting only of normal recurring adjustments
that we consider necessary for a fair statement of that
information when read in conjunction with the consolidated
financial statements and related notes included elsewhere in
this Annual Report on
Form 10-K.
The operating results for any quarter should not be considered
indicative of results for any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
July 31,
|
|
|
Oct. 31,
|
|
|
Jan. 31,
|
|
|
April 30,
|
|
|
July 31,
|
|
|
Oct. 31,
|
|
|
Jan. 31,
|
|
|
April 30,
|
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
(Unaudited, in thousands)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
12,205
|
|
|
$
|
15,670
|
|
|
$
|
17,698
|
|
|
$
|
18,192
|
|
|
$
|
15,802
|
|
|
$
|
19,169
|
|
|
$
|
21,775
|
|
|
$
|
23,870
|
|
Maintenance
|
|
|
5,630
|
|
|
|
6,617
|
|
|
|
7,380
|
|
|
|
7,980
|
|
|
|
8,568
|
|
|
|
9,530
|
|
|
|
10,004
|
|
|
|
10,419
|
|
Services
|
|
|
2,035
|
|
|
|
2,341
|
|
|
|
2,593
|
|
|
|
3,204
|
|
|
|
3,293
|
|
|
|
4,136
|
|
|
|
4,613
|
|
|
|
4,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
19,870
|
|
|
|
24,628
|
|
|
|
27,671
|
|
|
|
29,376
|
|
|
|
27,663
|
|
|
|
32,835
|
|
|
|
36,392
|
|
|
|
39,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
684
|
|
|
|
1,130
|
|
|
|
1,487
|
|
|
|
1,466
|
|
|
|
1,655
|
|
|
|
1,844
|
|
|
|
2,637
|
|
|
|
2,459
|
|
Maintenance(1)
|
|
|
1,246
|
|
|
|
1,381
|
|
|
|
1,456
|
|
|
|
1,608
|
|
|
|
1,631
|
|
|
|
1,663
|
|
|
|
1,637
|
|
|
|
1,930
|
|
Services(1)
|
|
|
1,078
|
|
|
|
1,362
|
|
|
|
1,454
|
|
|
|
1,906
|
|
|
|
2,043
|
|
|
|
2,387
|
|
|
|
2,587
|
|
|
|
2,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
3,008
|
|
|
|
3,873
|
|
|
|
4,397
|
|
|
|
4,980
|
|
|
|
5,329
|
|
|
|
5,894
|
|
|
|
6,861
|
|
|
|
7,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
16,862
|
|
|
|
20,755
|
|
|
|
23,274
|
|
|
|
24,396
|
|
|
|
22,334
|
|
|
|
26,941
|
|
|
|
29,531
|
|
|
|
32,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
4,260
|
|
|
|
4,847
|
|
|
|
5,063
|
|
|
|
5,592
|
|
|
|
5,315
|
|
|
|
5,423
|
|
|
|
5,201
|
|
|
|
6,598
|
|
Sales and marketing
|
|
|
11,919
|
|
|
|
12,688
|
|
|
|
12,760
|
|
|
|
16,086
|
|
|
|
14,868
|
|
|
|
14,355
|
|
|
|
12,298
|
|
|
|
14,758
|
|
General and administrative
|
|
|
3,520
|
|
|
|
3,468
|
|
|
|
2,939
|
|
|
|
3,495
|
|
|
|
4,349
|
|
|
|
4,863
|
|
|
|
4,943
|
|
|
|
6,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
19,699
|
|
|
|
21,003
|
|
|
|
20,762
|
|
|
|
25,173
|
|
|
|
24,532
|
|
|
|
24,641
|
|
|
|
22,442
|
|
|
|
27,479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(2,837
|
)
|
|
|
(248
|
)
|
|
|
2,512
|
|
|
|
(777
|
)
|
|
|
(2,198
|
)
|
|
|
2,300
|
|
|
|
7,089
|
|
|
|
4,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income (expense), net
|
|
|
19
|
|
|
|
21
|
|
|
|
98
|
|
|
|
334
|
|
|
|
305
|
|
|
|
340
|
|
|
|
157
|
|
|
|
(68
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for income taxes
|
|
|
(2,818
|
)
|
|
|
(227
|
)
|
|
|
2,610
|
|
|
|
(443
|
)
|
|
|
(1,893
|
)
|
|
|
2,640
|
|
|
|
7,246
|
|
|
|
4,484
|
|
Provision for income taxes
|
|
|
118
|
|
|
|
139
|
|
|
|
257
|
|
|
|
617
|
|
|
|
(563
|
)
|
|
|
795
|
|
|
|
2,183
|
|
|
|
149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(2,936
|
)
|
|
$
|
(366
|
)
|
|
$
|
2,353
|
|
|
$
|
(1,060
|
)
|
|
$
|
(1,330
|
)
|
|
$
|
1,845
|
|
|
$
|
5,063
|
|
|
$
|
4,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Stock-based compensation expense as included in above: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of maintenance revenues
|
|
$
|
8
|
|
|
$
|
30
|
|
|
$
|
24
|
|
|
$
|
44
|
|
|
$
|
46
|
|
|
$
|
54
|
|
|
$
|
56
|
|
|
$
|
60
|
|
Cost of services revenues
|
|
|
8
|
|
|
|
38
|
|
|
|
23
|
|
|
|
46
|
|
|
|
33
|
|
|
|
39
|
|
|
|
34
|
|
|
|
36
|
|
Research and development
|
|
|
157
|
|
|
|
490
|
|
|
|
293
|
|
|
|
416
|
|
|
|
339
|
|
|
|
334
|
|
|
|
322
|
|
|
|
347
|
|
Sales and marketing
|
|
|
461
|
|
|
|
680
|
|
|
|
771
|
|
|
|
773
|
|
|
|
751
|
|
|
|
752
|
|
|
|
466
|
|
|
|
482
|
|
General and administrative
|
|
|
81
|
|
|
|
180
|
|
|
|
171
|
|
|
|
232
|
|
|
|
234
|
|
|
|
346
|
|
|
|
786
|
|
|
|
628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expenses
|
|
$
|
715
|
|
|
$
|
1,418
|
|
|
$
|
1,282
|
|
|
$
|
1,511
|
|
|
$
|
1,403
|
|
|
$
|
1,525
|
|
|
$
|
1,664
|
|
|
$
|
1,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59
The following table sets forth our historical results, for the
periods indicated, as a percentage of our revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
July 31,
|
|
|
Oct. 31,
|
|
|
Jan. 31,
|
|
|
April 30,
|
|
|
July 31,
|
|
|
Oct. 31,
|
|
|
Jan. 31,
|
|
|
April 30,
|
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
61.4
|
%
|
|
|
63.6
|
%
|
|
|
64.0
|
%
|
|
|
61.9
|
%
|
|
|
57.1
|
%
|
|
|
58.4
|
%
|
|
|
59.8
|
%
|
|
|
60.8
|
%
|
Maintenance
|
|
|
28.3
|
|
|
|
26.9
|
|
|
|
26.6
|
|
|
|
27.2
|
|
|
|
31.0
|
|
|
|
29.0
|
|
|
|
27.5
|
|
|
|
26.5
|
|
Services
|
|
|
10.3
|
|
|
|
9.5
|
|
|
|
9.4
|
|
|
|
10.9
|
|
|
|
11.9
|
|
|
|
12.6
|
|
|
|
12.7
|
|
|
|
12.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
3.4
|
|
|
|
4.6
|
|
|
|
5.4
|
|
|
|
5.0
|
|
|
|
6.0
|
|
|
|
5.6
|
|
|
|
7.3
|
|
|
|
6.3
|
|
Maintenance
|
|
|
6.3
|
|
|
|
5.6
|
|
|
|
5.3
|
|
|
|
5.5
|
|
|
|
5.9
|
|
|
|
5.1
|
|
|
|
4.5
|
|
|
|
4.9
|
|
Services
|
|
|
5.4
|
|
|
|
5.5
|
|
|
|
5.2
|
|
|
|
6.5
|
|
|
|
7.4
|
|
|
|
7.3
|
|
|
|
7.1
|
|
|
|
7.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
15.1
|
|
|
|
15.7
|
|
|
|
15.9
|
|
|
|
17.0
|
|
|
|
19.3
|
|
|
|
18.0
|
|
|
|
18.9
|
|
|
|
18.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
84.9
|
|
|
|
84.3
|
|
|
|
84.1
|
|
|
|
83.0
|
|
|
|
80.7
|
|
|
|
82.0
|
|
|
|
81.1
|
|
|
|
81.5
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
21.4
|
|
|
|
19.7
|
|
|
|
18.3
|
|
|
|
19.0
|
|
|
|
19.2
|
|
|
|
16.5
|
|
|
|
14.3
|
|
|
|
16.8
|
|
Sales and marketing
|
|
|
60.0
|
|
|
|
51.5
|
|
|
|
46.1
|
|
|
|
54.8
|
|
|
|
53.7
|
|
|
|
43.7
|
|
|
|
33.8
|
|
|
|
37.6
|
|
General and administrative
|
|
|
17.7
|
|
|
|
14.1
|
|
|
|
10.6
|
|
|
|
11.9
|
|
|
|
15.7
|
|
|
|
14.8
|
|
|
|
13.5
|
|
|
|
15.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
99.1
|
|
|
|
85.3
|
|
|
|
75.0
|
|
|
|
85.7
|
|
|
|
88.6
|
|
|
|
75.0
|
|
|
|
61.6
|
|
|
|
70.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(14.3
|
)%
|
|
|
(1.0
|
)%
|
|
|
9.1
|
%
|
|
|
(2.6
|
)%
|
|
|
(7.9
|
)%
|
|
|
7.0
|
%
|
|
|
19.5
|
%
|
|
|
11.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to rounding to the nearest tenth of a percent, totals may
not equal the sum of the line items in the table above.
Our operating results may fluctuate due to a variety of factors,
many of which are outside our control. As a result, comparing
our operating results on a period-to-period basis may not be
meaningful. You should not rely on our past results as an
indication of our future performance.
Revenues have increased over the quarters presented, other than
the first quarter of fiscal 2009, due to increases in the number
of products sold to new and existing customers and expansion
into the international and mid-size markets. This revenue trend
was impacted by multiple element sales transactions that
included undelivered product elements for which we did not have
VSOE. Revenues in fiscal 2007 and prior years excluded revenues
related to multiple element sales transactions consummated for
which the revenues were deferred because we did not have VSOE,
for some product elements that were not delivered in the fiscal
year of the transaction. Following identification in mid-fiscal
2007 of transactions with such undelivered elements, during
fiscal 2009, fiscal 2008 and the fourth quarter of fiscal 2007,
with respect to many of these transactions, we either delivered
such product elements, or we and our customers amended the
contractual terms of these sales transactions to remove the
undelivered product elements. See Item 7.
Managements Discussion and Analysis of Financial Condition
and Results of Operations Sources of Revenues, Cost
of Revenues and Operating Expenses. The following table
sets forth the net quarterly impact of these types of sales
transactions by quarter for fiscal 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
July 31,
|
|
|
Oct. 31,
|
|
|
Jan. 31,
|
|
|
April 30,
|
|
|
July 31,
|
|
|
Oct. 31,
|
|
|
Jan. 31,
|
|
|
April 30,
|
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
(Unaudited, in millions)
|
|
|
Product revenues
|
|
|
0.8
|
|
|
|
0.6
|
|
|
|
1.0
|
|
|
|
0.3
|
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
0.3
|
|
|
|
0.2
|
|
Maintenance revenues
|
|
|
0.1
|
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
0.9
|
|
|
|
0.6
|
|
|
|
1.1
|
|
|
|
0.3
|
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
0.3
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
While similar multiple element transactions with undelivered
elements for which we lack VSOE may be identified prospectively
in future periods, we expect that in future periods the
comparison of revenues from period-to-period will not be
impacted to the same extent by similar prior or future
transactions.
60
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
61
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
ArcSight, Inc.
We have audited the accompanying consolidated balance sheets of
ArcSight, Inc. as of April 30, 2009 and 2008, and the
related consolidated statements of operations,
stockholders equity, and cash flows for each of the three
years in the period ended April 30, 2009. These financial
statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of ArcSight, Inc. at April 30, 2009 and
2008, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended
April 30, 2009, in conformity with U.S. generally
accepted accounting principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
ArcSight, Inc.s internal control over financial reporting
as of April 30, 2009, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our
report dated July 8, 2009 expressed an unqualified opinion
thereon.
/s/ Ernst & Young LLP
San Jose, California
July 8, 2009
62
ARCSIGHT,
INC.
|
|
|
|
|
|
|
|
|
|
|
As of April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except
|
|
|
|
share amounts and
|
|
|
|
par value)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
90,467
|
|
|
$
|
71,946
|
|
Accounts receivable, net of allowance for doubtful accounts of
$262 and $133, as of April 30, 2009 and 2008, respectively
|
|
|
34,184
|
|
|
|
26,658
|
|
Prepaid expenses and other current assets
|
|
|
3,861
|
|
|
|
5,565
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
128,512
|
|
|
|
104,169
|
|
Property and equipment, net
|
|
|
4,416
|
|
|
|
4,834
|
|
Goodwill
|
|
|
5,746
|
|
|
|
5,746
|
|
Acquired intangible assets, net
|
|
|
1,319
|
|
|
|
2,161
|
|
Other long-term assets
|
|
|
1,168
|
|
|
|
1,669
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
141,161
|
|
|
$
|
118,579
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,432
|
|
|
$
|
3,115
|
|
Accrued compensation and benefits
|
|
|
11,671
|
|
|
|
11,864
|
|
Other accrued liabilities
|
|
|
4,700
|
|
|
|
5,967
|
|
Deferred revenues, current
|
|
|
36,160
|
|
|
|
36,512
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
53,963
|
|
|
|
57,458
|
|
Deferred revenues, non-current
|
|
|
8,888
|
|
|
|
4,754
|
|
Other long-term liabilities
|
|
|
1,637
|
|
|
|
1,598
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
64,488
|
|
|
|
63,810
|
|
Commitments and contingencies (Note 6)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Convertible preferred stock, $0.00001 par value per share,
10,000,000 shares authorized as of April 30, 2009 and
2008, respectively; no shares issued and outstanding as of
April 30, 2009 and 2008, respectively
|
|
|
|
|
|
|
|
|
Common stock, $0.00001 par value per share;
150,000,000 shares authorized as of April 30, 2009 and
April 30, 2008, respectively; 32,248,116 and 31,022,190
issued and outstanding as of April 30, 2009 and 2008,
respectively
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
113,781
|
|
|
|
101,574
|
|
Deferred stock-based compensation
|
|
|
|
|
|
|
(53
|
)
|
Accumulated other comprehensive loss
|
|
|
(314
|
)
|
|
|
(45
|
)
|
Accumulated deficit
|
|
|
(36,794
|
)
|
|
|
(46,707
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
76,673
|
|
|
|
54,769
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
141,161
|
|
|
$
|
118,579
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
63
ARCSIGHT,
INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
80,616
|
|
|
$
|
63,765
|
|
|
$
|
43,989
|
|
Maintenance
|
|
|
38,521
|
|
|
|
27,607
|
|
|
|
18,762
|
|
Services
|
|
|
17,031
|
|
|
|
10,173
|
|
|
|
7,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
136,168
|
|
|
|
101,545
|
|
|
|
69,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
8,595
|
|
|
|
4,767
|
|
|
|
2,569
|
|
Maintenance(1)
|
|
|
6,861
|
|
|
|
5,691
|
|
|
|
3,498
|
|
Services(1)
|
|
|
9,875
|
|
|
|
5,800
|
|
|
|
3,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
25,331
|
|
|
|
16,258
|
|
|
|
9,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
110,837
|
|
|
|
85,287
|
|
|
|
60,245
|
|
Operating expenses(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
22,537
|
|
|
|
19,762
|
|
|
|
14,535
|
|
Sales and marketing
|
|
|
56,279
|
|
|
|
53,453
|
|
|
|
36,587
|
|
General and administrative
|
|
|
20,278
|
|
|
|
13,422
|
|
|
|
9,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
99,094
|
|
|
|
86,637
|
|
|
|
60,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
11,743
|
|
|
|
(1,350
|
)
|
|
|
(330
|
)
|
Interest income
|
|
|
991
|
|
|
|
857
|
|
|
|
637
|
|
Other income and expense, net
|
|
|
(257
|
)
|
|
|
(385
|
)
|
|
|
(175
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for income taxes
|
|
|
12,477
|
|
|
|
(878
|
)
|
|
|
132
|
|
Provision for income taxes
|
|
|
2,564
|
|
|
|
1,131
|
|
|
|
389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
9,913
|
|
|
$
|
(2,009
|
)
|
|
$
|
(257
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share, basic
|
|
$
|
0.32
|
|
|
$
|
(0.08
|
)
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share, diluted
|
|
$
|
0.30
|
|
|
$
|
(0.08
|
)
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic net income (loss) per common share
|
|
|
31,233
|
|
|
|
25,936
|
|
|
|
10,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing diluted net income (loss) per common
share
|
|
|
33,550
|
|
|
|
25,936
|
|
|
|
10,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Stock-based compensation expense included in above (see
Note 9): |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of maintenance revenues
|
|
$
|
216
|
|
|
$
|
106
|
|
|
$
|
3
|
|
Cost of services revenues
|
|
|
142
|
|
|
|
115
|
|
|
|
14
|
|
Research and development
|
|
|
1,342
|
|
|
|
1,356
|
|
|
|
501
|
|
Sales and marketing
|
|
|
2,451
|
|
|
|
2,685
|
|
|
|
661
|
|
General and administrative
|
|
|
1,994
|
|
|
|
664
|
|
|
|
350
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
64
ARCSIGHT,
INC.
For the
Fiscal Years Ended April 2007, 2008 and 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Convertible
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Deferred
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Stock-Based
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
Income (Loss)
|
|
|
Deficit
|
|
|
Equity
|
|
|
|
(In thousands, except share amounts)
|
|
|
Balance as of April 30, 2006
|
|
|
13,029,223
|
|
|
|
26,758
|
|
|
|
9,967,561
|
|
|
|
|
|
|
|
19,383
|
|
|
|
(396
|
)
|
|
|
(3
|
)
|
|
|
(44,309
|
)
|
|
|
1,433
|
|
Issuance of common stock in connection with legal settlement
|
|
|
|
|
|
|
|
|
|
|
62,500
|
|
|
|
|
|
|
|
178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
178
|
|
Exercise of Series B preferred stock warrants
|
|
|
3,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock in connection with acquisition of Enira
Technologies, LLC
|
|
|
|
|
|
|
|
|
|
|
253,038
|
|
|
|
|
|
|
|
1,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,538
|
|
Reclassification of options exercised but not vested, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
122
|
|
Issuance of common stock upon exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
225,326
|
|
|
|
|
|
|
|
582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
582
|
|
Repurchase of common stock subject to vesting
|
|
|
|
|
|
|
|
|
|
|
(21,263
|
)
|
|
|
|
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11
|
)
|
Amortization of deferred stock-based compensation, net of
terminations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13
|
)
|
|
|
280
|
|
|
|
|
|
|
|
|
|
|
|
267
|
|
Stock-based compensation under SFAS 123R options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
892
|
|
Issuance of restricted stock in connection with acquisition of
Enira Technologies, LLC
|
|
|
|
|
|
|
|
|
|
|
132,879
|
|
|
|
|
|
|
|
808
|
|
|
|
(808
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of restricted stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
370
|
|
|
|
|
|
|
|
|
|
|
|
370
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
16
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(257
|
)
|
|
|
(257
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(241
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of April 30, 2007
|
|
|
13,032,497
|
|
|
|
26,758
|
|
|
|
10,620,041
|
|
|
|
|
|
|
|
23,479
|
|
|
|
(554
|
)
|
|
|
13
|
|
|
|
(44,566
|
)
|
|
|
5,130
|
|
Cumulative effect adjustment due to the adoption of FIN 48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(132
|
)
|
|
|
(132
|
)
|
Issuance of common stock upon exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
402,260
|
|
|
|
|
|
|
|
923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
923
|
|
Reclassification of options exercised but not vested, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
|
|
Repurchase of common stock subject to vesting
|
|
|
|
|
|
|
|
|
|
|
(6,845
|
)
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
Amortization of deferred stock-based compensation, net of
terminations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6
|
)
|
|
|
97
|
|
|
|
|
|
|
|
|
|
|
|
91
|
|
Amortization of restricted stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
404
|
|
|
|
|
|
|
|
|
|
|
|
404
|
|
Stock-based compensation under SFAS 123R
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,431
|
|
Exercise of Series B preferred stock warrants
|
|
|
12,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of common stock warrants
|
|
|
|
|
|
|
|
|
|
|
6,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of preferred stock into common stock
|
|
|
(13,045,406
|
)
|
|
|
(26,758
|
)
|
|
|
14,000,441
|
|
|
|
|
|
|
|
26,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from initial public offering, net of issuance costs of
$4,288
|
|
|
|
|
|
|
|
|
|
|
6,000,000
|
|
|
|
|
|
|
|
45,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,932
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(58
|
)
|
|
|
|
|
|
|
(58
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,009
|
)
|
|
|
(2,009
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,067
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of April 30, 2008
|
|
|
|
|
|
|
|
|
|
|
31,022,190
|
|
|
|
|
|
|
|
101,574
|
|
|
|
(53
|
)
|
|
|
(45
|
)
|
|
|
(46,707
|
)
|
|
|
54,769
|
|
Issuance of common stock under stock option and stock purchase
plans
|
|
|
|
|
|
|
|
|
|
|
1,225,926
|
|
|
|
|
|
|
|
4,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,800
|
|
Reclassification of options exercised but not vested, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
|
|
Amortization of deferred stock-based compensation, net of
terminations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
19
|
|
Amortization of restricted stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
34
|
|
Stock-based compensation under SFAS 123R
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,092
|
|
Tax benefit from stock-based awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,291
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(269
|
)
|
|
|
|
|
|
|
(269
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,913
|
|
|
|
9,913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of April 30, 2009
|
|
|
|
|
|
$
|
|
|
|
|
32,248,116
|
|
|
$
|
|
|
|
$
|
113,781
|
|
|
$
|
|
|
|
$
|
(314
|
)
|
|
$
|
(36,794
|
)
|
|
$
|
76,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
65
ARCSIGHT,
INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
9,913
|
|
|
$
|
(2,009
|
)
|
|
$
|
(257
|
)
|
Adjustments to reconcile net loss to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,471
|
|
|
|
1,945
|
|
|
|
1,414
|
|
Amortization of acquired intangibles
|
|
|
842
|
|
|
|
573
|
|
|
|
476
|
|
Loss (gain) on disposal of property and equipment
|
|
|
17
|
|
|
|
(6
|
)
|
|
|
3
|
|
Stock-based compensation
|
|
|
6,145
|
|
|
|
4,926
|
|
|
|
1,529
|
|
Excess tax benefit from stock-based compensation
|
|
|
(1,291
|
)
|
|
|
|
|
|
|
|
|
Provision for allowance for doubtful accounts
|
|
|
142
|
|
|
|
33
|
|
|
|
112
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(7,668
|
)
|
|
|
(11,137
|
)
|
|
|
(3,352
|
)
|
Prepaid expenses and other assets
|
|
|
2,205
|
|
|
|
1,008
|
|
|
|
(725
|
)
|
Accounts payable
|
|
|
(1,683
|
)
|
|
|
269
|
|
|
|
2,199
|
|
Accrued compensation and benefits
|
|
|
(193
|
)
|
|
|
5,186
|
|
|
|
3,294
|
|
Other accrued liabilities
|
|
|
2,159
|
|
|
|
1,066
|
|
|
|
1,386
|
|
Deferred revenues
|
|
|
3,782
|
|
|
|
11,678
|
|
|
|
4,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
16,841
|
|
|
|
13,532
|
|
|
|
11,050
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
|
|
|
|
|
|
|
|
|
(842
|
)
|
Acquisition of Enira Technologies, LLC
|
|
|
|
|
|
|
|
|
|
|
(7,209
|
)
|
Purchase of property and equipment
|
|
|
(2,007
|
)
|
|
|
(4,031
|
)
|
|
|
(2,182
|
)
|
Proceeds from sales of property and equipment
|
|
|
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(2,007
|
)
|
|
|
(4,012
|
)
|
|
|
(10,233
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial public offering preparation costs
|
|
|
|
|
|
|
(3,669
|
)
|
|
|
(619
|
)
|
Proceeds from initial public offering
|
|
|
|
|
|
|
50,220
|
|
|
|
|
|
Excess tax benefit from stock-based compensation
|
|
|
1,291
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options, net of repurchases
|
|
|
4,800
|
|
|
|
920
|
|
|
|
571
|
|
Payment of capital lease and software license obligations
|
|
|
(2,143
|
)
|
|
|
(1,904
|
)
|
|
|
(311
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
3,948
|
|
|
|
45,567
|
|
|
|
(359
|
)
|
Effect of exchange rate changes on cash
|
|
|
(261
|
)
|
|
|
(58
|
)
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
18,521
|
|
|
|
55,029
|
|
|
|
474
|
|
Cash and cash equivalents at beginning of period
|
|
|
71,946
|
|
|
|
16,917
|
|
|
|
16,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
90,467
|
|
|
$
|
71,946
|
|
|
$
|
16,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
1,669
|
|
|
$
|
331
|
|
|
$
|
583
|
|
Interest expense paid
|
|
$
|
110
|
|
|
$
|
227
|
|
|
$
|
7
|
|
Supplemental disclosure of non-cash investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued to non-employee for settlement of
Series B financing costs and for consulting services
|
|
|
|
|
|
|
|
|
|
|
178
|
|
Issuance of restricted stock in connection with acquisition of
Enira Technologies, LLC
|
|
|
|
|
|
|
|
|
|
|
808
|
|
Common stock issued upon conversion of preferred stock
|
|
|
|
|
|
|
26,758
|
|
|
|
|
|
Common stock issued for acquisition
|
|
|
|
|
|
|
|
|
|
|
1,538
|
|
Property and equipment acquired under capital lease
|
|
|
101
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
66
ARCSIGHT,
INC.
|
|
1.
|
Description
of Business
|
ArcSight, Inc. (ArcSight or the Company)
is a leading provider of compliance and security management
solutions that protect enterprises and government agencies. The
Company helps customers comply with corporate and regulatory
policy, safeguard their assets and processes and control risk.
The Companys platform collects and correlates user
activity and event data across the enterprise so that businesses
can rapidly identify, prioritize and respond to compliance
violations, policy breaches, cybersecurity attacks and insider
threats. The Companys ESM products correlate massive
numbers of events from thousands of security point solutions,
network and computing devices and applications, enabling
intelligent identification, prioritization and response to
external threats, insider threats and compliance and corporate
policy violations. The Company also provides complementary
software that delivers pre-packaged analytics and reports
tailored to specific compliance and security initiatives, as
well as appliances that streamline event log archiving. The
Company is headquartered in Cupertino, California, and was
incorporated on May 3, 2000 under the laws of the state of
Delaware.
Initial
Public Offering
In February 2008, the Company completed an initial public
offering (IPO), in which it sold
6,000,000 shares of common stock, at an issue price of
$9.00 per share. The Company raised a total of
$54.0 million in gross proceeds from the IPO, or
$45.9 million in net proceeds after deducting
underwriters discounts of $3.8 million and other
offering expenses of $4.3 million. Upon the completion of
the IPO, all shares of convertible preferred stock outstanding
automatically converted into 14,000,441 shares of common
stock.
|
|
2.
|
Significant
Accounting Policies
|
Basis
of Presentation and Consolidation
The accompanying audited consolidated financial statements
include the accounts of the Company and its wholly-owned
subsidiaries. All significant inter-company transactions have
been eliminated on consolidation. Certain amounts in the
consolidated financial statements for prior periods have been
reclassified to conform to the current presentation.
On November 20, 2007, the Board of Directors and the
Companys stockholders approved a
1-for-4
reverse stock split of the Companys outstanding shares of
common stock and convertible preferred stock (the Reverse
Split). All authorized, reserved, issued and outstanding
common stock, convertible preferred stock and per share amounts
contained in these notes and the accompanying consolidated
financial statements have been retroactively adjusted to reflect
the Reverse Split.
On June 2, 2006, the Company completed the acquisition of
substantially all of the assets of Enira Technologies, LLC
(Enira), a privately-held provider of solutions for
responding to network security compromises. The accompanying
consolidated financial statements include the combined activity
since the date of the acquisition.
Use of
Estimates
The preparation of financial statements in conformity with
U.S. generally accepted accounting principles 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 as well as the reported amounts of revenues and
expenses during the reporting period. The Company bases its
estimates and judgments on its historical experience, knowledge
of current conditions, and its beliefs on what could occur in
the future, given available information. Estimates, assumptions
and judgments, are used for, but are not limited to, revenue
recognition, determination of fair value of stock and
stock-based awards, valuation of goodwill and intangible assets
acquired in business combinations, impairment of goodwill and
other intangible assets, amortization of intangible assets,
contingencies and litigation, accounting for income taxes and
uncertain tax positions, allowances
67
ARCSIGHT,
INC.
Notes to
Consolidated Financial
Statements (Continued)
for doubtful accounts, valuations of cash equivalents, and
accrued liabilities. Actual results may differ from those
estimates, and such differences may be material to the financial
statements.
Cash
and Cash Equivalents
The Company maintains its cash and cash equivalents in accounts
with high-credit quality financial instruments. The Company
considers all highly liquid investments purchased with a
maturity of three months or less at the date of purchase to be
cash equivalents. The Companys cash equivalents consist of
money market accounts on deposit with one primary bank and are
stated at cost, which approximates fair value.
Fair
Value of Financial Instruments
The carrying amounts of cash equivalents, restricted cash, trade
accounts receivable, accounts payable, and other accrued
liabilities approximate their respective fair values due to the
relatively short-term maturities. The carrying amounts of
derivative financial instruments approximate their respective
fair values due to adjusting these investments to their
respective market values each reporting period.
Foreign
Currency Translation/Transactions
The functional currency of the Companys foreign
subsidiaries is the local currency. Adjustments resulting from
translating foreign functional currency financial statements
into U.S. dollars are recorded as a separate component of
accumulated other comprehensive income (loss). Income and
expense accounts are translated into U.S. dollars at
average rates of exchange prevailing during the periods
presented. All assets and liabilities denominated in a foreign
currency are translated into U.S. dollars at the exchange
rates in effect on the balance sheet dates.
Net foreign currency transaction losses of approximately
$0.1 million, $0.1 million and $0.2 million, for
fiscal 2009, 2008 and 2007, respectively, were primarily the
result of the settlement of inter-company transactions and are
included in other expense.
Derivative
Financial Instruments
The majority of the Companys sales are denominated in
United States dollars; however, there are some sales
transactions denominated in foreign currencies. In addition, the
Companys foreign subsidiaries pay their expenses in local
currency. Therefore, movements in exchange rates could cause net
sales and expenses to fluctuate, affecting the Companys
profitability and cash flows. The Companys general
practice is to use foreign currency forward contracts to reduce
its exposure to foreign currency exchange rate fluctuations.
Unrealized gains and losses associated with these foreign
currency contracts are reflected in the Companys balance
sheet and recorded in prepaid expenses and other current assets
or accrued expenses and other current liabilities. Changes in
fair value and premiums paid for foreign currency contracts are
recorded directly in other income and expense in the
consolidated statements of operations. Cash flows from such
derivatives are classified as operating activities. The
objective of these contracts is to reduce the impact of foreign
currency exchange rate movements on the Companys operating
results. During fiscal 2009, 2008 and 2007, the Company
considered the net results of the use of foreign currency
forward contracts to be an effective mechanism to minimize the
fluctuations and movements in exchange rates that affect the
Companys profitability and cash flows. All of the
Companys foreign currency forward contracts mature within
12 months from the balance sheet date. The Company does not
use derivatives for speculative or trading purposes, nor does
the Company designate its derivative instruments as hedging
instruments, as defined by the Financial Accounting Standard
Board (FASB) under Statement of Financial Accounting
Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities
(SFAS 133).
68
ARCSIGHT,
INC.
Notes to
Consolidated Financial
Statements (Continued)
Concentration
of Credit Risk and Business Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash
equivalents and accounts receivable. The Company is exposed to
credit risk in the event of default by the primary financial
institution holding its cash and cash equivalents to the extent
recorded on its balance sheet. Risks associated with cash
equivalents are mitigated by banking with high-credit quality
institutions. Such deposits may be in excess of insured limits.
Management believes that the financial institutions that hold
the Companys investments are financially sound and,
accordingly, minimal credit risk exists with respect to these
investments. To date, the Company has not experienced any losses
on its cash and cash equivalents. The Company performs periodic
evaluations of the relative credit standing of these financial
institutions.
The Company sells its products and maintenance and services
directly to customers or through resellers in Asia Pacific,
Europe, the Middle East and Africa (collectively,
EMEA) and the Americas, with the majority of its
sales in the United States. The Company monitors its exposure
within accounts receivable and records an allowance against
doubtful accounts as necessary. The Company performs ongoing
credit evaluations of its customers and extends credit in the
normal course of business and generally does not require
collateral. Historically, the Company has not experienced
significant credit losses on its accounts receivable. Management
believes that any risk of loss for trade receivables is
mitigated by the Companys ongoing credit evaluations of
its customers.
No customer or reseller accounted for more than 10% of total
revenues for fiscal 2009, 2008 or 2007. As of April 30,
2009, the Company had two customers with accounts receivable
balances greater than 10% of the Companys net accounts
receivable, with balances of 17% and 11% of net accounts
receivable. As of April 30, 2008, the Company had two
customers with accounts receivable balances greater than 10% of
the Companys net accounts receivable, with balances of 25%
and 15% of net accounts receivable. In fiscal 2009, 2008 and
2007, the Company derived 22%, 20% and 32% of our revenues,
respectively, from contracts with agencies of the
U.S. federal government.
The majority of the Companys revenues are derived from
sales of the ESM product and related products and services, and
the Company expects this to continue for the foreseeable future.
As a result, although the Company has introduced complementary
appliance products in fiscal 2009, 2008 and 2007 for which the
Company uses a single source for manufacturing and fulfillment,
the Companys revenues and operating results will continue
to depend significantly on the demand for the ArcSight ESM
product. Demand for ArcSight ESM is affected by a number of
factors, some of which are beyond the Companys control,
including the timing of development and release of new products
by the Company and its competitors, technological change,
lower-than-expected growth or a contraction in the worldwide
market for enterprise compliance and security management
solutions and other risks. If the Company is unable to continue
to meet customer demands or achieve more widespread market
acceptance of ArcSight ESM, its business, operating results,
financial condition and growth prospects will be adversely
affected.
Revenue
Recognition
The Company derives its revenues from three sources:
(1) sales of software licenses and related appliances
(products); (2) fees for maintenance to provide
unspecified upgrades and customer technical support
(maintenance); and (3) fees for services, which
includes services performed in connection with
time-and-materials
based consulting agreements (services).
For all sales, revenues are subject to the guidance and
requirements of American Institute of Certified Public
Accountants (AICPA) Statement of Position
(SOP)
No. 97-2,
Software Revenue Recognition
(SOP 97-2),
as amended by
SOP No. 98-9,
Software Revenue Recognition with Respect to Certain
Arrangements
(SOP 98-9).
The Company enters into software license agreements through
direct sales to customers and through resellers. The license
agreements include post-contract customer support and may
include professional services deliverables. Post-contract
customer support includes rights to receive unspecified software
product updates and upgrades,
69
ARCSIGHT,
INC.
Notes to
Consolidated Financial
Statements (Continued)
maintenance releases and patches released during the term of the
support period, and Internet and telephone access to technical
support personnel and content. Professional services include
installation and implementation of the Companys software,
staffing and management services for customer security operation
centers, and customer training. Professional services are not
essential to the functionality of the associated licensed
software.
For all sales, revenues attributable to an element in a customer
arrangement are recognized when persuasive evidence of an
arrangement exists and delivery has occurred, provided the fee
is fixed or determinable and collectibility is reasonably
assured.
The Company typically uses a binding purchase order in
conjunction with either a signed contract or reference on the
purchase order to the terms and conditions of the Companys
shrinkwrap or end-user license agreement as evidence of an
arrangement. In circumstances where the customer does not issue
purchase orders separate from a signed contract, the Company
uses the signed contract as evidence of the arrangement. Sales
through its significant resellers are evidenced by a master
agreement governing the relationship.
Resellers and systems integrators purchase products for specific
end users and do not hold inventory. Resellers and systems
integrators perform functions that include delivery to the end
customer, installation or integration and post-sales service and
support. The agreements with these resellers and systems
integrators have terms that are generally consistent with the
standard terms and conditions for the sale of the Companys
products and services to end users and do not provide for
product rotation or pricing allowances. For sales to direct
end-users, resellers and systems integrators, the Company
recognizes product revenue upon transfer of title and risk of
loss, which is generally upon shipment, provided all other
criteria for revenue recognition have been met. Where sales are
made through resellers, revenue is generally recorded only upon
shipment to the end-users, when all other criteria for revenue
recognition have been met. In a limited number of instances,
where delivery is to be made to a reseller upon the request of
either the end-user or the reseller, and all other criteria for
revenue recognition have been met, it is the Companys
practice to recognize revenue on shipment to a reseller but only
where an end-user has been identified prior to shipment. For
end-users, resellers and system integrators, the Company
generally has no significant obligations for future performance
such as rights of return or pricing credits.
At the time of each transaction, the Company assesses whether
the fees associated with the transaction are fixed or
determinable. If a significant portion of a fee is due after the
Companys normal payment terms, currently up to three
months (payment terms beyond three months are considered to be
extended terms), or if as a result of customer acceptance
provisions, the price is subject to refund or forfeiture,
concession or other adjustment, then the Company considers the
fee to not be fixed or determinable. In the limited instances in
which these cases occur, revenues are deferred and recognized
when payments become due and payable, or the right to refund or
forfeiture, concession or adjustment, if any, lapses upon
customer acceptance.
The Company assesses whether collection is reasonably assured
based on a number of factors including the creditworthiness of
the customer as determined by credit checks and analysis, past
transaction history, geographic location and financial
viability. The Company generally does not require collateral
from customers. If the determination is made at the time of the
transaction that collection of the fee is not reasonably
assured, then all of the related revenues are deferred until the
time that collection becomes reasonably assured, which in some
cases requires the collection of cash prior to recognition of
the related revenues.
The Company uses shipping documents, contractual terms and
conditions and customer acceptance, when applicable, to verify
delivery to the customer. For software license fees in
arrangements that do not include customization, or services that
are not considered essential to the functionality of the
licenses, delivery is deemed to occur when the product is
delivered to the customer. Services and consulting arrangements
that are not essential to the functionality of the licensed
product are recognized as revenues as these services are
provided. Delivery of maintenance agreements is considered to
occur on a straight-line basis ratably over the life of the
contract, typically 12 months.
70
ARCSIGHT,
INC.
Notes to
Consolidated Financial
Statements (Continued)
Vendor-specific objective evidence of fair value
(VSOE) for maintenance and support services is based
on separate sales
and/or
renewals to other customers or upon renewal rates quoted in
contracts when the quoted renewal rates are deemed substantive
in both rate and term. VSOE for professional services is
established based on prices charged to customers when such
services are sold separately. For deliverables and multiple
element arrangements subject to
SOP 97-2,
as amended by
SOP 98-9,
when VSOE exists for all of the undelivered elements of the
arrangement, but does not exist for the delivered elements in
the arrangement, the Company recognizes revenues under the
residual method. Under the residual method, at the outset of the
arrangement with a customer, revenues are deferred for the fair
value of the undelivered elements and revenues are recognized
for the remainder of the arrangement fee attributable to the
delivered elements (typically products) when all of the
applicable criteria in
SOP 97-2
have been met. In the event that VSOE for maintenance services
does not exist, and this represents the only undelivered
element, revenues for the entire arrangement are recognized
ratably over the performance period. Revenues from maintenance
and support agreements are recognized on a straight-line basis
ratably over the life of the contract. Revenues from time-based
(term) license sales that include ongoing delivery obligations
throughout the term of the arrangement are recognized ratably
over the term because the Company does not have VSOE for the
undelivered elements.
Many of the Companys product contracts include
implementation and training services. When products are sold
together with consulting services, license fees are recognized
upon delivery, provided that (i) the criteria of software
revenue recognition have been met, (ii) payment of the
license fees is not dependent upon the performance of the
services, and (iii) the services do not provide significant
customization of the products and are not essential to the
functionality of the software that was delivered. The Company
does not typically provide significant customization of its
software products. These services are typically recognized on a
time-and-materials
basis.
The cost of providing the Companys products and
maintenance and services consists primarily of direct material
costs for products and the fully burdened cost of the
Companys service organization for maintenance and
services. Shipping and handling charges incurred and billed to
customers for product shipments are recorded in product revenue
and related cost of product revenues in the accompanying
Consolidated Statements of Operations. If it becomes probable
that the amount allocated to an undelivered element will result
in a loss on that element of the arrangement, the loss is
recognized pursuant to SFAS No. 5, Accounting
for Contingencies (SFAS 5).
Deferred revenues consist primarily of deferred product
revenues, deferred maintenance fees and deferred services fees.
Deferred revenues are recorded net of pre-billed services,
post-contract customer support billings for which the term has
not commenced and invoices for cash basis customers. Deferred
product revenues generally relate to product sales being
recognized ratably over the term of the licensing arrangement,
and, to a lesser extent, partial shipments when the Company does
not have VSOE for the undelivered elements and products that
have been delivered but await customer acceptance. Deferred
maintenance fees and consulting services generally relate to
payments for maintenance and consulting services in advance of
the time of delivery of services. These deferred amounts are
expected to be recognized as revenues based on the policy
outlined above.
Allowance
for Doubtful Accounts
The Company maintains an allowance for doubtful accounts for
potential future estimated losses resulting from the inability
or unwillingness of certain customers to make all of their
required payments. The allowance for doubtful accounts is based
on the Companys assessment of the collectibility of
customer accounts. The Company regularly reviews the allowance
by considering factors such as historical experience, credit
quality, the age of the accounts receivable balances, and
current economic conditions that may affect a customers
ability to pay. This assessment requires significant judgment.
When facts and circumstances indicate the collection of specific
amounts or from specific customers is at risk, the Company
assesses the impact on amounts recorded for bad debts and, if
necessary, records a charge in the period the determination is
made. If the financial condition of its customers or any of the
other factors the Company uses to analyze creditworthiness were
to worsen, additional allowances may be
71
ARCSIGHT,
INC.
Notes to
Consolidated Financial
Statements (Continued)
required, resulting in future operating losses that are not
included in the allowance for doubtful accounts as of
April 30, 2009.
The following describes activity in the allowance for doubtful
accounts for fiscal 2009, 2008 and 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Addition
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charged to
|
|
|
|
|
|
Balance at
|
|
|
|
Beginning of
|
|
|
Costs and
|
|
|
|
|
|
End of
|
|
Period
|
|
Period
|
|
|
Expenses
|
|
|
Deductions(1)
|
|
|
Period
|
|
|
2007
|
|
$
|
54
|
|
|
$
|
112
|
|
|
$
|
(43
|
)
|
|
$
|
123
|
|
2008
|
|
$
|
123
|
|
|
$
|
33
|
|
|
$
|
(23
|
)
|
|
$
|
133
|
|
2009
|
|
$
|
133
|
|
|
$
|
142
|
|
|
$
|
(13
|
)
|
|
$
|
262
|
|
|
|
|
(1) |
|
Uncollectible amounts written off, net of recoveries. |
Restricted
Cash
Restricted cash consists of a deposit in a money market account
amounting to $0.8 million as of April 30, 2009 and
2008 that is held to secure a standby letter of credit required
in connection with the operating lease for the Companys
headquarters in Cupertino, California, which is included in
other long-term assets on the Companys Consolidated
Balance Sheets.
Impairment
of Long-Lived Assets
Long-lived assets, such as property, plant and equipment and
acquired intangible assets subject to amortization, are reviewed
for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable in accordance with the provisions of
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (SFAS 144).
Among the factors and circumstances considered by management in
determining assessments of recoverability are: (i) a
significant decrease in the market price of a long-lived asset;
(ii) a significant adverse change in the extent or manner
in which a long-lived asset is being used or in its physical
condition; (iii) a significant adverse change in legal
factors or in the business climate that could affect the value
of a long-lived asset, including an adverse action or assessment
by a regulator; (iv) an accumulation of costs significantly
in excess of the amount originally expected for the acquisition
or construction of a long-lived asset; (v) current-period
operating or cash flow loss combined with a history of operating
or cash flow losses or a projection or forecast that
demonstrates continuing losses associated with the use of a
long-lived asset; and (vi) a current expectation that, more
likely than not, a long-lived asset will be sold or otherwise
disposed of significantly before the end of its previously
estimated useful life. Under SFAS 144, recoverability of
assets to be held and used is measured by a comparison of the
carrying amount of an asset to the estimated undiscounted future
cash flows expected to be generated by the asset. If the
carrying amount of an asset exceeds its estimated future cash
flows, an impairment charge is recognized in the amount by which
the carrying amount of the asset group exceeds the fair value of
the asset. There have been no indicators of impairment and no
impairment losses have been recorded by the Company in any
period presented.
Property
and Equipment, Net
Property and equipment are carried at cost, net of accumulated
depreciation and amortization. Depreciation is computed using
the straight-line method over the estimated useful lives of the
property and equipment typically ranging from two to five years.
Leasehold improvements are recorded at cost with any
reimbursement from the landlord being accounted for as an offset
to rent expense using the straight-line method over the lease
term. Leasehold improvements are amortized over the shorter of
the remaining operating lease term or the useful lives of the
assets.
72
ARCSIGHT,
INC.
Notes to
Consolidated Financial
Statements (Continued)
Business
Combinations
The Company accounts for business combinations in accordance
with SFAS No. 141, Business Combinations
(SFAS 141), which requires the purchase method
of accounting for business combinations. In accordance with
SFAS 141, the Company determines the recognition of
intangible assets based on the following criteria: (i) the
intangible asset arises from contractual or other rights; or
(ii) the intangible is separable or divisible from the
acquired entity and capable of being sold, transferred,
licensed, returned or exchanged. In accordance with
SFAS 141, the Company allocates the purchase price of its
business combinations to the tangible assets, liabilities and
intangible assets acquired based on their estimated fair values.
The excess purchase price over those fair values is recorded as
goodwill.
The Company must make valuation assumptions that require
significant estimates, especially with respect to intangible
assets. Critical estimates in valuing certain intangible assets
include, but are not limited to, future expected cash flows from
customer contracts, customer lists, distribution agreements and
discount rates. The Company estimates fair value based upon
assumptions the Company believes to be reasonable, but which are
inherently uncertain and unpredictable and, as a result, actual
results may differ from estimates.
Goodwill
Goodwill is not amortized, but rather it is periodically
assessed for impairment.
The Company tests goodwill for impairment annually on November 1
of each fiscal year, and more frequently if events merit. The
Company performs this fair-value based test in accordance with
SFAS No. 142, Goodwill and Other Intangible
Assets. Future goodwill impairment tests could result in a
charge to earnings.
Software
Development Costs
In accordance with SFAS No. 86, Accounting for
the Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed, costs incurred for the development of new
software products are expensed as incurred until technological
feasibility is established. Development costs are capitalized
beginning when a products technological feasibility has
been established and ending when the product is available for
general release to customers. Technological feasibility is
reached when the product reaches the beta stage using the
working model approach. To date, the period of time between the
establishment of a technologically feasible working model and
the subsequent general release of the product have been of a
relatively short duration of time and have resulted in
insignificant amounts of costs qualifying for capitalization for
all years presented. Thus, all software development costs have
been expensed as incurred in research and development expense.
Research
and Development Expenses
The Company expenses research and development expenses in the
period in which these costs are incurred.
Advertising
Expenses
Advertising costs are expensed as incurred. The Company incurred
$0.2 million, $0.2 million and $0.4 million in
advertising expenses for fiscal 2009, 2008 and 2007,
respectively.
Income
Taxes
The Company uses the liability method of accounting for income
taxes in accordance with SFAS No. 109 Accounting
for Income Taxes. The Company estimates income taxes in
each of the jurisdictions in which it operates. This process
involves determining income tax expense together with
calculating the deferred income tax expense related to temporary
differences resulting from the differing treatment of items for
tax and accounting purposes, such as deferred revenue or
deductibility of certain intangible assets which are recognized
for the
73
ARCSIGHT,
INC.
Notes to
Consolidated Financial
Statements (Continued)
estimated future tax consequences attributable to differences
between the consolidated financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Deferred tax assets are recognized for deductible temporary
differences, along with net operating loss carry-forwards, if it
is more likely than not that the tax benefits will be realized.
To the extent a deferred tax asset cannot be recognized under
the preceding criteria, a valuation allowance is established.
Deferred tax assets and liabilities are measured using tax rates
currently in effect for the year in which those temporary
differences are expected to be recovered or settled. These
temporary differences result in deferred tax assets and
liabilities. To the extent a deferred tax asset cannot be
recognized under the preceding criteria, a valuation allowance
is established. Changes in these estimates may result in
significant increases or decreases to the Companys tax
provision in a period in which such estimates are charged, which
would affect net income.
The Company adopted FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an
interpretation of SFAS 109 (FIN 48),
on May 1, 2007. FIN 48 prescribes a recognition
threshold and measurement attributes for the financial statement
recognition and measurement of uncertain tax positions taken or
expected to be taken in a companys income tax return.
FIN 48 also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim
periods, disclosure and transition with respect to income tax
uncertainty. Management judgment is required to determine if the
weight of available evidence indicates that a tax position is
more likely than not to be sustained, as well as the largest
amount of benefit from each sustained position that is more
likely than not to be realized.
Stock-Based
Compensation Expense
Prior to May 1, 2006, the Company accounted for its
stock-based awards to employees using the intrinsic value method
prescribed in APB Opinion No. 25, Accounting for
Stock Issued to Employees (APB 25), and
related interpretations as permitted by SFAS No. 123,
Accounting for Stock-Based Compensation
(SFAS 123). Under the intrinsic value method,
compensation expense was measured on the date of the grant as
the difference between the deemed fair value of the
Companys common stock and the exercise or purchase price
multiplied by the number of stock options or restricted stock
awards granted. The Company amortizes deferred stock-based
compensation using the multiple option method as prescribed by
FASB Interpretation No. 28 Accounting for Stock
Appreciation Rights and Other Variable Stock Option Award
Plans (FIN 28) over the option vesting
period using an accelerated amortization schedule, which results
in amortization to expense over the grants vesting period,
which is generally four years. As such, the Company continued to
apply APB 25 in future periods to unvested equity awards
outstanding at the date of adoption of SFAS 123R that were
measured using the intrinsic value method. In addition, the
Company continued to amortize those awards granted prior to
May 1, 2006 using the multiple option method as prescribed
by FIN 28, as described above.
Effective May 1, 2006, the Company adopted the provisions
of SFAS No. 123(R) (revised 2004), Share-Based
Payment (SFAS 123R), using the
prospective-transition method. In accordance with
SFAS 123R, measurement and recognition of compensation
expense for all share-based payment awards made to employees and
directors beginning on May 1, 2006 is recognized based on
estimated fair values. SFAS 123R requires nonpublic
companies that used the minimum value method under SFAS 123
for either recognition or pro forma disclosures to apply
SFAS 123R using the prospective-transition method. In
addition, the Company continued to amortize those awards granted
prior to May 1, 2006 using the multiple option method as
prescribed by FIN 28, as described above. As of
April 30, 2009, amortization under the APB 25 minimum value
method is complete. In accordance with SFAS 123R, the
Company uses the Black-Scholes pricing model to determine the
fair value of the stock options on the grant dates for stock
awards made on or after May 1, 2006, and the Company
amortizes the fair value of share-based payments on a
straight-line basis.
The Companys 2007 Employee Stock Purchase Plan
(ESPP) became effective upon the effectiveness of
the IPO on February 14, 2008. The ESPP provides for
consecutive six-month offering periods, except for the first
such offering period which commenced on February 14, 2008
and ended on September 15, 2008. The ESPP is
74
ARCSIGHT,
INC.
Notes to
Consolidated Financial
Statements (Continued)
compensatory and results in compensation cost accounted for
under SFAS 123R. The Black-Scholes option pricing model is
used to estimate the fair value of rights to acquire stock
granted under the ESPP.
Comprehensive
Income (Loss)
The Company reports comprehensive income (loss) in accordance
with SFAS No. 130, Reporting Comprehensive
Income. Comprehensive income (loss) includes certain
unrealized gains and losses that are recorded as a component of
stockholders equity and excluded from the determination of
net income. The Companys accumulated other comprehensive
income (loss) consisted solely of cumulative currency
translation adjustments resulting from the translation of the
financial statements of its foreign subsidiaries. The tax
effects on the foreign currency translation adjustments have not
been significant.
Adoption
of New Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (SFAS 157).
SFAS 157 defines fair value, establishes a framework for
measuring fair value under generally accepted accounting
principles (GAAP) and expands disclosures about fair
value measurements. In February 2008, the FASB adopted FASB
Staff Position (FSP) on
SFAS No. 157-2,
Effective Date of FASB Statement No. 157
(FSP 157-2),
delaying the effective date of SFAS 157 for one year for
all non-financial assets and liabilities, except those that are
recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually), until
fiscal years beginning after November 15, 2008. The
remaining provisions of SFAS 157 are effective for fiscal
years beginning after November 15, 2007 and interim periods
within those fiscal years. On May 1, 2008, the Company
adopted SFAS 157, except as it applies to those
non-financial assets and liabilities as described in
FSP 157-2.
Non-recurring non-financial assets and non-financial liabilities
for which the Company has not applied the provisions of
SFAS 157 include those measured at fair value in goodwill
impairment tests and intangible assets measured at fair value
for impairment.
SFAS 157 clarifies that fair value is an exit price,
representing the amount that would be received to sell an asset
or paid to transfer a liability in an orderly transaction
between market participants. As such, fair value is a
market-based measurement that should be determined based on
assumptions that market participants would use in pricing an
asset or liability. SFAS 157 establishes a three-tier value
hierarchy, which prioritizes the inputs used in measuring fair
value as follows:
|
|
|
|
|
Level 1 observable inputs such as
unadjusted quoted prices in active markets for identical assets
and liabilities;
|
|
|
|
Level 2 observable inputs such as quoted
prices for similar assets and liabilities in active markets that
are observable either directly or indirectly; and
|
|
|
|
Level 3 unobservable inputs in which
there is little or no market data, which require the Company to
develop its own assumptions.
|
This hierarchy requires the Company to use observable market
data, when available, and to minimize the use of unobservable
inputs when determining fair value. A financial asset or
liabilitys classification within the hierarchy is
determined based on the lowest level input that is significant
to the fair value measurement. On a recurring basis, the Company
measures certain financial assets, comprised of money market
accounts, at fair value based on Level 1 inputs. In
accordance with SFAS No. 107, Disclosures about
Fair Value of Financial Instruments
(SFAS 107), the Company is required to measure
and disclose the fair value of outstanding financial liabilities
on a recurring basis. The fair value of financial obligations
relating to the capital leases, based on quoted interest rates
(Level 2 inputs) for the remaining duration of the
liabilities, approximated their carrying value.
75
ARCSIGHT,
INC.
Notes to
Consolidated Financial
Statements (Continued)
In accordance with SFAS 157, the following table represents
the Companys fair value hierarchy for its financial assets
(cash and cash equivalents) and liabilities measured at fair
value on a recurring basis as of April 30, 2009 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Cash and cash equivalents
|
|
$
|
90,467
|
|
|
|
|
|
|
$
|
|
|
|
$
|
90,467
|
|
Restricted cash
|
|
|
842
|
|
|
|
|
|
|
|
|
|
|
|
842
|
|
Capital lease obligations
|
|
|
|
|
|
$
|
101
|
|
|
|
|
|
|
|
101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
91,309
|
|
|
$
|
101
|
|
|
$
|
|
|
|
$
|
91,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities (SFAS 159), including an
amendment of SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities, which
allows an entity to choose to measure certain financial
instruments and liabilities at fair value. Subsequent
measurements for the financial instruments and liabilities an
entity elects to measure at fair value will be recognized in
earnings. SFAS 159 also establishes additional disclosure
requirements. SFAS 159 is effective for fiscal years
beginning after November 15, 2007. On May 1, 2008, the
Company evaluated its existing financial instruments and
liabilities and elected not to adopt the fair value option on
its financial instruments. However, because the SFAS 159
election is based on an
instrument-by-instrument
election at the time the Company first recognizes an eligible
item or enters into an eligible firm commitment, the Company may
decide to exercise the option on new items when business reasons
support doing so in the future. As a result, SFAS 159 did
not have any impact on the Companys financial condition or
results of operations for the year ended April 30, 2009.
In October 2008, the FASB issued an FSP on
SFAS No. 157-3,
Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active
(FSP 157-3).
FSP 157-3
clarified the application of SFAS 157.
FSP 157-3
demonstrated how the fair value of a financial asset is
determined when the market for that financial asset is inactive.
FSP 157-3
was effective upon issuance, including prior periods for which
financial statements had not been issued. The implementation of
this standard did not have an impact on the Companys
consolidated results of operations, financial condition or cash
flows.
Recent
Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations (SFAS 141R)
which replaces SFAS No. 141. SFAS 141R
establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and
non-controlling interests in the acquiree and the goodwill
acquired, in connection with a business combination.
SFAS 141R also establishes disclosure requirements.
SFAS 141R is effective for fiscal years beginning after
December 15, 2008. The Company will adopt SFAS 141R at
the beginning of its 2010 fiscal year which is May 1, 2009.
The impact of SFAS 141R will depend on the nature, terms
and size of any acquisition the Company may consummate after the
effective date.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities an amendment of FASB Statement
No. 133 (SFAS 161). SFAS 161
changes the disclosure requirements for derivative instruments
and hedging activities. Entities are required to provide
enhanced disclosures about (a) how and why an entity uses
derivative instruments, (b) how derivative instruments and
related hedge items are accounted for under Statement 133 and
its related interpretations, and (c) how derivative
instruments and related hedged items affect an entitys
financial position, financial performance and cash flows.
SFAS 161 is effective for financial statements issued for
fiscal years and interim periods beginning after
November 15, 2008. The Company is currently evaluating the
potential impact, if any, of the adoption of SFAS 161, on
its consolidated financial disclosures.
76
ARCSIGHT,
INC.
Notes to
Consolidated Financial
Statements (Continued)
In April 2008, the FASB issued an FSP on
SFAS No. 142-3,
Determination of the Useful Life of Intangible
Assets
(FSP 142-3).
FSP 142-3
amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful
life of a recognized intangible asset under FASB Statement
No. 142, Goodwill and Other Intangible Assets
(Statement 142). The intent of
FSP 142-3
is to improve the consistency between the useful life of a
recognized intangible asset under Statement 142 and the period
of expected cash flows used to measure the fair value of the
asset under FASB Statement No. 141 (revised 2007),
Business Combinations, and other U.S. generally
accepted accounting principles.
FSP 142-3
is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and early adoption is
not permitted. The Company is currently evaluating the potential
impact, if any, of the adoption of
SFAS 142-3
on its consolidated results of operations, financial condition
or cash flows.
In May 2008, the FASB issued SFAS No. 162, The
Hierarchy of Generally Accepted Accounting Principles
(SFAS 162). SFAS 162 identifies the
sources of accounting principles and the framework for selecting
the principles used in the preparation of financial statements
of nongovernmental entities that are presented in conformity
with generally accepted accounting principles. SFAS 162
became effective for financial statements issued for fiscal
years and interim periods beginning after November 15,
2008. The adoption of SFAS 162 did not have a material
effect on the Companys consolidated results of operations,
financial condition or cash flows.
In February 2009, the FASB issued an FSP on
SFAS No. 141(R)-a, Accounting for Assets
Acquired and Liabilities Assumed in a Business Combination
(FSP 141R-a). FSP 141R-a amends the
provisions related to the initial recognition and measurement,
subsequent measurement and disclosure of assets and liabilities
arising from contingencies in a business combination under
SFAS 141R. FSP 141R-a establishes principles and
requirements for pre-acquisition contingencies and an
acquirees pre-existing contingent consideration
arrangement in a business combination measured under
SFAS 141R. In addition, FSP 141R-a requires separate
disclosure of recognized and unrecognized contingencies.
FSP 141R-a has the same effective date as SFAS 141R,
and is effective for fiscal years beginning after
December 15, 2008. The Company will adopt FSP 141R-a
at the beginning of its 2010 fiscal year which is May 1,
2009. The impact of FSP 141R-a will depend on the nature,
terms and size of any acquisition the Company may consummate
after the effective date.
|
|
3.
|
Net
Income (Loss) Per Common Share
|
On February 20, 2008, the closing date of the IPO, and
pursuant to the amended and restated certificate of
incorporation, all outstanding shares of convertible preferred
stock converted into an aggregate of 14,000,441 shares of
common stock. Additionally, in connection with the conversion of
the shares of convertible preferred stock, warrants to purchase
shares of convertible preferred stock and common stock were also
converted to a net 19,202 shares of common stock.
Basic and diluted net income (loss) per common share is computed
by dividing the net income (loss) attributable to common
stockholders for the period by weighted-average number of shares
of common stock outstanding during the period. Diluted net loss
per share is the same for fiscal 2008 and 2007 because the
potentially dilutive securities consisting of convertible
preferred stock, stock options, shares purchasable under
employee stock purchase plan, common stock subject to repurchase
and warrants would have had an anti-dilutive effect.
77
ARCSIGHT,
INC.
Notes to
Consolidated Financial
Statements (Continued)
The following table sets forth the computation of basic and
diluted net income (loss) per share (in thousands, except per
share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Numerator for basic and diluted net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
9,913
|
|
|
$
|
(2,009
|
)
|
|
$
|
(257
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares, net of weighted-average shares
subject to repurchase, used in computing net income (loss) per
common share-basic
|
|
|
31,233
|
|
|
|
25,936
|
|
|
|
10,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used above, basic
|
|
|
31,233
|
|
|
|
25,936
|
|
|
|
10,042
|
|
Stock options
|
|
|
2,266
|
|
|
|
|
|
|
|
|
|
Shares subject to repurchase
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net income (loss) per share:
|
|
|
33,550
|
|
|
|
25,936
|
|
|
|
10,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.32
|
|
|
$
|
(0.08
|
)
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.30
|
|
|
$
|
(0.08
|
)
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As the Company had a net loss for fiscal 2008 and fiscal 2007,
basic and diluted net loss per share are the same. The
weighted-average shares used in the computation of basic and
diluted net loss per share for the net loss periods are
presented net of shares subject to repurchase.
The following table sets forth the weighted-average number of
shares subject to potentially dilutive outstanding securities
(i.e., convertible preferred stock, common stock options, common
stock subject to repurchase and warrants) that were excluded
from the computation of diluted net income (loss) per share for
the periods presented because including them would have had an
anti-dilutive effect (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Convertible preferred stock (as converted)
|
|
|
|
|
|
|
11,046
|
|
|
|
13,984
|
|
Options to purchase common stock
|
|
|
1,354
|
|
|
|
2,484
|
|
|
|
2,519
|
|
Common stock subject to repurchase
|
|
|
|
|
|
|
153
|
|
|
|
353
|
|
Warrants to purchase common stock and convertible preferred
stock (as converted)
|
|
|
|
|
|
|
13
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,354
|
|
|
|
13,696
|
|
|
|
16,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.
|
Acquisition
of Enira Technologies, LLC
|
On June 2, 2006, the Company completed the acquisition of
substantially all of the assets of Enira Technologies, LLC
(Enira), a privately-held provider of solutions for
responding to network security compromises. Eniras core
product, Network Response, was an appliance-based solution that
speeds the time to threat remediation by automating the
error-prone and time-consuming network discovery and network
change/configuration tasks without altering an
organizations existing infrastructure. Through this
acquisition, the Company acquired the predecessor products to
its ArcSight TRM and ArcSight NCM appliance products.
78
ARCSIGHT,
INC.
Notes to
Consolidated Financial
Statements (Continued)
The acquisition was accounted for under the purchase method of
accounting in accordance with SFAS 141. Assets acquired and
liabilities assumed were recorded at their fair values as of
June 2, 2006.
The total purchase price of $8.7 million was comprised of
(in thousands):
|
|
|
|
|
Cash consideration for members of Enira
|
|
$
|
7,000
|
|
Fair value of common stock issued(1)
|
|
|
1,538
|
|
Acquisition-related costs(2)
|
|
|
209
|
|
|
|
|
|
|
Total consideration
|
|
$
|
8,747
|
|
|
|
|
|
|
|
|
|
(1) |
|
The members of Enira received $7.0 million in aggregate
cash consideration and 253,038 shares of the Companys
common stock. The fair value of the Companys shares issued
was based on a per share value of $6.08, which was equal to its
then deemed fair value. |
|
(2) |
|
The acquisition-related costs consist primarily of legal and
accounting fees and other directly related costs. |
The total purchase consideration was allocated to the assets and
liabilities acquired, including identifiable intangible assets
and assumed contractual obligations and related contingent
liabilities, based on their respective fair values at the
acquisition date and resulting in excess purchase consideration
over the net tangible liabilities and identifiable intangible
assets acquired of $5.7 million.
In connection with the Enira acquisition, 132,879 additional
shares of restricted common stock were issued to Enira employees
who accepted employment with the Company. These shares were
subject to a two-year vesting requirement based on continued
employment by these former Enira employees. The fair value of
these restricted shares amounted to $0.8 million and was
based on a per share value of $6.08. In accordance with Emerging
Issues Task Force Issue
No. 95-8,
Accounting for Contingent Consideration Paid to
Shareholders of an Acquired Enterprise in a Purchase Business
Combination, the total fair value of these shares was
accounted for as deferred compensation expense and was amortized
on a straight-line basis over the term of the required
post-combination services, which was completed in June 2008. For
fiscal 2009, 2008 and 2007 the related compensation expense
amounted to approximately $34,000, $0.4 million and
$0.4 million, respectively.
The following condensed balance sheet data presents the
respective fair values of the assets and liabilities acquired
(in thousands):
|
|
|
|
|
Accounts receivable
|
|
$
|
67
|
|
Inventory
|
|
|
32
|
|
Other assets
|
|
|
15
|
|
Goodwill
|
|
|
5,746
|
|
Intangible assets
|
|
|
3,210
|
|
Liabilities
|
|
|
(323
|
)
|
|
|
|
|
|
Total
|
|
$
|
8,747
|
|
|
|
|
|
|
79
ARCSIGHT,
INC.
Notes to
Consolidated Financial
Statements (Continued)
The estimated fair value of identified intangible assets and the
useful lives assigned to them at the time of acquisition are as
follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Useful Lives
|
|
|
|
Purchase Price
|
|
|
in Years
|
|
|
Core and developed technologies
|
|
$
|
1,970
|
|
|
|
5.00
|
|
Customer installed-base relationships
|
|
|
80
|
|
|
|
6.00
|
|
Employee non-compete agreements
|
|
|
1,160
|
|
|
|
5.00
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The excess of the purchase price over the fair value of the net
tangible and identifiable intangible assets was recorded as
goodwill, and is deductible for federal tax purposes.
Acquired intangible assets other than goodwill are amortized
over their respective estimated useful lives to match the
amortization to the benefits received. The total amortization
expense related to intangible assets was $0.8 million,
$0.6 million and $0.5 million for fiscal 2009, 2008
and 2007, respectively.
The gross carrying amount and net book value of goodwill and
intangible assets as of April 30, 2009 and 2008 are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of April 30, 2009
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Core and developed technologies
|
|
$
|
1,970
|
|
|
$
|
(960
|
)
|
|
$
|
1,010
|
|
Customer installed-base relationships
|
|
|
80
|
|
|
|
(53
|
)
|
|
|
27
|
|
Employee non-compete agreements
|
|
|
1,160
|
|
|
|
(878
|
)
|
|
|
282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,210
|
|
|
$
|
(1,891
|
)
|
|
$
|
1,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
$
|
5,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of April 30, 2008
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Core and developed technologies
|
|
$
|
1,970
|
|
|
$
|
(434
|
)
|
|
$
|
1,536
|
|
Customer installed-base relationships
|
|
|
80
|
|
|
|
(37
|
)
|
|
|
43
|
|
Employee non-compete agreements
|
|
|
1,160
|
|
|
|
(578
|
)
|
|
|
582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,210
|
|
|
$
|
(1,049
|
)
|
|
$
|
2,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
$
|
5,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There was no impairment of goodwill or intangible assets in
fiscal 2009 or 2008.
80
ARCSIGHT,
INC.
Notes to
Consolidated Financial
Statements (Continued)
As of April 30, 2009, future estimated amortization costs
per year for the Companys existing intangible assets other
than goodwill are estimated as follows (in thousands):
|
|
|
|
|
|
|
Estimated
|
|
|
|
Amortization
|
|
Fiscal Year Ending April 30:
|
|
Expense
|
|
|
2010
|
|
$
|
889
|
|
2011
|
|
|
425
|
|
2012
|
|
|
5
|
|
|
|
|
|
|
Total
|
|
$
|
1,319
|
|
|
|
|
|
|
Property
and Equipment, Net
Property and equipment consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Computers and equipment
|
|
$
|
7,064
|
|
|
$
|
6,135
|
|
Furniture and fixtures
|
|
|
1,072
|
|
|
|
1,071
|
|
Software
|
|
|
788
|
|
|
|
754
|
|
Leasehold improvements
|
|
|
2,337
|
|
|
|
2,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,261
|
|
|
|
10,040
|
|
Less: accumulated depreciation and amortization
|
|
|
(6,845
|
)
|
|
|
(5,206
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
4,416
|
|
|
$
|
4,834
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense was $2.1 million, $1.6 million
and $1.0 million for fiscal 2009, 2008 and 2007,
respectively. Amortization expense was $0.4 million,
$0.3 million and $0.4 million for fiscal 2009, 2008
and 2007, respectively.
Accrued
Compensation and Benefits
Accrued compensation and benefits consist of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
As of April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Accrued bonus
|
|
$
|
5,441
|
|
|
$
|
4,621
|
|
Accrued commissions
|
|
|
2,807
|
|
|
|
3,997
|
|
Accrued vacation
|
|
|
2,273
|
|
|
|
1,804
|
|
Accrued payroll taxes
|
|
|
667
|
|
|
|
672
|
|
Accrued ESPP
|
|
|
346
|
|
|
|
600
|
|
Other compensation and benefits
|
|
|
137
|
|
|
|
170
|
|
|
|
|
|
|
|
|
|
|
Total accrued compensation and benefits
|
|
$
|
11,671
|
|
|
$
|
11,864
|
|
|
|
|
|
|
|
|
|
|
81
ARCSIGHT,
INC.
Notes to
Consolidated Financial
Statements (Continued)
Deferred
Revenues
Deferred revenues consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Deferred product revenues
|
|
$
|
9,786
|
|
|
$
|
13,627
|
|
Deferred maintenance revenues
|
|
|
32,408
|
|
|
|
24,256
|
|
Deferred services revenues
|
|
|
2,854
|
|
|
|
3,383
|
|
|
|
|
|
|
|
|
|
|
Total deferred revenues
|
|
|
45,048
|
|
|
|
41,266
|
|
Less deferred revenues, current portion
|
|
|
(36,160
|
)
|
|
|
(36,512
|
)
|
|
|
|
|
|
|
|
|
|
Deferred revenues, non-current
|
|
$
|
8,888
|
|
|
$
|
4,754
|
|
|
|
|
|
|
|
|
|
|
|
|
6.
|
Commitments
and Contingencies
|
The Company and its subsidiaries operate from leased premises in
the United States, Asia Pacific and Europe with lease periods
expiring through fiscal 2014. In April 2007, the Company entered
into a lease extension through October 2013, and added
additional office space to the lease for the corporate
headquarters. This lease agreement includes a rent escalation
clause of 4% per annual lease term through expiration in October
2013. The lease agreement includes leasehold improvement
allowances in the amount of $0.7 million which is recorded
as deferred rent and amortized as reductions to rent expense on
a straight line basis over the remainder of the lease term. The
lease agreement also includes a renewal period at the
Companys option for an additional 5 years at the then
current fair market rate. The Company recognizes expense for
scheduled rent increases on a straight-line basis over the lease
term beginning with the date the Company takes possession of the
leased space.
Future minimum lease payments under the Companys
noncancelable operating leases as of April 30, 2009 are as
follows (in thousands):
|
|
|
|
|
|
|
Amount of
|
|
Fiscal Year Ending April 30:
|
|
Payments
|
|
|
2010
|
|
$
|
2,196
|
|
2011
|
|
|
1,988
|
|
2012
|
|
|
2,068
|
|
2013
|
|
|
2,151
|
|
2014
|
|
|
1,118
|
|
|
|
|
|
|
Total future minimum lease payments
|
|
$
|
9,521
|
|
|
|
|
|
|
Rent expense under all operating leases was approximately
$3.5 million, $2.2 million and $0.9 million for
fiscal 2009, 2008 and 2007, respectively.
|
|
7.
|
Indemnification
and Warranties
|
The Company from time to time enters into certain types of
contracts that contingently require it to indemnify various
parties against claims from third parties. These contracts
primarily relate to (i) certain real estate leases under
which the Company may be required to indemnify property owners
for environmental and other liabilities and other claims arising
from the Companys use of the applicable premises,
(ii) the Companys bylaws, under which it must
indemnify directors and executive officers, and may indemnify
other officers and employees, for liabilities arising out of
their relationship, (iii) contracts under which the Company
must indemnify directors and certain officers for liabilities
arising out of their relationship, (iv) contracts under
which the Company may be required to indemnify customers or
resellers against third-party claims, including claims that a
Company product infringes a
82
ARCSIGHT,
INC.
Notes to
Consolidated Financial
Statements (Continued)
patent, copyright or other intellectual property right, and
(v) procurement, consulting, partner or license agreements
under which the Company may be required to indemnify vendors,
consultants, partners or licensors for certain claims, including
claims that may be brought against them arising from the
Companys acts or omissions with respect to the supplied
products or technology.
In the event that one or more of these matters were to result in
a claim against the Company, an adverse outcome, including a
judgment or settlement, may cause a material adverse effect on
the Companys future business, operating results or
financial condition. It is not possible to determine the maximum
potential amount under these indemnification agreements due to
the limited history of prior indemnification claims and the
unique facts and circumstances involved in each particular
agreement.
The Company maintains director and officer insurance, which may
cover certain liabilities arising from its obligation to
indemnify its directors. To date, the Company has not been
required to make any payment resulting from infringement claims
asserted against its customers and has not recorded any related
accruals.
The Company generally provides a warranty for its products and
services to its customers and accounts for its warranties under
SFAS 5. To date, the Companys product warranty
expense has not been significant. Accordingly, the Company has
not recorded a warranty reserve as of April 30, 2009 or
April 30, 2008.
Common
Stock
In February 2008, the Company completed an IPO of common stock
in which it sold 6,000,000 shares of common stock, at an
issue price of $9.00 per share. The Company raised a total of
$54.0 million in gross proceeds from the IPO, or
$45.9 million in net proceeds after deducting underwriting
discounts of $3.8 million and offering expenses of
$4.3 million. Upon the closing of the IPO, all shares of
convertible preferred stock outstanding automatically converted
into 14,000,441 shares of common stock.
Preferred
Stock
The Companys Board of Directors is authorized, subject to
limitations prescribed by Delaware law, to issue at its
discretion preferred stock in one or more series, to establish
from time to time the number of shares to be included in each
series and to fix the designation, powers, preferences and
rights of the shares of each series and any of such series
qualifications, limitations or restrictions. The Board of
Directors also can increase or decrease the number of authorized
shares of any series, but not below the number of shares of that
series then outstanding, without any further vote or action by
the Companys stockholders.
The following is a summary of the authorized, issued and
outstanding convertible preferred stock as of April 30,
2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Issued
|
|
|
Authorized
|
|
and
|
|
|
Shares
|
|
Outstanding
|
|
Undesignated
|
|
|
10,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83
ARCSIGHT,
INC.
Notes to
Consolidated Financial
Statements (Continued)
Common
Stock Reserved for Issuance
Number of shares of common stock reserved for future issuance is
as follows:
|
|
|
|
|
|
|
As of April 30, 2009
|
|
|
Options available for future grant under the 2007 Equity
Incentive Plan
|
|
|
4,520,099
|
|
Options outstanding under the stock option plans
|
|
|
6,940,996
|
|
Shares reserved for future issuance under the 2007 Employee
Stock Purchase Plan
|
|
|
941,736
|
|
|
|
|
|
|
Total shares reserved
|
|
|
12,402,831
|
|
|
|
|
|
|
Stock
Plans
2007 Equity Incentive Plan. In November 2007,
the Board of Directors and the Companys stockholders
approved the 2007 Equity Incentive Plan, which became effective
on the effective date of the Companys IPO on
February 14, 2008. A total of 4,569,015 shares of the
Companys common stock were originally authorized for
future issuance under the 2007 Equity Incentive Plan, including
shares that became available for grant upon the concurrent
termination of the Companys 2002 Stock Plan. In addition,
shares subject to outstanding grants under the Companys
2000 Stock Incentive Plan and the 2002 Stock Plan on
February 14, 2008, and any shares issued thereunder that
are forfeited or repurchased by the Company or that are issuable
upon exercise of options that expire or become unexercisable for
any reason without having been exercised in full, will be
available for grant and issuance under the 2007 Equity Incentive
Plan. An aggregate of 1,821,907 of such additional shares have
become available for grant and issuance under the 2007 Equity
Incentive Plan as of April 30, 2009. The number of shares
available for grant and issuance under the 2007 Equity Incentive
Plan will automatically increase on each January 1 of 2009
through 2012 by an amount equal to 4% of the Companys
shares outstanding on the immediately preceding
December 31, unless the Companys Board of Directors,
in its discretion, determines to make a smaller increase. In
January 2009, the Company registered with the SEC 1,260,416
additional shares of the Companys common stock to be
issuable under the 2007 Equity Incentive Plan pursuant to the
plans evergreen provision.
The 2007 Equity Incentive Plan provides for the grant of
options, which includes both incentive and nonqualified stock
options, restricted stock awards, stock appreciation rights,
restricted stock units, stock bonus awards and performance share
awards. Incentive stock options are granted under the 2007 Stock
Plan to employees at exercise prices not less than 100% of the
fair market value of such shares as determined by the
Companys Board of Directors as of the grant date (and not
less than 110% of such fair market value for grants to any
person who owns more than 10% of the total combined voting power
of all classes of outstanding stock of the Company as of the
grant date). Nonqualified stock options may be granted under the
2007 Stock Plan to employees, directors and service providers at
exercise prices that may be less than 100% of the closing fair
market value of the Companys common stock as quoted on the
NASDAQ Global Market on the day of grant at the Committees
discretion. Options granted under the 2007 Equity Incentive Plan
generally expire ten years from the date of grant and are
exercisable either (i) at any time after the date of grant
or (ii) as such stock options vest. Options granted
generally vest over four years. Shares issued upon exercise
prior to vesting are subject to a right of repurchase, which
lapses according to the vesting schedule of the original option.
The 2007 Equity Incentive Plan will terminate in February 2018,
unless it is terminated earlier by the Companys Board of
Directors.
2007 Employee Stock Purchase Plan. In November
2007, the Board of Directors and the Companys stockholders
approved the 2007 Employee Stock Purchase Plan, which became
effective on the effective date of the Companys IPO in
February 2008. A total of 1,000,000 shares of the
Companys common stock were originally authorized for
future issuance under the 2007 Employee Stock Purchase Plan. The
number of shares reserved for issuance under the Companys
2007 Employee Stock Purchase Plan will increase automatically on
January 1 of each of the first eight years commencing with 2009
by the number of shares equal to 1% of the Companys total
outstanding shares as of the immediately preceding December 31
(rounded to the nearest whole share). The Board
84
ARCSIGHT,
INC.
Notes to
Consolidated Financial
Statements (Continued)
of Directors or its compensation committee may reduce the amount
of the increase in any particular year. No more than
20,000,000 shares of the Companys common stock may be
issued under the 2007 Employee Stock Purchase Plan, and no other
shares may be added to this plan without the approval of the
Companys stockholders. In January 2009, the Company
registered 315,104 additional shares of the Companys
common stock to be issuable under the 2007 Employee Stock
Purchase Plan pursuant to the plans evergreen
provision.
The 2007 Employee Stock Purchase Plan is designed to enable
eligible employees to purchase shares of the Companys
common stock periodically at a discount, and is intended to
qualify as an employee stock purchase plan under
Section 423 of the Code. The Companys employees
generally will be eligible to participate in the 2007 Employee
Stock Purchase Plan if they are employed by the Company, or a
subsidiary or parent of the Company that the Company may
designate. Employees who are 5% stockholders, or would become 5%
stockholders as a result of their participation in the 2007
Employee Stock Purchase Plan, are not eligible to participate in
the 2007 Employee Stock Purchase Plan. Eligible employees may
acquire shares of the Companys common stock by
accumulating funds through payroll deductions, at selected rates
between 1% and 15% of their base salary or regular hourly wages.
The purchase price for shares of the Companys common stock
purchased under the 2007 Employee Stock Purchase Plan will be
85% of the lesser of the fair market value of the Companys
common stock on the first day of the offering period or the last
trading day of the applicable purchase period within that
offering period. For the initial offering period, the fair
market value on the first day of the offering period will be the
price at which the Companys shares are initially offered
in this offering. The 2007 Employee Stock Purchase Plan will
terminate on the tenth anniversary of the first purchase date
(as set forth in the plan), unless it is terminated earlier by
the Board of Directors. An employees participation will
automatically end upon termination of employment for any reason.
2002 Stock Plan. In March 2002, the Board of
Directors adopted the 2002 Stock Plan, as amended, and the
Companys stockholders approved the 2002 Stock Plan. A
total of 4,020,074 shares were originally authorized for
issuance under the 2002 Stock Plan. In addition,
93,940 shares were rolled over from the 2000 Stock
Incentive Plan, 18,911 shares were cancelled or repurchased
under the 2000 Stock Incentive Plan and the Board of Directors
authorized a net increase of an additional 5,964,807 shares
for issuance. The 2002 Stock Plan provides for either the award
of stock purchase rights or the grant of both incentive and
non-statutory stock options. Options have been granted under the
2002 Stock Plan to employees, directors and service providers at
exercise prices not less than 85% of the fair market value of
such shares as determined by the Companys Board of
Directors as of the grant date (and not less than 110% of such
fair market value for grants to any person who owns more than
10% of the total combined voting power of all classes of
outstanding stock of the Company as of the grant date). Options
granted under the 2002 Stock Plan generally expire ten years
from the date of grant and are exercisable either (i) at
any time after the date of grant or (ii) as such stock
options vest. Options granted under the 2002 Stock Plan
generally vest over four years. Shares issued upon exercise
prior to vesting are subject to a right of repurchase, which
lapses according to the vesting schedule of the original option.
The Company ceased granting awards under the 2002 Stock Plan
upon the implementation of the 2007 Equity Incentive Plan
described above.
2000 Stock Incentive Plan. The 2000 Stock
Incentive Plan provides for both the award of restricted stock
and the grant of both incentive and non-statutory stock options.
The Company ceased granting awards under the 2000 Stock
Incentive Plan upon the implementation of the 2002 Stock Plan
described above. These options generally expire ten years from
the date of grant and are exercisable at any time after the date
of grant. Options granted generally vest over four years. Shares
issued upon exercise prior to vesting are subject to a right of
repurchase, which lapses according to the vesting schedule of
the original option. The Company is not obligated to but has the
right to repurchase the vested shares at the fair market value
of the vested shares if the participants service is
terminated for any reason. The repurchase right terminated with
respect to the vested shares upon the first sale of common stock
of the Company to the general public pursuant to the
Companys IPO on February 14, 2008.
85
ARCSIGHT,
INC.
Notes to
Consolidated Financial
Statements (Continued)
Stock
Plan Activity
A summary of the option activity under the 2007 Equity Incentive
Plan, the 2002 Stock Plan and the 2000 Stock Incentive Plan
during fiscal 2009, 2008 and 2007, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Options
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
Shares
|
|
|
|
|
|
Exercise
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Available
|
|
|
Number of
|
|
|
Price
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
for Grant
|
|
|
Shares
|
|
|
per Share
|
|
|
Term (Years)
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Options outstanding as of April 30, 2006
|
|
|
780,876
|
|
|
|
4,279,979
|
|
|
|
2.34
|
|
|
|
|
|
|
|
|
|
Options authorized
|
|
|
2,591,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(2,208,347
|
)
|
|
|
2,208,347
|
|
|
|
6.87
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
|
|
|
|
(225,326
|
)
|
|
|
2.58
|
|
|
|
|
|
|
|
|
|
Options canceled
|
|
|
490,188
|
|
|
|
(490,188
|
)
|
|
|
3.66
|
|
|
|
|
|
|
|
|
|
Shares repurchased
|
|
|
21,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding as of April 30, 2007
|
|
|
1,675,840
|
|
|
|
5,772,812
|
|
|
|
3.95
|
|
|
|
8.31
|
|
|
$
|
31,003
|
|
Options authorized
|
|
|
4,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(1,731,313
|
)
|
|
|
1,731,313
|
|
|
|
9.78
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
|
|
|
|
(402,260
|
)
|
|
|
2.30
|
|
|
|
|
|
|
|
|
|
Options canceled
|
|
|
414,820
|
|
|
|
(414,820
|
)
|
|
|
6.10
|
|
|
|
|
|
|
|
|
|
Shares repurchased
|
|
|
6,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding as of April 30, 2008
|
|
|
4,366,192
|
|
|
|
6,687,045
|
|
|
|
5.43
|
|
|
|
7.89
|
|
|
|
15,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options authorized
|
|
|
1,260,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(1,752,950
|
)
|
|
|
1,752,950
|
|
|
|
7.73
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
|
|
|
|
(852,793
|
)
|
|
|
2.40
|
|
|
|
|
|
|
|
|
|
Options canceled
|
|
|
646,206
|
|
|
|
(646,206
|
)
|
|
|
8.42
|
|
|
|
|
|
|
|
|
|
Shares repurchased
|
|
|
235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding as of April 30, 2009
|
|
|
4,520,099
|
|
|
|
6,940,996
|
|
|
|
6.10
|
|
|
|
7.30
|
|
|
|
62,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest as of April 30, 2009, net of
anticipated forfeitures
|
|
|
|
|
|
|
5,518,092
|
|
|
|
6.10
|
|
|
|
7.30
|
|
|
|
49,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable as of April 30, 2009
|
|
|
|
|
|
|
3,810,499
|
|
|
|
4.56
|
|
|
|
6.56
|
|
|
|
40,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic values shown in the table above are
equal to the difference between the per share exercise price of
the underlying stock options and the fair value of the
Companys common stock as of the respective dates in the
table.
86
ARCSIGHT,
INC.
Notes to
Consolidated Financial
Statements (Continued)
The following table summarizes additional information regarding
outstanding options as of April 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Vested and Exercisable
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
Exercise
|
|
|
|
Number
|
|
|
Contractual
|
|
|
Number of
|
|
|
Price per
|
|
Exercise Price
|
|
Outstanding
|
|
|
Life (Years)
|
|
|
Shares
|
|
|
Share
|
|
|
$0.12-0.40
|
|
|
520,842
|
|
|
|
3.92
|
|
|
|
520,842
|
|
|
$
|
0.20
|
|
$0.48-0.80
|
|
|
815,801
|
|
|
|
5.69
|
|
|
|
815,801
|
|
|
|
0.73
|
|
$4.00
|
|
|
633,163
|
|
|
|
6.17
|
|
|
|
601,807
|
|
|
|
4.00
|
|
$4.74-5.98
|
|
|
341,600
|
|
|
|
9.56
|
|
|
|
|
|
|
|
|
|
$6.08-6.80
|
|
|
1,896,331
|
|
|
|
7.52
|
|
|
|
1,226,255
|
|
|
|
6.55
|
|
$7.17-8.95
|
|
|
1,290,272
|
|
|
|
7.97
|
|
|
|
69,554
|
|
|
|
8.05
|
|
$9.00-9.95
|
|
|
283,202
|
|
|
|
8.45
|
|
|
|
115,122
|
|
|
|
9.20
|
|
$10.00
|
|
|
1,084,585
|
|
|
|
8.43
|
|
|
|
461,118
|
|
|
|
10.00
|
|
$11.08-15.74
|
|
|
75,200
|
|
|
|
9.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
6,940,996
|
|
|
|
7.30
|
|
|
|
3,810,499
|
|
|
$
|
4.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intrinsic value of options exercised for fiscal 2009, 2008
and 2007 was $6.6 million, $3.0 million and
$1.0 million, respectively, determined at the date of
option exercise.
|
|
9.
|
Stock-Based
Compensation
|
During fiscal 2009, 2008 and 2007, the Company recorded
stock-based compensation as described below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Stock-based compensation under SFAS 123R
|
|
$
|
5,117
|
|
|
$
|
4,186
|
|
|
$
|
892
|
|
Stock-based compensation under prospective transition method for
option awards granted prior to the adoption of SFAS 123R
|
|
|
19
|
|
|
|
91
|
|
|
|
267
|
|
Amortization of restricted stock awards in connection with the
acquisition of Enira Technologies, LLC
|
|
|
34
|
|
|
|
404
|
|
|
|
370
|
|
Stock-based compensation under Employee Stock Purchase Plan
|
|
|
975
|
|
|
|
245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,145
|
|
|
$
|
4,926
|
|
|
$
|
1,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adoption
of SFAS 123R
On May 1, 2006, the Company adopted SFAS 123R, which
establishes standards for the accounting of transactions in
which an entity exchanges its equity instruments for goods or
services, primarily focusing on accounting for transactions
where an entity obtains employee services in stock-based payment
transactions. SFAS 123R requires the Company to measure the
cost of employee services received in exchange for an award of
equity instruments, including stock options, based on the
grant-date fair value of the award and to recognize it as
compensation expense over the period the employee is required to
provide service in exchange for the award, usually the vesting
period. SFAS 123R superseded the Companys previous
accounting under APB 25 beginning May 1, 2006.
The Company adopted SFAS 123R using the
prospective-transition method, which requires the application of
the accounting standard as of May 1, 2006, the first day of
fiscal 2007. The consolidated financial statements for
87
ARCSIGHT,
INC.
Notes to
Consolidated Financial
Statements (Continued)
fiscal 2009, 2008 and 2007, reflect the impact of
SFAS 123R. In accordance with the prospective-transition
method, the consolidated financial statements for prior periods
have not been restated to reflect, and do not include, the
impact of SFAS 123R.
Effective with the adoption of SFAS 123R, the fair value of
stock-based awards to employees is calculated using the
Black-Scholes option pricing model. The Black-Scholes model
requires, among other inputs, an estimate of the fair value of
the underlying common stock on the date of grant and assumptions
as to volatility of the Companys stock over the term of
the related options, the expected term of the options, the
risk-free interest rate and the option forfeiture rate. These
assumptions used in the pricing model are determined by the
Company at each grant date. As there was no public market for
the Companys common stock prior to the IPO, the Company
determined the volatility for options granted in fiscal periods
prior to the IPO, based on an analysis of reported data for a
peer group of companies that issued options with substantially
similar terms. Since the IPO, the expected volatility of options
granted has been determined using a combination of
weighted-average measures of the peer group of companies of the
implied volatility and the historical volatility for a period
equal to the expected life of the option, and the Companys
historical volatility. The expected life of options has been
determined considering the expected life of options granted by a
group of peer companies and the average vesting and contractual
term of the Companys options. The risk-free interest rate
is based on a zero coupon United States treasury instrument
whose term is consistent with the expected life of the stock
options. As the Company has not paid and does not anticipate
paying cash dividends on outstanding shares of common stock, the
expected dividend yield is assumed to be zero. In addition,
SFAS 123R requires companies to utilize an estimated
forfeiture rate when calculating the expense for the period,
whereas SFAS 123 permitted companies to record forfeitures
based on actual forfeitures, which was the Companys
historical policy under SFAS 123. The Company applied an
estimated annual forfeiture rate of 5%, based on its historical
forfeiture experience during the previous six years, in
determining the expense recorded in its consolidated statement
of operations.
SFAS 123R requires the cash flows resulting from the tax
benefits resulting from tax deductions in excess of the
compensation cost recognized for those options to be classified
as financing cash flows. For the fiscal year ended
April 30, 2009, the Company recorded excess tax benefits
resulting from tax deductions in excess of the compensation cost
recognized amounting to $1.3 million. Due to the
Companys historical loss position and current valuation
allowance, no tax benefits have been realized or recorded for
any of the prior periods presented. Prior to the adoption of
SFAS 123R those benefits would have been reported as
operating cash flows had the Company received any tax benefits
related to stock option exercises.
Valuation
and Expense Information under SFAS 123R
The weighted-average fair value calculations for options granted
within the period are based on the following weighted-average
assumptions set forth in the table below and assume no dividends
will be paid. Options that were granted in prior periods are
based on assumptions prevailing at the date of grant.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Risk-free interest rate
|
|
|
3.13
|
%
|
|
|
4.22
|
%
|
|
|
5.00
|
%
|
Expected volatility
|
|
|
52
|
%
|
|
|
55
|
%
|
|
|
66
|
%
|
Expected life (years)
|
|
|
5.74
|
|
|
|
5.25
|
|
|
|
5.25
|
|
Based on these calculations, the weighted-average fair value per
option granted to acquire a share of common stock was $3.96,
$5.17 and $4.20 per share for fiscal 2009, 2008 and 2007,
respectively. The compensation costs that have been included in
the Companys results of operations for these stock-based
compensation arrangements
88
ARCSIGHT,
INC.
Notes to
Consolidated Financial
Statements (Continued)
during fiscal 2009, 2008 and 2007 in accordance with
SFAS 123R, were as follows (in thousands, except per share
amount):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Cost of maintenance revenues
|
|
$
|
216
|
|
|
$
|
106
|
|
|
$
|
3
|
|
Cost of services revenues
|
|
|
142
|
|
|
|
115
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SFAS 123R expense included in cost of revenues
|
|
|
358
|
|
|
|
221
|
|
|
|
17
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
1,342
|
|
|
|
1,356
|
|
|
|
501
|
|
Sales and marketing
|
|
|
2,451
|
|
|
|
2,685
|
|
|
|
661
|
|
General and administrative
|
|
|
1,994
|
|
|
|
664
|
|
|
|
350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SFAS 123R expense included in operating expenses
|
|
|
5,787
|
|
|
|
4,705
|
|
|
|
1,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SFAS 123R expense included in net loss
|
|
$
|
6,145
|
|
|
$
|
4,926
|
|
|
$
|
1,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Because the amount of stock-based compensation associated with
the Companys cost of products is not significant, no
amounts have been capitalized for any of the periods presented.
On September 25, 2008, in connection with the impending
retirement and resignation of the Companys former CEO, and
in connection with his continued service as chairman of the
Companys Board of Directors, the Company agreed to
accelerate the vesting on certain of his existing stock option
grants to the extent that he continues as the chairman of the
Companys Board of Directors until September 30, 2009.
On March 16, 2009, The Companys former CEO, then the
chairman of the Companys Board of Directors, unexpectedly
resigned as chairman and as a member of the Board of Directors
due to a disability. In connection with his resignation, the
Company agreed to extend the exercise term to one full year from
standard post termination exercise terms of 30 day and
3 month terms on all stock option grants vested as of his
resignation date. As of April 30, 2009, the Company
recorded remaining and modified stock-based compensation expense
attributable to this termination and modification of grants of
approximately $36,000 for services provided through
March 16, 2009.
As of April 30, 2009 and 2008 there was $11.1 million
and $11.2 million, respectively, of total unrecognized
stock based compensation expenses under SFAS 123R, net of
estimated forfeitures, that the Company expects to amortize. As
of April 30, 2009 and 2008, respectively, total
unrecognized stock based compensation expenses related to
non-vested awards are expected to be recognized over a
weighted-average period of 2.61 and 2.87 years. The total
fair value of all shares vested during fiscal 2009 was
$5.5 million.
Employee
Stock Purchase Plan
In November 2007, the Board of Directors and the Companys
stockholders approved the 2007 Employee Stock Purchase Plan (the
ESPP), which became effective upon the
Companys IPO on February 14, 2008. A total of
1,315,104 shares of the Companys common stock have
been reserved for issuance under the ESPP since inception,
including the annual increase in January 2009 pursuant to its
evergreen provision. Under the ESPP, employees may
purchase shares of common stock at a price that is 85% of the
lesser of the fair market value of the Companys common
stock as of beginning or the end of each offering period. The
ESPP provides for consecutive offering periods of six months
each, except for the first such offering period which commenced
on February 14, 2008 and will end on September 15,
2008.
In fiscal 2009, 373,368 shares were purchased under the
ESPP at a weighted average purchase price per share of $7.37.
Total cash proceeds from the purchase of shares under the ESPP
was $2.8 million. As of April 30, 2009 there was an
aggregate of 941,736 shares of common stock available for
issuance pursuant to future rights to acquire stock under the
ESPP.
89
ARCSIGHT,
INC.
Notes to
Consolidated Financial
Statements (Continued)
The ESPP is compensatory and results in compensation cost
accounted for under SFAS 123R. The Black-Scholes option
pricing model is used to estimate the fair value of rights to
acquire stock granted under the ESPP. The weighted-average fair
value calculations for rights to acquire stock under the ESPP
within the periods presented are based on the following
weighted-average assumptions set forth in the table below,
assuming no dividends will be paid, and based on assumptions
prevailing as of the enrollment dates of the offering periods.
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Risk-free interest rate
|
|
|
1.32
|
%
|
|
|
2.11
|
%
|
Expected volatility
|
|
|
61
|
%
|
|
|
53
|
%
|
Expected term (years)
|
|
|
0.52
|
|
|
|
0.58
|
|
Based on these calculations, the weighted-average fair value per
right to acquire shares of common stock was $3.24 and $2.77 per
share for fiscal 2009 and 2008, respectively. For the year ended
April 30, 2009 and 2008, the Company recorded stock-based
compensation expense associated with its ESPP of
$1.0 million and $0.2 million, respectively. As of
April 30, 2009 there was $0.4 million of total
unrecognized compensation expenses under SFAS 123R, net of
expected forfeitures, related to common stock purchase rights
that the Company expects to amortize over the remaining offering
period ending September 15, 2009.
APB 25
Intrinsic Value Charges
Given the absence of an active market for the Companys
common stock prior to the Companys IPO on
February 14, 2008, the Companys Board of Directors
historically determined the fair value of the Companys
common stock in connection with the Companys grant of
stock options and stock awards. The Companys Board of
Directors made such determinations based on the business,
financial and venture capital experience of the individual
directors along with input from management. In January 2006, the
Company engaged Financial Strategies Consulting Group, an
unrelated third-party valuation firm as described by AICPA
Practice Aid Valuation of Privately-Held Company Equity
Securities Issued as Compensation, to advise the Board of
Directors in determining the fair value of its common stock.
As a result of managements reassessment of the fair value
of the Companys common stock at the grant dates of options
granted to purchase common stock in fiscal 2004 and 2005,
deferred stock compensation was recorded for the excess of the
fair value of the common stock underlying the options at the
grant date over the exercise price of the options. These amounts
were amortized on an accelerated basis over the vesting period,
generally four years, consistent with the method described in
FIN 28. Amortization of the deferred compensation was
$19,000, $0.1 million and $0.3 million for fiscal
2009, 2008 and 2007, respectively. All options granted in and
after fiscal 2006 were issued with exercise prices equal to the
fair value. Amortization of deferred compensation is considered
complete as of April 30, 2009.
Restricted
Stock Awards for Enira Acquisition
In connection with the acquisition of Enira Technologies, LLC,
132,879 shares of restricted common stock that were subject
to two-year vesting were issued. See Note 4
Acquisition of Enira Technologies, LLC. During
fiscal 2009 and 2008, 66,438 and 66,441 of such shares vested,
respectively. No such shares vested in fiscal 2007. As of
April 30, 2009, all shares of restricted common stock had
vested.
The Company operates in one industry segment selling compliance
and security management solutions.
90
ARCSIGHT,
INC.
Notes to
Consolidated Financial
Statements (Continued)
SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, establishes standards
for reporting information about operating segments. Operating
segments are defined as components of an enterprise for which
separate financial information is available and is evaluated
regularly by the chief operating decision maker, or decision
making group, in deciding how to allocate resources and in
assessing performance. The Companys chief operating
decision maker is the Chief Executive Officer (CEO).
The CEO reviews financial information presented on a
consolidated basis for evaluating financial performance and
allocating resources. There are no segment managers who are held
accountable for operations below the consolidated financial
statement level. Accordingly, the Company has determined that it
operates in a single reportable segment.
The CEO evaluates performance based primarily on revenues in the
geographic locations in which the Company operates. Revenues are
attributable to geographic locations based on the ship-to
location of the Companys customers. The Companys
assets are primarily located in the United States and not
allocated to any specific region. Therefore, geographic
information is presented only for total revenues. As of
April 30, 2009, 2008 and 2007, respectively, long-lived
assets, which represent property, plant and equipment, goodwill
and intangible assets, net of accumulated depreciation and
amortization, located outside the Americas were immaterial and
less than one percent of the total net assets as of these dates.
Total revenues by geographical region are based on the ship-to
location and are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Total revenues by geography:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States:
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
58,189
|
|
|
$
|
40,021
|
|
|
$
|
32,782
|
|
Maintenance
|
|
|
28,574
|
|
|
|
21,042
|
|
|
|
15,444
|
|
Services
|
|
|
12,897
|
|
|
|
7,280
|
|
|
|
5,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
99,660
|
|
|
|
68,343
|
|
|
|
53,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EMEA:
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
11,432
|
|
|
|
12,923
|
|
|
|
6,462
|
|
Maintenance
|
|
|
5,867
|
|
|
|
3,960
|
|
|
|
2,126
|
|
Services
|
|
|
2,110
|
|
|
|
1,564
|
|
|
|
820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
19,409
|
|
|
|
18,447
|
|
|
|
9,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asia Pacific:
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
4,422
|
|
|
|
3,553
|
|
|
|
3,532
|
|
Maintenance
|
|
|
1,872
|
|
|
|
1,305
|
|
|
|
701
|
|
Services
|
|
|
653
|
|
|
|
619
|
|
|
|
488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
6,947
|
|
|
|
5,477
|
|
|
|
4,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Americas:
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
6,573
|
|
|
|
7,267
|
|
|
|
1,214
|
|
Maintenance
|
|
|
2,208
|
|
|
|
1,301
|
|
|
|
490
|
|
Services
|
|
|
1,371
|
|
|
|
710
|
|
|
|
245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
10,152
|
|
|
|
9,278
|
|
|
|
1,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
136,168
|
|
|
$
|
101,545
|
|
|
$
|
69,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91
ARCSIGHT,
INC.
Notes to
Consolidated Financial
Statements (Continued)
The Companys book income (loss) before provision for
income taxes is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
11,804
|
|
|
$
|
(2,360
|
)
|
|
$
|
102
|
|
Foreign
|
|
|
673
|
|
|
|
1,482
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
12,477
|
|
|
$
|
(878
|
)
|
|
$
|
132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The provision of federal, state and foreign income tax expense
on income from continuing operations consists of the following
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
1,312
|
|
|
$
|
150
|
|
|
$
|
73
|
|
State
|
|
|
731
|
|
|
|
185
|
|
|
|
91
|
|
Foreign
|
|
|
371
|
|
|
|
512
|
|
|
|
225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
2,414
|
|
|
|
847
|
|
|
|
389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
130
|
|
|
|
250
|
|
|
|
|
|
State
|
|
|
20
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
150
|
|
|
|
284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision
|
|
$
|
2,564
|
|
|
$
|
1,131
|
|
|
$
|
389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of income taxes at the statutory federal income
tax rate of 34% to the income tax expense included in the
accompanying consolidated statements of operations is as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
U.S. federal taxes (benefit) at statutory rate
|
|
$
|
4,242
|
|
|
$
|
(298
|
)
|
|
$
|
45
|
|
State tax expense, net
|
|
|
482
|
|
|
|
122
|
|
|
|
60
|
|
Foreign taxes
|
|
|
1
|
|
|
|
512
|
|
|
|
225
|
|
Net operating losses benefited
|
|
|
(969
|
)
|
|
|
(653
|
)
|
|
|
(231
|
)
|
Alternative minimum tax
|
|
|
|
|
|
|
149
|
|
|
|
73
|
|
Tax credits
|
|
|
(1,202
|
)
|
|
|
|
|
|
|
|
|
Stock option expense
|
|
|
746
|
|
|
|
905
|
|
|
|
214
|
|
Meals and entertainment
|
|
|
131
|
|
|
|
101
|
|
|
|
92
|
|
Amortization of tax deductible goodwill
|
|
|
150
|
|
|
|
284
|
|
|
|
|
|
Change in valuation allowance
|
|
|
(725
|
)
|
|
|
|
|
|
|
|
|
Other
|
|
|
(292
|
)
|
|
|
9
|
|
|
|
(89
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision
|
|
$
|
2,564
|
|
|
$
|
1,131
|
|
|
$
|
389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92
ARCSIGHT,
INC.
Notes to
Consolidated Financial
Statements (Continued)
The Company provides for U.S. federal income taxes on the
earnings of foreign subsidiaries unless the subsidiaries
earnings are considered indefinitely reinvested outside the
United States. As of April 30, 2009, U.S. federal
income taxes were not provided for on a cumulative total of
$0.4 million of undistributed earnings for foreign
subsidiaries. These earnings are considered indefinitely
invested in operations outside the United States. If these
earnings were to be repatriated, the Company would be subject to
additional U.S. federal income taxes (subject to an
adjustment for foreign tax credits).
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. Significant components of the
deferred tax assets are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating losses
|
|
$
|
1,998
|
|
|
$
|
3,303
|
|
Research credits
|
|
|
2,352
|
|
|
|
2,777
|
|
Non-deductible reserves and accruals
|
|
|
1,403
|
|
|
|
1,705
|
|
Non-deductible stock-based compensation
|
|
|
6,516
|
|
|
|
5,619
|
|
Deferred revenues
|
|
|
3,097
|
|
|
|
4,377
|
|
Foreign earnings
|
|
|
(70
|
)
|
|
|
230
|
|
Intangibles
|
|
|
492
|
|
|
|
247
|
|
Other
|
|
|
91
|
|
|
|
276
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
15,879
|
|
|
|
18,534
|
|
Valuation allowance
|
|
|
(15,879
|
)
|
|
|
(18,534
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Amortization of tax deductible goodwill
|
|
$
|
(434
|
)
|
|
$
|
(284
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
$
|
(434
|
)
|
|
$
|
(284
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$
|
(434
|
)
|
|
$
|
(284
|
)
|
|
|
|
|
|
|
|
|
|
Realization of deferred tax assets is dependent upon future
earnings, if any, the timing and amount of which are uncertain.
Accordingly, the net deferred tax assets have been fully offset
by a valuation allowance. The valuation allowance increased
(decreased) by ($2.7 million), $(0.3 million) and
$1.3 million for the fiscal years ended April 30,
2009, 2008 and 2007. The 2009 valuation allowance decrease is
primarily attributable to decreased federal and state net
operating loss carryforwards and a decrease in deferred
revenues. On February 20, 2009, California also enacted new
legislation, which, among other things, provides for the
election of single factor apportionment formula beginning in
2011. The effect of the new legislation resulted in the Company
reducing its state deferred tax assets and related valuation
allowance by approximately $0.1 million at the end of the
year and had no impact to the year-end tax provision.
As of April 30, 2009, the Company had net operating loss
carry-forwards for federal income tax purposes of approximately
$4.7 million, which expire beginning in fiscal 2022 if not
utilized. The Company also has California net operating loss
carry-forwards of approximately $10.8 million which expire
beginning in fiscal 2015. The Company also has federal and
California research and development tax credits of
$2.9 million and $3.5 million for the fiscal years
ended April 30, 2009 and 2008, respectively. The federal
research credits will begin to expire in fiscal 2025, and the
California research credits have no expiration date.
93
ARCSIGHT,
INC.
Notes to
Consolidated Financial
Statements (Continued)
Pursuant to SFAS No. 123R, footnote 82, the Company
must track the portion of its deferred tax assets related to
stock option deductions in a separate memo account. Therefore,
these amounts are no longer included in the Companys gross
or net deferred tax assets. The portion of the stock option
benefits that will be recorded to equity when the Company
reduces taxes payable is approximately $1.0 million.
Utilization of the Companys net operating loss may be
subject to substantial annual limitation due to the ownership
change limitations provided by the Internal Revenue Code and
similar state provision. Such an annual limitation could result
in the expiration of the net operating loss before utilization.
The Company has experienced annual limitations in its ability to
utilize its net operating losses due to ownership changes. Our
current annual limitation amounts to $2.2 million as of
April 30, 2009.
During fiscal 2007 the Company acquired substantially all of the
assets of Enira Technologies, LLC in a taxable asset
acquisition. For tax purposes, the goodwill acquired in a
taxable asset acquisition is amortized over a period of
15 years, while SFAS No. 142 provides that
goodwill cannot be amortized but must be analyzed annually for
impairment. In accordance with SFAS No. 109, a
deferred tax liability must be recorded to account for this tax
deductible temporary difference and such liability may not be
used as a source of income to support deferred tax assets. The
Company has, therefore, recorded a non-cash charge of
$0.1 million during fiscal 2008 and a corresponding
deferred tax liability on the balance sheet to establish
deferred tax liabilities related to the tax deductible
amortization of goodwill since June 2006.
The Company adopted FASB Interpretation 48, Accounting for
Uncertainty in Income Taxes, an interpretation of
SFAS 109 (FIN 48), on May 1,
2007. As of April 30, 2009, the liability for uncertain tax
positions increased to $0.3 million. In addition, as of
April 30, 2008, the Company recorded a $1.8 million
reduction to deferred tax assets for unrecognized tax benefits,
all of which is currently offset by a full valuation allowance
that had no effect to the beginning balance of accumulated
deficit or the net balance sheet. As of April 30, 2009, the
unrecognized tax benefit of $1.8 million increased to
$2.5 million, all of which is offset by a full valuation
allowance.
The Companys total unrecognized tax benefit as of
April 30, 2008 and 2009 was $2.1 million and
$2.7 million, respectively. As of April 30, 2009, the
Company had $0.2 million of unrealized tax benefits that,
if recognized, would affect its effective tax rate for fiscal
2009. In addition, the Company does not expect any material
changes to the estimated amount of liability associated with its
uncertain tax positions within the next 12 months.
The following is a roll-forward of the total gross unrecognized
tax benefit for fiscal 2009 (in thousands):
|
|
|
|
|
Balance as of May 1, 2007
|
|
$
|
1,497
|
|
Tax positions related to current year:
|
|
|
|
|
Additions
|
|
|
615
|
|
|
|
|
|
|
Balance as of April 30, 2008
|
|
$
|
2,112
|
|
|
|
|
|
|
Tax positions related to current year:
|
|
|
|
|
Additions for current year items
|
|
|
543
|
|
Additions for prior year items
|
|
|
96
|
|
Reductions for prior year items
|
|
|
(57
|
)
|
|
|
|
|
|
Balance as of April 30, 2009
|
|
$
|
2,694
|
|
|
|
|
|
|
The Company files income tax returns in the U.S. federal
jurisdiction, California and various state and foreign tax
jurisdictions in which it has a subsidiary or branch operation.
The tax years 2002 to 2008 remain open to examination by
U.S. and state tax authorities, and the tax years 2005 to
2008 remain open to examination by the foreign tax authorities.
94
ARCSIGHT,
INC.
Notes to
Consolidated Financial
Statements (Continued)
The Companys policy is to recognize interest and penalties
accrued on any unrecognized tax benefits as a component of
income tax expense. As of April 30, 2009, the Company had
approximately $37,000 of accrued interest or penalties
associated with unrecognized tax benefits.
|
|
12.
|
Related-Party
Transactions
|
During fiscal 2009, 2008 and 2007, the Company entered into
various agreements with M-Factor to provide event planning and
hosting of the Companys corporate events. A member of the
Companys Board of Directors is also a director and 10%
shareholder of M-Factor. During 2009, 2008 and 2007, the Company
recorded expenses of $1.5 million, $1.2 million and
$0.7 million, respectively related to such activities. All
such activities were provided in the ordinary course of business
at prices and on terms and conditions that the Company believes
are the same as those that would result from arms-length
negotiations between unrelated parties.
|
|
13.
|
Employee
Benefit Plan
|
The Company sponsors a 401(k) savings plan for all employees who
meet certain eligibility requirements. Participants may
contribute, on a pretax basis, up to 100% of their annual
compensation, but not to exceed a maximum contribution pursuant
to Section 401(k) of the Internal Revenue Code. The Company
is not required to contribute, nor has it contributed, to the
plan for any of the periods presented. Administrative expenses
relating to the plan are insignificant.
95
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
Our management, with the participation and supervision of our
chief executive officer and chief financial officer, evaluated
the effectiveness of our disclosure controls and procedures
pursuant to
Rule 13a-15
under the Exchange Act. In designing and evaluating the
disclosure controls and procedures, management recognizes that
any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the
desired control objectives. In addition, the design of
disclosure controls and procedures must reflect the fact that
there are resource constraints and that management is required
to apply its judgment in evaluating the benefits of possible
controls and procedures relative to their costs.
Based on the aforementioned evaluation, our chief executive
officer and chief financial officer have concluded that as of
April 30, 2009, our disclosure controls and procedures are
designed at a reasonable assurance level and are effective to
provide reasonable assurance that information we are required to
disclose in reports that we file or submit under the Exchange
Act is recorded, processed, summarized and reported within the
time periods specified in SEC rules and forms, and that such
information is accumulated and communicated to our management,
including our chief executive officer and chief financial
officer, as appropriate, to allow timely decisions regarding
required disclosure.
Internal
Control over Financial Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term
is defined in Exchange Act
Rules 13a-15(f)
and
15d-15(f).
Under the supervision and with the participation of our
management, including our chief executive officer and chief
financial officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting
as of April 30, 2009 based on the guidelines established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Based on the results of this evaluation, our
management has concluded that our internal control over
financial reporting was effective as of April 30, 2009 to
provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements
for external reporting purposes in accordance with generally
accepted accounting principles.
96
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
ArcSight, Inc.
We have audited ArcSight Inc.s internal control over
financial reporting as of April 30, 2009, based on criteria
established in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). ArcSight Inc.s
management is responsible for maintaining effective internal
control over financial reporting, and for its assessment of the
effectiveness of internal control over financial reporting
included in the accompanying Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the
companys internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, ArcSight, Inc. maintained, in all material
respects, effective internal control over financial reporting as
of April 30, 2009, based on the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of ArcSight, Inc. as of
April 30, 2009 and 2008, and the related consolidated
statements of operations, stockholders equity, and cash
flows for each of the three years in the period ended
April 30, 2009 of ArcSight, Inc. and our report dated
July 8, 2009 expressed an unqualified opinion thereon.
San Jose, California
July 8, 2009
97
Changes
in Internal Control over Financial Reporting
Regulations under the Exchange Act require public companies,
including our company, to evaluate any change in our
internal control over financial reporting as such
term is defined in
Rule 13a-15(f)
and
Rule 15d-15(f)
of the Exchange Act. In connection with their evaluation of our
disclosure controls and procedures as of the end of the period
covered by this Annual Report on
Form 10-K,
our chief executive officer and chief financial officer did not
identify any changes in our internal control over financial
reporting during our fiscal fourth quarter ended April 30,
2009 that materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
|
|
Item 9B.
|
Other
Information
|
None.
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
Except as set forth below, the information required by this item
is incorporated by reference to our Proxy Statement for our 2009
Annual Meeting of Stockholders to be filed with the SEC within
120 days after the end of the fiscal year ended
April 30, 2009.
We maintain a Code of Business Conduct and Ethics that
incorporates our code of ethics applicable to all employees,
including all officers. Our Code of Business Conduct and Ethics
is published on the Investor Relations section of our website at
www.arcsight.com. We intend to disclose future amendments to
certain provisions of our Code of Business Conduct and Ethics,
or waivers of such provisions granted to executive officers and
directors, on this website within four business days following
the date of such amendment or waiver.
|
|
Item 11.
|
Executive
Compensation
|
The information required by this item is incorporated by
reference to our Proxy Statement for our 2009 Annual Meeting of
Stockholders to be filed with the SEC within 120 days after
the end of the fiscal year ended April 30, 2009.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The information required by this item with respect to
Item 403 of
Regulation S-K
regarding security ownership of certain beneficial owners and
management is incorporated by reference to our Proxy Statement
for our 2009 Annual Meeting of Stockholders to be filed with the
SEC within 120 days after the end of the fiscal year ended
April 30, 2009. For the information required by this item
with respect to Item 201(d) of
Regulation S-K
regarding securities authorized for issuance under equity
compensation plans, see Item 5: Market for
Registrants Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities Equity
Compensation Plan Information.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The information required by this item is incorporated by
reference to our Proxy Statement for our 2009 Annual Meeting of
Stockholders to be filed with the SEC within 120 days after
the end of the fiscal year ended April 30, 2009.
|
|
Item 14.
|
Principal
Accounting Fees and Services
|
The information required by this item is incorporated by
reference to our Proxy Statement for our 2009 Annual Meeting of
Stockholders to be filed with the SEC within 120 days after
the end of the fiscal year ended April 30, 2009.
98
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(a)(1) Financial Statements: The financial
statements filed as part of this Annual Report on
Form 10-K
are listed on the index to financial statements on page 61.
(2) No Financial Statement Schedules were required to be
filed as part of this report because the required information is
not present or is not present in amounts sufficient to require
submission of the schedules or because the information required
is included in the Consolidated Financial Statements or Notes
thereto.
(b) Exhibits. The exhibits listed on the
Exhibit Index (following the Signatures section of this
report) are included, or incorporated by reference, in this
Annual Report on
Form 10-K.
99
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, on July 8, 2009, the
Registrant has duly caused this Annual Report on
Form 10-K
to be signed on its behalf by the undersigned, thereunto duly
authorized.
ARCSIGHT,
INC.
|
|
|
|
|
|
|
By:
|
|
/s/ Thomas
J. Reilly
Thomas
J. Reilly
President and Chief Executive Officer
(Principal Executive Officer)
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By:
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/s/ Stewart
Grierson
Stewart
Grierson
Chief Financial Officer
(Principal Financial Officer)
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POWER OF
ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Thomas J.
Reilly as his attorney-in-fact, with the power of substitution,
for him in any and all capacities, to sign any amendments to
this Annual Report on
Form 10-K,
and to file the same, with exhibits thereto and other documents
in connection therewith with the Securities and Exchange
Commission, hereby ratifying and confirming all that said
attorney-in-fact, or his substitute or substitutes, may do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below by the following persons
in the capacities and on the dates indicated.
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Signature
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Title
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Date
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/s/ Thomas
J. Reilly
Thomas
J. Reilly
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President, Chief Executive Officer and Director
(Principal Executive Officer)
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July 8, 2009
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/s/ Stewart
Grierson
Stewart
Grierson
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Chief Financial Officer
(Principal Financial Officer)
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July 8, 2009
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/s/ Sandra
Bergeron
Sandra
Bergeron
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Director
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July 8, 2009
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/s/ William
P. Crowell
William
P. Crowell
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Director
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July 8, 2009
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/s/ E.
Stanton McKee, Jr.
E.
Stanton McKee, Jr.
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Director
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July 8, 2009
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/s/ Craig
Ramsey
Craig
Ramsey
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Director
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July 8, 2009
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/s/ Scott
A. Ryles
Scott
A. Ryles
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Director
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July 8, 2009
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/s/ Ted
Schlein
Ted
Schlein
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Director
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July 8, 2009
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/s/ Roger
Siboni
Roger
Siboni
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Director
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July 8, 2009
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/s/ Ernest
von Simson
Ernest
von Simson
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Director
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July 8, 2009
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100
EXHIBIT INDEX
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Incorporated by Reference
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Exhibit
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Filing
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Provided
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Number
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Exhibit Description
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Form
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File No.
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Exhibit
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Date
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Herewith
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3
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.1
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Restated Certificate of Incorporation of ArcSight, Inc., as
currently in effect.
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S-1/A
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333-145974
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3
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.2
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11/23/07
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3
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.2
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Amended and Restated Bylaws of ArcSight, Inc., as currently in
effect.
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S-1/A
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333-145974
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3
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.4
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11/23/07
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4
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.1
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Form of ArcSight, Inc. common stock certificate.
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S-1/A
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333-145974
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4
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.1
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11/23/07
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4
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.2
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Amended and Restated Investors Rights Agreement, dated as
of October 24, 2002, between ArcSight, Inc. and certain
security holders of ArcSight, Inc.
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S-1/A
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333-145974
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4
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.2
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9/11/07
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10
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.1
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Form of Indemnity Agreement entered into between ArcSight, Inc.
and its directors and executive officers.
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S-1/A
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333-145974
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10
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.1
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10/29/07
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10
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.2
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2000 Stock Incentive Plan.
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S-1/A
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333-145974
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10
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.2
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9/11/07
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10
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.3
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Forms of Stock Option Agreement and Stock Option Exercise
Agreement under the 2000 Stock Incentive Plan.
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S-1/A
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333-145974
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10
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.3
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9/11/07
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10
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.4
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2002 Stock Plan, as amended.
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S-1/A
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333-145974
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10
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.4
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9/11/07
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10
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.5
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Forms of Stock Option Agreement and Stock Option Exercise
Agreement under the 2002 Stock Plan.
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S-1/A
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333-145974
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10
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.5
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9/11/07
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10
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.6
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2007 Equity Incentive Plan.
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S-1/A
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333-145974
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10
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.6
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11/23/07
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10
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.7
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Form of Stock Option Agreement, Stock Option Exercise Agreement,
Restricted Stock Agreement, Restricted Stock Units Award
Agreement, Stock Appreciation Right Award Agreement, Performance
Shares Award Agreement and Stock Bonus Award Agreement
under the 2007 Equity Incentive Plan.
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S-1/A
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333-145974
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10
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.7
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11/23/07
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10
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.8
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2007 Employee Stock Purchase Plan.
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S-1/A
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333-145974
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10
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.8
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11/23/07
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10
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.9
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Form of Subscription Agreement under the 2007 Employee Stock
Purchase Plan.
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S-1/A
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333-145974
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10
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.9
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11/23/07
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10
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.10
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Offer Letter, dated June 1, 2000, between ArcSight, Inc.
and Hugh S. Njemanze.
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S-1/A
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333-145974
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10
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.11
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9/20/07
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10
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.11
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Offer Letter, dated January 24, 2003, between ArcSight,
Inc. and Stewart Grierson, as amended.
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S-1/A
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333-145974
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10
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.12
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11/23/07
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10
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.12
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Offer Letter, dated October 5, 2006, between ArcSight, Inc.
and Thomas Reilly, as amended.
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S-1/A
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333-145974
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10
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.14
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11/23/07
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10
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.13
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Offer Letter, dated May 6, 2007, between ArcSight, Inc. and
Reed Henry, as amended.
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10-K
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001-33923
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10
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.19
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7/22/08
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10
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.14
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Fiscal Year 2009 Management Bonus Plan.
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S-1/A
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333-145974
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10
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.19
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1/22/08
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10
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.15
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Lease Agreement, dated April 24, 2007, between ArcSight,
Inc. and ECI Two Results LLC.
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S-1/A
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333-145974
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10
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.17
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9/11/07
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10
|
.16
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Oracle PartnerNetwork Embedded Software License Distribution
Agreement, dated May 31, 2009, as amended, between
ArcSight, Inc. and Oracle USA,
Inc.
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X
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21
|
.1
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Subsidiaries of ArcSight, Inc.
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X
|
101
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Incorporated by Reference
|
|
|
Exhibit
|
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|
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|
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|
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|
|
Filing
|
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Provided
|
Number
|
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Exhibit Description
|
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Form
|
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File No.
|
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Exhibit
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Date
|
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Herewith
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23
|
.1
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Consent of Independent Registered Public Accounting Firm.
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X
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31
|
.01
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Certification of Principal Executive Officer Pursuant to
Securities Exchange Act
Rule 13a-14(a).
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X
|
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31
|
.02
|
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Certification of Principal Financial Officer Pursuant to
Securities Exchange Act
Rule 13a-14(a).
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X
|
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32
|
.01
|
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Certification of Principal Executive Officer Pursuant to
18 U.S.C. Section 1350 and Securities Exchange Act
Rule 13a-14(b).*
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X
|
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32
|
.02
|
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Certification of Principal Financial Officer Pursuant to
18 U.S.C. Section 1350 and Securities Exchange Act
Rule 13a-14(b).*
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X
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Certain portions of this exhibit have been omitted and have been
filed separately with the SEC pursuant to a request for
confidential treatment under
Rule 24b-2
as promulgated under the Securities Exchange Act of 1934, as
amended. |
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* |
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This certification is not deemed filed for purposes
of Section 18 of the Securities Exchange Act, or otherwise
subject to the liability of that section. Such certification
will not be deemed to be incorporated by reference into any
filing under the Securities Act of 1933 or the Securities
Exchange Act of 1934, except to the extent that ArcSight, Inc.
specifically incorporates it by reference. |
102