e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended July 31, 2008
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period from to
Commission File Number 001-33923
ArcSight, Inc.
(Exact name of the Registrant as Specified in its Charter)
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Delaware
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52-2241535 |
(State or Other Jurisdiction of
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(I.R.S. Employer |
Incorporation or Organization)
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Identification No.) |
5 Results Way
Cupertino, California 95014
(Address of Principal Executive Offices, including Zip Code)
(408) 864-2600
(Registrants Telephone Number, including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Sections 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 is a large accelerated filer, an accelerated
filer, or 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 o
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Non-accelerated filer þ
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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
Shares of ArcSight, Inc. common stock, $0.00001 par value per share, outstanding as of
September 1, 2008: 31,086,765 shares.
ARCSIGHT, INC.
FORM 10-Q
Quarterly Period Ended July 31, 2008
TABLE OF CONTENTS
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARCSIGHT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts and par value)
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As of |
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As of |
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July 31, |
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April 30, |
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2008 |
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2008 |
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(Unaudited) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
74,172 |
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$ |
71,946 |
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Accounts receivable, net of allowance for doubtful accounts of $120 and $133, respectively |
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17,323 |
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26,658 |
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Other prepaid expenses and current assets |
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5,886 |
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5,565 |
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Total current assets |
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97,381 |
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104,169 |
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Property and equipment, net |
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5,479 |
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4,834 |
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Goodwill |
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5,746 |
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5,746 |
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Acquired intangible assets, net |
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1,950 |
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2,161 |
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Other long-term assets |
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1,422 |
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1,669 |
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Total assets |
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$ |
111,978 |
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$ |
118,579 |
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Liabilities and Stockholders Equity |
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Current liabilities: |
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Accounts payable |
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$ |
2,548 |
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$ |
3,115 |
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Accrued compensation and benefits |
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5,591 |
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11,864 |
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Other accrued liabilities |
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6,435 |
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5,967 |
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Deferred revenues, current |
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35,613 |
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36,512 |
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Total current liabilities |
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50,187 |
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57,458 |
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Deferred revenues, non-current |
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5,152 |
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4,754 |
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Other long-term liabilities |
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1,643 |
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1,598 |
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Total liabilities |
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56,982 |
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63,810 |
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Commitments and contingencies (see Note 5) |
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Stockholders equity: |
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Preferred stock, $0.00001 par value per share, 10,000,000 shares authorized; no shares
issued and outstanding |
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Common stock, $0.00001 par value per share; 150,000,000 shares authorized; 31,053,722 and
31,022,190 issued and outstanding as of July 31, 2008 and April 30, 2008, respectively |
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Additional paid-in capital |
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103,087 |
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101,574 |
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Deferred stock-based compensation |
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(9 |
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(53 |
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Accumulated other comprehensive loss |
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(45 |
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(45 |
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Accumulated deficit |
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(48,037 |
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(46,707 |
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Total stockholders equity |
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54,996 |
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54,769 |
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Total liabilities and stockholders equity |
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$ |
111,978 |
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$ |
118,579 |
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See accompanying Notes to Condensed Consolidated Financial Statements.
3
ARCSIGHT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
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Three Months Ended |
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July 31, |
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2008 |
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2007 |
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Revenues: |
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Products |
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$ |
15,802 |
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$ |
12,205 |
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Maintenance |
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8,568 |
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5,630 |
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Services |
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3,293 |
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2,035 |
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Total revenues |
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27,663 |
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19,870 |
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Cost of revenues: |
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Products |
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1,655 |
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684 |
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Maintenance(1) |
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1,631 |
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1,246 |
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Services(1) |
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2,043 |
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1,078 |
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Total cost of revenues |
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5,329 |
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3,008 |
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Gross profit |
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22,334 |
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16,862 |
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Operating expenses(1): |
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Research and development |
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5,315 |
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4,260 |
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Sales and marketing |
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14,868 |
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11,919 |
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General and administrative |
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4,349 |
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3,520 |
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Total operating expenses |
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24,532 |
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19,699 |
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Loss from operations |
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(2,198 |
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(2,837 |
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Interest income |
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404 |
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148 |
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Other income and (expense), net |
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(99 |
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(129 |
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Loss before provision for (benefit from) income taxes |
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(1,893 |
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(2,818 |
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Provision for (benefit from) income taxes |
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(563 |
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118 |
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Net loss |
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$ |
(1,330 |
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$ |
(2,936 |
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Net loss per common share, basic and diluted |
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$ |
(0.04 |
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$ |
(0.28 |
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Shares used in computing basic and diluted net loss per common share |
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30,992 |
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10,391 |
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(1) Stock-based compensation expense included in above (see Note 8): |
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Cost of maintenance revenues |
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$ |
46 |
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$ |
8 |
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Cost of services revenues |
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33 |
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8 |
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Research and development |
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339 |
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157 |
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Sales and marketing |
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751 |
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461 |
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General and administrative |
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234 |
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81 |
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See accompanying Notes to Condensed Consolidated Financial Statements.
4
ARCSIGHT, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
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Three Months Ended |
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July 31, |
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2008 |
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2007 |
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Cash flows from operating activities: |
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Net loss |
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$ |
(1,330 |
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$ |
(2,936 |
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Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
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Depreciation and amortization |
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568 |
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387 |
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Amortization of acquired intangibles |
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211 |
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143 |
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Loss on disposal of property and equipment |
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3 |
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Stock-based compensation |
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1,403 |
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715 |
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Provision for allowance for doubtful accounts |
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146 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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9,335 |
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(4,746 |
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Prepaid expenses and other assets |
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(74 |
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183 |
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Accounts payable |
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(567 |
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(1,148 |
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Accrued compensation and benefits |
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(6,273 |
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(2,190 |
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Other accrued liabilities |
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1,013 |
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154 |
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Deferred revenues |
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(501 |
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2,373 |
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Net cash provided by (used in) operating activities |
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3,788 |
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(6,919 |
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Cash flows from investing activities: |
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Purchase of property and equipment |
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(1,216 |
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(588 |
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Net cash used in investing activities |
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(1,216 |
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(588 |
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Cash flows from financing activities: |
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Initial public offering preparation costs |
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(61 |
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Proceeds from exercise of stock options, net of repurchases |
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143 |
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241 |
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Payment of capital lease and software license obligations |
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(489 |
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(497 |
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Net cash used in financing activities |
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(346 |
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(317 |
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Effect of exchange rate changes on cash |
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2 |
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Net increase (decrease) in cash and cash equivalents |
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2,226 |
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(7,822 |
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Cash and cash equivalents at beginning of period |
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71,946 |
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16,917 |
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Cash and cash equivalents at end of period |
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$ |
74,172 |
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$ |
9,095 |
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Supplemental disclosure of cash flow information: |
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Income taxes paid |
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$ |
148 |
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$ |
123 |
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See accompanying Notes to Condensed Consolidated Financial Statements.
5
ARCSIGHT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 condensed consolidated balance sheet as of April 30, 2008 is derived from audited
financial statements as of that date but does not include all of the information and footnotes
required by accounting principles generally accepted in the United States for complete financial
statements. The accompanying unaudited condensed 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 condensed consolidated
financial statements for prior periods have been reclassified to conform to current presentation.
These condensed consolidated financial statements should be read in conjunction with the
consolidated financial statements and related notes included in our Annual Report on Form 10-K,
filed with the SEC on July 22, 2008.
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
condensed consolidated financial statements have been retroactively adjusted to reflect the Reverse
Split.
Unaudited Interim Financial Information
The accompanying interim consolidated balance sheet as of July 31, 2008, and the consolidated
statements of operations and cash flows for the three months ended July 31, 2008 and 2007 are
unaudited. The unaudited interim condensed consolidated financial statements have been prepared on
the same basis as the annual consolidated financial statements and, in the opinion of management,
reflect all adjustments, which include normal recurring adjustments, necessary to present fairly
the Companys financial position as of July 31, 2008, its results of operations and cash flows for
the three months ended July 31, 2008 and 2007. The results of operations for the three months ended
July 31, 2008 are not necessarily indicative of the results to be expected for fiscal 2009 or for
any other interim period or for any other future year.
6
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 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 consisting of 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 two banks and are stated at cost,
which approximates fair value.
Fair Value of Financial Instruments
The carrying amounts of cash equivalents, trade accounts receivable, accounts payable, other
accrued liabilities and derivative financial instruments approximate their respective fair values
due to their relative short-term maturities.
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 for each of the three
months ended July 31, 2008 and 2007 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 expense
in the consolidated statements of operations. The objective of these contracts is to reduce the
impact of foreign currency exchange rate movements on the Companys operating results. During the
first quarter of fiscal 2009 and 2008, 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).
7
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 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 the financial institutions.
The Company sells its products and maintenance and services directly to customers or through
resellers in the Americas, Europe and Asia, with the majority of its sales in 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 the three months
ended July 31, 2008. One customer accounted for 18% of total revenues for the three months ended
July 31, 2007. The Company had two customers with accounts receivable balances greater than 10% of
the Companys net accounts receivable, with balances of 10% and 11% of net accounts receivable as
of July 31, 2008. The Company had one customer that accounted for 26% of the Companys net accounts
receivable as of July 31, 2007.
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 2008 for
which the Company uses a single source for manufacture and fulfillment of its appliance product,
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; and (3) fees for services, which includes services performed in
connection with time-and-materials based consulting agreements (maintenance and 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, 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 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
8
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 system
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 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
agreements is considered to occur on a straight-line basis ratably over the life of the contract,
typically 12 months.
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 attributed to the delivered elements (typically products)
under the residual method 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.
9
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 required, resulting in future
operating losses that are not included in the allowance for doubtful accounts as of July 31, 2008
and April 30, 2008.
The following describes activity in the allowance for doubtful accounts for fiscal 2008 and
the three months ended July 31, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Addition |
|
|
|
|
|
|
|
|
Balance at |
|
Charged to |
|
|
|
|
|
Balance at |
|
|
Beginning |
|
Costs and |
|
|
|
|
|
End |
Period |
|
of Period |
|
Expenses |
|
Deductions(1) |
|
of Period |
Fiscal 2008 |
|
$ |
123 |
|
|
$ |
33 |
|
|
$ |
(23 |
) |
|
$ |
133 |
|
Three months ended July 31, 2008 |
|
$ |
133 |
|
|
$ |
|
|
|
$ |
(13 |
) |
|
$ |
120 |
|
|
|
|
(1) |
|
Uncollectible amounts written off, net of recoveries. |
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
10
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.
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.
11
Advertising Expenses
Advertising costs are expensed as incurred. The Company incurred $0.1 million and $42,000 in
advertising expenses for the three months ended July 31, 2008 and 2007, respectively.
Income Taxes
Provision for (benefit from) income taxes is calculated in accordance with SFAS No. 109 Accounting for
Income Taxes (SFAS 109) and APB No. 28, Interim Financial Reporting, (APB 28). The Company
estimates income taxes in each of the jurisdictions in which it operates. This process involves
determining income tax expense and 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 that are recognized for the
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. 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.
Beginning in fiscal 2009, and for the period ended July 31, 2008, based in part on historical
evidence, trends in profitability, current expectations of future taxable net income and newly
implemented tax planning strategies for fiscal 2009, we transitioned from using the actual effective
tax rate for the year to date as the best estimate of the annual effective tax rate under FASB
Interpretation No. 18, Accounting for Income Taxes in the Interim Period (FIN 18) as amended by
SFAS 109, to determining our tax provision (benefit) based on an estimated annual tax rate also in
compliance with SFAS 109 and APB 28. The income tax provision, which includes U.S. federal,
state and local and foreign income taxes, is based on the application of a forecasted annual income
tax rate applied to the current quarters year-to-date pre-tax income. In determining the estimated
annual effective income tax rate, the Company analyzes various factors, including estimates of
the Companys annual earnings, taxing jurisdictions in which the earnings will be generated, the
impact of state and local income taxes, the Companys ability to use tax credits and net operating
loss carryforwards, the current year accrual for unrecognized tax benefits and available tax
planning alternatives. Discrete items, including the effect of changes in tax laws, tax rates,
changes in liabilities for previous years uncertain tax positions and applicable circumstances with
respect to valuation allowances or other unusual or non-recurring tax adjustments are reflected in
the period in which they occur as an addition to, or reduction from, the income tax provision,
rather than included in the estimated effective annual income tax rate. Significant components
affecting the tax rate for fiscal 2009 include R&D and foreign tax credits, the composite state tax
rate, and non-deductible stock-based compensation expense.
The Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes,
an interpretation of SFAS 109 (FIN 48), on May 1, 2007. As a result of the implementation of
FIN 48, the Company 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.
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 Accounting Principles Board 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 is 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.
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
12
either recognition or pro forma disclosures to apply SFAS 123R using the
prospective-transition method. As such, the Company continues 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 continues to amortize those awards granted
prior to May 1, 2006 using the multiple option method as prescribed by FIN 28, as described above.
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 will
end on September 15, 2008. 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.
Comprehensive Loss
The Company reports comprehensive loss in accordance with SFAS No. 130, Reporting
Comprehensive Income. Comprehensive 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 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 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; |
|
|
|
|
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 based on Level 1 inputs, at fair value. 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 capitalized software
licenses, based on quoted interest rates (Level 2 inputs) for the remaining duration of the
liabilities, approximated carrying value.
13
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 July 31, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
Cash and cash equivalents |
|
$ |
74,172 |
|
|
|
|
|
|
|
|
|
|
$ |
74,172 |
|
Restricted cash |
|
|
842 |
|
|
|
|
|
|
|
|
|
|
|
842 |
|
Capitalized software license obligations |
|
|
|
|
|
$ |
1,637 |
|
|
|
|
|
|
|
1,637 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
75,014 |
|
|
$ |
1,637 |
|
|
|
|
|
|
$ |
76,651 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, with early adoption permitted provided that the
entity also adopts SFAS 157. 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 three months ended July 31, 2008.
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 consummates after the
effective date.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements an amendment of ARB No. 51 (SFAS 160). The statement changes how
noncontrolling interests in subsidiaries are measured to initially be measured at fair value and
classified as a separate component of equity. SFAS 160 establishes a single method of accounting
for changes in a parents ownership interest in a subsidiary that do not result in deconsolidation.
No gains or losses will be recognized on partial disposals of a subsidiary where control is
retained. In addition, in partial acquisitions, where control is obtained, the acquiring company
will recognize and measure at fair value all of the assets and liabilities, including goodwill, as
if the entire target company had been acquired. The statement is to be applied prospectively for
fiscal years beginning on or after December 15, 2008. We do not expect the adoption of SFAS 160 to
have a material effect on our consolidated results of operations or financial condition.
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
our consolidated results of operations, financial condition or cash flows.
In April 2008, the FASB issued a FASB Staff Position 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. 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
14
fiscal years beginning after December 15, 2008, and interim periods within those fiscal years.
The Company is 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 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 (the GAAP hierarchy). SFAS 162 will become effective 60 days following the SECs
approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The
Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. We do not
expect the adoption of SFAS 162 to have a material effect on our consolidated results of operations
or financial condition.
In December 2007, the SEC released Staff Accounting Bulletin No. 110 (SAB 110). SAB 110
amends SAB No. 107, "Share-Based Payment (SAB 107), to allow for the continued use, under
certain circumstances, of the simplified method in developing an estimate of the expected term of
plain vanilla stock options accounted for under SFAS 123R. The SEC staff indicated in SAB 107
that it will accept a companys election to use the simplified method, regardless of whether the
Company has sufficient information to make more refined estimates of expected term. At the time SAB
107 was issued, the staff believed that more detailed external information about employee exercise
behavior would, over time, become readily available to companies. Therefore, the SEC staff stated
in SAB 107 that it would not expect a company to use the simplified method for share option grants
after December 31, 2007, acknowledging that such detailed information about employee exercise
behavior may not yet be widely available. Accordingly, SAB 110 states that the staff will continue
to accept, under certain circumstances, the use of the simplified method beyond December 31, 2007.
The Company will continue to use the simplified method until it has sufficient historical data to
provide a reasonable basis to estimate the expected term, and does not expect the adoption of SAB
110 to have a material effect on its results of operations or financial condition.
3. Net 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 loss per common share is computed using the weighted-average number of
shares of common stock outstanding during the period. Potentially dilutive securities consisting of
convertible preferred stock, stock options, common stock subject to repurchase and warrants were
not included in the diluted loss per common share computation for any period presented because the
inclusion of such shares would have had an anti-dilutive effect.
The following table sets forth the computation of basic and diluted net loss per share (in
thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
July 31, |
|
|
|
2008 |
|
|
2007 |
|
Numerator for basic and diluted net loss per share: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(1,330 |
) |
|
$ |
(2,936 |
) |
|
|
|
|
|
|
|
Weighted-average common shares, net of
weighted-average shares subject to repurchase,
used in computing net loss per common share-basic
and diluted |
|
|
30,992 |
|
|
|
10,391 |
|
|
|
|
|
|
|
|
Net loss per common share, basic and diluted |
|
$ |
(0.04 |
) |
|
$ |
(0.28 |
) |
|
|
|
|
|
|
|
As the Company had a net loss for each of the periods presented, 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 periods are presented net of shares subject to repurchase.
15
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
loss per share for the periods presented because including them would have had an anti-dilutive
effect (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
July 31, |
|
|
|
2008 |
|
|
2007 |
|
Convertible preferred stock (as converted) |
|
|
|
|
|
|
13,987 |
|
Options to purchase common stock |
|
|
2,072 |
|
|
|
2,722 |
|
Common stock subject to repurchase |
|
|
45 |
|
|
|
229 |
|
Employee stock purchase plan |
|
|
5 |
|
|
|
|
|
Warrants to purchase common stock and convertible preferred stock (as converted) |
|
|
|
|
|
|
19 |
|
|
|
|
|
|
|
|
Total |
|
|
2,122 |
|
|
|
16,957 |
|
|
|
|
|
|
|
|
4. Balance Sheet Details
Property and Equipment, Net
Property and equipment consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
As of |
|
|
|
July 31, |
|
|
April 30, |
|
|
|
2008 |
|
|
2008 |
|
Computers and equipment |
|
$ |
7,267 |
|
|
$ |
6,135 |
|
Furniture and fixtures |
|
|
1,072 |
|
|
|
1,071 |
|
Software |
|
|
647 |
|
|
|
754 |
|
Leasehold improvements |
|
|
2,080 |
|
|
|
2,080 |
|
|
|
|
|
|
|
|
|
|
|
11,066 |
|
|
|
10,040 |
|
Less: accumulated depreciation and amortization |
|
|
(5,587 |
) |
|
|
(5,206 |
) |
|
|
|
|
|
|
|
Property and equipment, net |
|
$ |
5,479 |
|
|
$ |
4,834 |
|
|
|
|
|
|
|
|
Depreciation expense was $0.5 million and $0.4 million for the three months ended July 31, 2008 and
2007, respectively. Amortization expense was $0.1 million and $36,000 for the three months ended
July 31, 2008 and 2007, respectively.
Goodwill and Intangible Assets, Net
The estimated useful lives, gross carrying amount, accumulated amortization and net book value
of goodwill and intangible assets as of July 31, 2008 and April 30, 2008 are as follows (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful |
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
|
Lives |
|
|
Carrying |
|
|
Accumulated |
|
|
Carrying |
|
As of July 31, 2008: |
|
in Years |
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
Core and developed technologies |
|
|
5.00 |
|
|
$ |
1,970 |
|
|
$ |
(566 |
) |
|
$ |
1,404 |
|
Customer installed-base relationships |
|
|
6.00 |
|
|
|
80 |
|
|
|
(41 |
) |
|
|
39 |
|
Employee non-compete agreements |
|
|
5.00 |
|
|
|
1,160 |
|
|
|
(653 |
) |
|
|
507 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
3,210 |
|
|
$ |
(1,260 |
) |
|
$ |
1,950 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,746 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful |
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
|
Lives |
|
|
Carrying |
|
|
Accumulated |
|
|
Carrying |
|
As of April 30, 2008: |
|
in Years |
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
Core and developed technologies |
|
|
5.00 |
|
|
$ |
1,970 |
|
|
$ |
(434 |
) |
|
$ |
1,536 |
|
Customer installed-base relationships |
|
|
6.00 |
|
|
|
80 |
|
|
|
(37 |
) |
|
|
43 |
|
Employee non-compete agreements |
|
|
5.00 |
|
|
|
1,160 |
|
|
|
(578 |
) |
|
|
582 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
3,210 |
|
|
$ |
(1,049 |
) |
|
$ |
2,161 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,746 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
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 $0.2 million and $0.1 million for the three months ended July 31,
2008 and 2007, respectively.
There was no impairment of goodwill or intangible assets for the three months ended July 31,
2008 or in fiscal 2008.
As of July 31, 2008, future estimated amortization costs per year for the Companys existing
intangible assets other than goodwill are estimated as follows (in thousands):
|
|
|
|
|
|
|
Estimated |
|
|
|
Amortization |
|
As of July 31, 2008: |
|
Expense |
|
Remainder of fiscal 2009 |
|
$ |
631 |
|
Fiscal 2010 |
|
|
889 |
|
Fiscal 2011 |
|
|
425 |
|
Fiscal 2012 |
|
|
5 |
|
|
|
|
|
Total |
|
$ |
1,950 |
|
|
|
|
|
Deferred Revenues
Deferred revenues consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
As of |
|
|
|
July 31, |
|
|
April 30, |
|
|
|
2008 |
|
|
2008 |
|
Deferred product revenues |
|
$ |
12,017 |
|
|
$ |
13,627 |
|
Deferred maintenance revenues |
|
|
25,668 |
|
|
|
24,256 |
|
Deferred services revenues |
|
|
3,080 |
|
|
|
3,383 |
|
|
|
|
|
|
|
|
Total deferred revenues |
|
|
40,765 |
|
|
|
41,266 |
|
Less deferred revenues, current portion |
|
|
(35,613 |
) |
|
|
(36,512 |
) |
|
|
|
|
|
|
|
Deferred revenues, non-current |
|
$ |
5,152 |
|
|
$ |
4,754 |
|
|
|
|
|
|
|
|
5. Commitments and Contingencies
The Company and its subsidiaries operate from leased premises in the United States, Asia and
Europe with lease periods expiring through 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 value. 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 July
31, 2008 are as follows (in thousands):
|
|
|
|
|
|
|
Amount of |
|
As of July 31, 2008: |
|
Payments |
|
Remainder of fiscal 2009 |
|
$ |
1,711 |
|
Fiscal 2010 |
|
|
1,967 |
|
Fiscal 2011 |
|
|
1,988 |
|
Fiscal 2012 |
|
|
2,068 |
|
Fiscal 2013 |
|
|
2,151 |
|
Thereafter |
|
|
1,118 |
|
|
|
|
|
Total future minimum lease payments |
|
$ |
11,003 |
|
|
|
|
|
17
Rent expense under all operating leases was approximately $0.7 million and $0.6 million for
the three months ended July 31, 2008 and 2007, respectively.
6. 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 patent, copyright or other intellectual property right, and (v)
procurement, consulting, or license agreements under which the Company may be required to indemnify
vendors, consultants 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 July 31, 2008
or April 30, 2008.
7. Stockholders Equity
Preferred Stock
The following is a summary of the authorized, issued and outstanding preferred stock as of
July 31, 2008 and April 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Issued |
|
|
Authorized |
|
and |
|
|
Shares |
|
Outstanding |
Undesignated |
|
|
10,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 its 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 our stockholders.
Common Stock Reserved for Issuance
Number of shares of common stock reserved for future issuance is as follows:
|
|
|
|
|
|
|
As of July 31, |
|
|
2008 |
Options available for future grant under the 2007 Equity Incentive Plan |
|
|
3,922,462 |
|
Options outstanding under the stock option plans |
|
|
7,099,243 |
|
ESPP shares reserved for future issuance |
|
|
1,000,000 |
|
|
|
|
|
|
Total shares reserved |
|
|
12,021,705 |
|
|
|
|
|
|
18
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 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 276,534 of such additional
shares have become available for grant and issuance under the 2007 Equity Incentive Plan, for a
total of 4,845,549 shares authorized for issuance as of the period ended July 31, 2008.
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 on February 14, 2008. 1,000,000 shares of the Companys common
stock were originally authorized for future issuance under the 2007 Employee Stock Purchase Plan.
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 for the three months ended July 31, 2008, 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, 2008 |
|
|
4,366,192 |
|
|
|
6,687,045 |
|
|
|
5.43 |
|
|
|
7.89 |
|
|
$ |
15,142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options authorized |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted |
|
|
(673,200 |
) |
|
|
673,200 |
|
|
|
8.62 |
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
|
|
|
|
(31,767 |
) |
|
|
4.52 |
|
|
|
|
|
|
|
|
|
Options canceled |
|
|
229,235 |
|
|
|
(229,235 |
) |
|
|
8.22 |
|
|
|
|
|
|
|
|
|
Shares repurchased |
|
|
235 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding as of July 31, 2008 |
|
|
3,922,462 |
|
|
|
7,099,243 |
|
|
|
5.64 |
|
|
|
7.82 |
|
|
|
40,233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest as of July
31, 2008, net of anticipated forfeitures |
|
|
|
|
|
|
5,966,204 |
|
|
|
5.64 |
|
|
|
7.82 |
|
|
|
12,215 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable as of July 31, 2008 |
|
|
|
|
|
|
3,683,543 |
|
|
|
3.58 |
|
|
|
6.88 |
|
|
|
28,484 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
The following table summarizes additional information regarding outstanding options as of July
31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
Options Vested and Exercisable |
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Remaining |
|
|
|
|
|
Average |
|
|
Number |
|
Contractual |
|
Number of |
|
Exercise |
Exercise Price |
|
Outstanding |
|
Life (Years) |
|
Shares |
|
Price per Share |
$0.12-0.24 |
|
|
745,890 |
|
|
|
4.92 |
|
|
|
745,890 |
|
|
$ |
0.20 |
|
$0.36-0.80 |
|
|
1,125,889 |
|
|
|
6.29 |
|
|
|
998,758 |
|
|
|
0.69 |
|
$4.00 |
|
|
770,021 |
|
|
|
6.91 |
|
|
|
591,206 |
|
|
|
4.00 |
|
$6.08-6.80 |
|
|
2,089,956 |
|
|
|
8.23 |
|
|
|
993,650 |
|
|
|
6.52 |
|
$7.17-7.95 |
|
|
84,975 |
|
|
|
9.75 |
|
|
|
|
|
|
|
7.61 |
|
$8.00-8.95 |
|
|
646,737 |
|
|
|
9.84 |
|
|
|
|
|
|
|
8.50 |
|
$9.00-9.32 |
|
|
317,000 |
|
|
|
9.13 |
|
|
|
69,611 |
|
|
|
9.27 |
|
$10.00 |
|
|
1,278,150 |
|
|
|
9.17 |
|
|
|
284,428 |
|
|
|
10.00 |
|
$11.08-11.55 |
|
|
40,625 |
|
|
|
9.98 |
|
|
|
|
|
|
|
11.43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,099,243 |
|
|
|
7.82 |
|
|
|
3,683,543 |
|
|
$ |
3.58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
Total intrinsic value of options exercised for the three months ended July 31, 2008 was $0.1
million, determined at the date of option exercise.
8. Stock-Based Compensation
Adoption of SFAS 123R
See Note 2 for a description of our adoption of SFAS 123(R). Share-Based Payment, on May 1,
2006. During the three months ended July 31, 2008 and 2007, the Company recorded stock-based
compensation as described below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
July 31, |
|
|
|
2008 |
|
|
2007 |
|
Stock-based compensation under SFAS 123R |
|
$ |
1,104 |
|
|
$ |
579 |
|
Stock-based compensation under prospective transition method for option awards granted prior to the
adoption of SFAS 123R |
|
|
10 |
|
|
|
35 |
|
Amortization of restricted stock awards in connection with the acquisition of Enira Technologies, LLC |
|
|
33 |
|
|
|
101 |
|
Stock-based compensation under Employee Stock Purchase Plan |
|
|
256 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,403 |
|
|
$ |
715 |
|
|
|
|
|
|
|
|
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 2007 and 2008, 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. Due to the Companys historical loss position, no tax benefits have been
realized or recorded for any of the 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.
20
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
July 31, |
|
|
2008 |
|
2007 |
Risk-free interest rate |
|
|
3.17 |
% |
|
|
5.00 |
% |
Expected volatility |
|
|
53 |
% |
|
|
66 |
% |
Expected life (years) |
|
5.74 years |
|
5.25 years |
Based on these calculations, the weighted-average fair value per share of common stock was
$4.48 per share for the three months ended July 31, 2008. There were no options granted during the
three months ended July 31, 2007. The compensation costs that have been included in the Companys
results of operations for these stock-based compensation arrangements for the three months ended
2008 and 2007, as a result of the Companys adoption of SFAS 123R, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
July 31, |
|
|
|
2008 |
|
|
2007 |
|
Cost of maintenance revenues |
|
$ |
46 |
|
|
$ |
8 |
|
Cost of services revenues |
|
|
33 |
|
|
|
8 |
|
|
|
|
|
|
|
|
SFAS 123R expense included in cost of revenues |
|
|
79 |
|
|
|
16 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
Research and development |
|
|
339 |
|
|
|
157 |
|
Sales and marketing |
|
|
751 |
|
|
|
461 |
|
General and administrative |
|
|
234 |
|
|
|
81 |
|
|
|
|
|
|
|
|
SFAS 123R expense included in operating expenses |
|
|
1,324 |
|
|
|
699 |
|
|
|
|
|
|
|
|
SFAS 123R expense included in net loss |
|
$ |
1,403 |
|
|
$ |
715 |
|
|
|
|
|
|
|
|
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.
As of July 31, 2008 and 2007, there was $12.3 million and $6.9 million, respectively, of total
unrecognized stock based compensation expenses under SFAS 123R, net of estimated forfeitures, that
the Company expects to amortize. Total unrecognized stock based compensation expenses related to
non-vested awards are expected to be recognized over a weighted-average period of 2.90 years.
During the three months ended July 31, 2008, the Company granted 673,200 options. These
options have exercise prices equal to the closing price of the Companys common stock as quoted on
the NASDAQ on the day of grant (or the most recent trading day if the date of grant is not a NASDAQ
trading day), with exercise prices ranging from $7.54 to $11.55 per share at a weighted-average per
share price of $8.62.
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 effectiveness of the IPO
on February 14, 2008. A total of 1,000,000 shares of the Companys common stock were initially
reserved for future issuance under the ESPP. 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.
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 period 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 date of the offering period.
|
|
|
|
|
|
|
Three Months |
|
|
Ended |
|
|
July 31, |
Risk-free interest rate |
|
|
2.11 |
% |
Expected volatility |
|
|
53 |
% |
Expected term (in years) |
|
0.58 years |
21
Based on these calculations, the weighted-average fair value per share of common stock was
$2.77 per share for the three months ended July 31, 2008. For the three months ended July 31, 2008,
the Company recorded stock-based compensation expense associated with its ESPP of $0.3 million. As
of July 31, 2008, there was $0.1 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, 2008.
APB 25 Intrinsic Value Charges
Given the absence of an active market for the Companys common stock prior to the 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 has been 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 are being 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 $10,000 and $35,000 for the
three months ended July 31, 2008 and 2007, respectively. All options granted in and after fiscal
2006 were issued with exercise prices equal to the fair value.
Information regarding the Companys stock option grants for these fiscal years is summarized
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
Exercise Price |
|
|
|
|
Subject to |
|
per Share |
|
Reassessed |
|
|
Options |
|
and Original |
|
per Share |
Grant Date |
|
Granted |
|
Fair Value |
|
Fair Value |
May 25, 2004 |
|
|
341,251 |
|
|
$ |
0.36 |
|
|
$ |
0.48 |
|
August 12, 2004 |
|
|
147,188 |
|
|
|
0.48 |
|
|
|
0.64 |
|
October 6, 2004 |
|
|
669,375 |
|
|
|
0.48 |
|
|
|
0.64 |
|
November 11, 2004 |
|
|
160,750 |
|
|
|
0.48 |
|
|
|
0.72 |
|
February 3, 2005 |
|
|
911,524 |
|
|
|
0.80 |
|
|
|
1.88 |
|
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. During the three months ended July
31, 2008, the remaining 66,438 of such shares vested. As of July 31, 2008, no shares remain
unvested. Recognition of stock based compensation related to the above restricted common stock
grants is complete as of July 31, 2008.
9. Segment Information
The Company operates in one industry segment selling compliance and security management
solutions.
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 attributed 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
22
total
revenues. As of July 31, 2008 and 2007, 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):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
July 31, |
|
|
|
2008 |
|
|
2007 |
|
Total revenues by geography: |
|
|
|
|
|
|
|
|
United States: |
|
|
|
|
|
|
|
|
Products |
|
$ |
11,409 |
|
|
$ |
8,910 |
|
Maintenance |
|
|
6,358 |
|
|
|
4,341 |
|
Services |
|
|
2,526 |
|
|
|
1,492 |
|
|
|
|
|
|
|
|
Total |
|
|
20,293 |
|
|
|
14,743 |
|
|
|
|
|
|
|
|
EMEA: |
|
|
|
|
|
|
|
|
Products |
|
|
2,694 |
|
|
|
2,193 |
|
Maintenance |
|
|
1,349 |
|
|
|
780 |
|
Services |
|
|
473 |
|
|
|
311 |
|
|
|
|
|
|
|
|
Total |
|
|
4,516 |
|
|
|
3,284 |
|
|
|
|
|
|
|
|
Asia Pacific: |
|
|
|
|
|
|
|
|
Products |
|
|
1,209 |
|
|
|
387 |
|
Maintenance |
|
|
393 |
|
|
|
261 |
|
Services |
|
|
183 |
|
|
|
137 |
|
|
|
|
|
|
|
|
Total |
|
|
1,785 |
|
|
|
785 |
|
|
|
|
|
|
|
|
Other Americas: |
|
|
|
|
|
|
|
|
Products |
|
|
490 |
|
|
|
715 |
|
Maintenance |
|
|
468 |
|
|
|
248 |
|
Services |
|
|
111 |
|
|
|
95 |
|
|
|
|
|
|
|
|
Total |
|
|
1,069 |
|
|
|
1,058 |
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
27,663 |
|
|
$ |
19,870 |
|
|
|
|
|
|
|
|
10. Income Taxes
For the three months ended July 31, 2008, we recorded a benefit for income taxes of ($0.6)
million. The effective tax rate for the three months ended July 31, 2008 was 29.7%, and was based on
our estimated taxable income for the year, plus certain discrete items recorded during the quarter.
The difference between the provision for (benefit from) 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, which is offset by
tax credits. For the three months ended July 31, 2007, we recorded a provision for income taxes of
$0.1 million. The effective tax rate for the three months ended July 31, 2007 was (4.2%). The
effective tax rate for the first quarter of 2007 differs from the U.S. federal statutory rate
primarily due to the impact of non-deductible SFAS 123R stock-based compensation expenses and
un-benefited domestic losses.
We intend to continue maintaining a full valuation allowance 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.
The Company adopted FIN 48 on May 1, 2007. As of July 31, 2008, the liability for uncertain
tax positions was $0.3 million. As of April 30, 2008, the Company also 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 July 31, 2008, the unrecognized tax benefit of $1.8 million increased
to $1.9 million, all of which is offset by a full valuation allowance.
The Companys total unrecognized tax benefit as of April 30, 2008 and July 31, 2008 was $2.1
million and $2.3 million, respectively. As of July 31, 2008, the Company had $0.3 million of
unrealized tax benefits that, if recognized, would affect its effective tax rate for the three
months ended July 31, 2008. In addition, the Company does not expect any material changes to the
23
estimated amount of liability associated with its uncertain tax positions within the next 12 months
related to any statute of limitations expiring and may increase as a result of normal operating
activity.
The following is a roll-forward of the total gross unrecognized tax benefit as of July 31,
2008 (in thousands):
|
|
|
|
|
Balance as of May 1, 2008 |
|
$ |
2,112 |
|
Tax positions related to current year: |
|
|
|
|
Additions |
|
|
151 |
|
Reductions |
|
|
|
|
Settlements |
|
|
|
|
Lapse of statute of limitations |
|
|
|
|
|
|
|
|
Balance as of July 31, 2008 |
|
$ |
2,263 |
|
|
|
|
|
The Companys policy is that it recognizes interest and penalties accrued on any unrecognized
tax benefits as a component of income tax expense. As of July 31, 2008, the Company had
approximately $31,000 of accrued interest or penalties associated with unrecognized tax benefits.
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.
11. Related-Party Transactions
As of July 31, 2008, the Company had prepaid commission payments to certain employees in the
Companys sales and marketing organization, which amounted to approximately $112,000. These
prepayments are properly reflected on the balance sheet as of July 31, 2008 under other prepaid
expenses and current assets.
The Company has previously 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. For the three months ended July 31,
2008 and 2007, the Company recorded expenses of approximately $683,000 and $689,000, 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.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should
be read in conjunction with the (1) unaudited condensed consolidated financial statements and the
related notes thereto included elsewhere in this Quarterly Report on Form 10-Q, and (2) the audited
consolidated financial statements and notes thereto and managements discussion and analysis of
financial condition and results of operations for the fiscal year ended April 30, 2008 included in
our Annual Report on Form 10-K filed with the Securities and Exchange Commission, or the SEC, on
July 22, 2008. This Quarterly Report on Form 10-Q contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. 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. 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 Part II,
Item 1A of this Form 10-Q and in our other SEC filings, including our Annual Report on Form 10-K
for the fiscal year ended April 30, 2008. We disclaim any obligation to update any forward-looking
statements to reflect events or circumstances after the date of such statements.
24
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. Our revenues
have grown from $32.8 million in fiscal 2005 to $101.5 million in fiscal 2008, and were $27.7
million in our first quarter of 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 2008. We generated and
used $3.8 million and $6.9 million in cash from our operating activities during the three months
ended July 31, 2008 and 2007, respectively, and we generally expect to continue to generate
positive cash flows from operating activities on an annual basis. We initially funded our
operations primarily through convertible preferred stock financings that raised a total of
$26.8 million. As of July 31, 2008, we had cash and cash equivalents and accounts receivable of
$91.5 million, and an aggregate of $14.6 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 Platform and Appliance Products to New Customers. The market for compliance and
security management software solutions is rapidly expanding, 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 platform 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
specific compliance and security issues and business risks. In addition, customers may purchase our
Logger appliances to address their log archiving needs. Our growth depends on our ability to sell
our products to new customers.
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 2008
included our ArcSight ESM Management Solution, ArcSight Log Management Suite and ArcSight Connector
Appliance products. We continue the enhancement of our ESM platform and solutions, such as the May
2007 introduction of features such as identity correlation and role-based management and from a
global perspective, the July 2007 introduction of a new compliance solution package for the
Japanese analogue of Sarbanes-Oxley (JSOX). In addition, we continue to develop and release
appliance versions of our software products and updates to complementary solution packages for our
Logger product as well.
Development of an Expanded Channel Network for Our Products. We currently sell our products
primarily through our direct sales force, although we do sell to government purchasers and
internationally through resellers and system integrators. We believe further
25
development of our sales channel will assist us in penetrating the mid-market, particularly as
we expand our appliance-based offerings. In addition, it is likely that 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, motivating our channel partners to promote our products 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 increased revenues in the
three months ended July 31, 2008 and 2007, by $0.2 million and $0.9 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. As of July 31, 2008 and April 30, 2008, deferred
revenues included $2.2 million and $2.5 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. 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. While we
expect revenues from sales to agencies of the U.S. federal government to continue to grow in
absolute dollars, we believe that such sales will continue to decrease as a percentage of revenues
in future periods. In addition, we expect that sales to customers outside of the United States will
continue to grow both in absolute dollars and as a percentage of revenues in future periods.
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 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
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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.
As of July 31, 2008 and April 30, 2008, deferred product revenues were $12.0 million and
$13.6 million, respectively. Included in deferred product revenues as of July 31, 2008 and
April 30, 2008 was $2.0 million and $2.2 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 July 31, 2008 and April 30, 2008 was
$10.0 million and $11.4 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.
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
July 31, 2008 and April 30, 2008, deferred product revenues of $12.0 million and $13.6 million,
respectively, were reduced by net-down adjustments of $3.7 million and $3.3 million, respectively.
See Critical Accounting Policies, Significant Judgments and EstimatesRevenue Recognition and
Note 2 to our Condensed Consolidated Financial Statements (Significant Accounting PoliciesRevenue
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 maintenancestandard and, for customers that require 24-hour coverage seven days a
week, premium. 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 deferred 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 July 31, 2008, deferred maintenance revenues were $25.7 million, of which $20.9 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. Deferred maintenance revenues relate to advanced payments for support contracts that are
recognized ratably. As of July 31, 2008 and April 30, 2008, the deferred maintenance revenues of
$25.7 million and $24.3 million, respectively, were reduced by net-down adjustments of $1.9 million
and $1.5 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 EstimatesRevenue Recognition and Note 2
to our Condensed Consolidated Financial Statements (Significant Accounting PoliciesRevenue
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. 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.
As of July 31, 2008 and April 30, 2008, deferred service revenues were $3.1 million and
$3.4 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 July 31, 2008 and April 30, 2008, the deferred service revenues of $3.1 million
and $3.4 million,
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respectively were reduced by net-down adjustments of $1.4 million and $0.7 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 EstimatesRevenue Recognition and Note 2 to our Condensed
Consolidated Financial Statements (Significant Accounting PoliciesRevenue 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, for certain appliance
products, 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 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, maintenance and services are typically accrued
and expensed when the respective revenue elements are 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, systems integrators and strategic partners 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 insurance 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.
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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. Following our IPO, we had additional cash and cash equivalents of approximately
$45.9 million resulting from the net proceeds of our IPO, after deducting the underwriting
discounts and other offering expenses. This will likely cause a substantial increase in our
interest income compared to periods prior to our IPO. Our foreign currency-related gains and losses
will also vary depending upon movements in underlying exchange rates.
Provision for (Benefit from) Income Taxes. Provision for (benefit from) 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 and
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 that are recognized for the 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. 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 under the preceding criteria, a valuation
allowance is established. Changes in these estimates may result in significant increases or
decreases to our tax provision in a subsequent period, which in turn would affect net income. 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 (benefit from) 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.
Beginning in fiscal 2009, and for the three months ended July 31, 2008, based in part on
historical evidence, trends in profitability, current expectations of future taxable net income and
newly implemented tax planning strategies for fiscal 2009, we transitioned from using actual
effective tax rate for the year to date as the best estimate of the annual effective tax rate under
FASB Interpretation No. 18, Accounting for Income Taxes in the Interim Periods, or FIN 18, as amended
by SFAS 109, to determining our tax provision (benefit) based on an estimated annual tax rate also
in compliance with SFAS 109 and APB No. 28, Interim Financial Reporting, or APB 28. We do not
believe that the change in method of estimating the annual effective rate will have a significant impact on the tax provision
(benefit) on an annual basis, although there may be an impact on a quarterly basis. For example, if we had not made the change in method of estimating
the annual effective rate, we would have recorded a provision for income taxes in the three months ended July 31, 2008. Significant
components affecting the tax rate for fiscal 2009 include R&D and foreign tax credits, the
composite state tax rate, and non-deductible stock-based compensation expense.
For the three months ended July 31, 2008, we recorded a benefit for income taxes of ($0.6)
million. The effective tax rate for the three months ended July 31, 2008 is 29.7%, and is based on
our estimated taxable income for the year, plus certain discrete items recorded during the quarter.
The difference between the provision for (benefit from) 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 non-deductible SFAS 123R stock-based compensation expenses, which is offset by
tax credits. To the extent our level of profitability changes during the year, the effective tax
rate will be revised to reflect these changes. For the three months ended July 31, 2007, we
recorded a provision for income taxes of $0.1 million. The effective tax rate for the three months
ended July 31, 2007 was (4.2%), and was primarily related to foreign income taxes. The effective tax
rate for the first quarter of 2007 differs from the U.S. federal statutory rate primarily due to
the impact of non-deductible SFAS 123R stock-based compensation expenses and un-benefited domestic
losses.
We intend to continue maintaining a full valuation allowance 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.
Critical Accounting Policies, Significant Judgments and Estimates
Our condensed 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 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 uncertainties in income taxes,
contingencies and litigation, allowances for doubtful accounts, and accrued liabilities.
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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 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. |
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 request, nor do we require,
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 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.
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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 only
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. This refinement to our
revenue recognition policy had no impact on revenue recorded for the current or prior periods. For
end-users, resellers and system 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 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 deferred
stock-based compensation of $10,000 and $35,000 for the three months ended July 31, 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 will continue 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 are continuing to amortize those awards
granted prior to May 1, 2006 utilizing an accelerated amortization schedule. In accordance with
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 the three months ended July 31, 2007 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 our historical volatility. The
weighted-average expected volatility for options granted for the three months ended July 31, 2008
and 2007 was 53% 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 the three months ended July 31, 2008 and 2007 was 5.74 years and
5.25 years, respectively. For the three months ended July 31, 2008 and 2007, the weighted-average
risk-free interest rate used was 3.17% 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 the three months ended July 31, 2008 and 2007, in determining the
expense recorded in our consolidated statement of operations.
We recorded expense of $1.1 million and $0.6 million for the three months ended July 31, 2008
and 2007, respectively, in connection with stock-based awards accounted for under SFAS 123R. As of
July 31, 2008, unrecognized stock-based compensation
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expense of non-vested stock options was $12.3 million, which is expected to be recognized
using the straight line method over the required service period of the options. We expect
stock-based compensation expense to increase in absolute dollars as a result of the adoption of
SFAS 123R. 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 upon 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 will end 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 three months ended July 31, 2008, we recorded stock-based compensation
expense associated with the ESPP of $0.3 million. As of July 31, 2008, unrecognized stock-based
compensation expense associated with rights to acquire shares of common stock under the ESPP was
$0.1 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 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 July 31, 2008, we had two customers that accounted for
10% and 11%, respectively, of our net accounts receivable.
32
Accounting for Income Taxes
Provision for (benefit from) income taxes is calculated in accordance with SFAS 109 and APB 28. We estimate
income taxes in each of the jurisdictions in which we operate. This process involves determining
income tax expense and 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 that are recognized for the 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. 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 our tax provision in a period in which such estimates are
charged, which would affect net income.
Beginning in fiscal 2009, and for the period ended July 31, 2008, based in part on historical
evidence, trends in profitability, current expectations of future taxable net income, and newly
implemented tax planning strategies for fiscal 2009, we transitioned from using the actual effective
tax rate for the year to date as the best estimate of the annual effective tax rate under FIN 18, as
amended by SFAS 109, to determining our tax provision (benefit) based on an estimated annual tax
rate also in compliance with SFAS 109 and APB 28. The income tax provision, which includes U.S.
federal, state and local and foreign income taxes, is based on the application of a forecasted
annual income tax rate applied to the current quarters year-to-date pre-tax income. In determining
the estimated annual effective income tax rate, we analyze various factors, including estimates
of our annual earnings, taxing jurisdictions in which the earnings will be generated, the impact of
state and local income taxes, our ability to use tax credits and net operating loss carryforwards,
the current year accrual for unrecognized tax benefits and available tax planning alternatives.
Discrete items, including the effect of changes in tax laws, tax rates, changes in liabilities for
previous years uncertain tax positions and applicable circumstances with respect to valuation
allowances or other unusual or non-recurring tax adjustments are reflected in the period in which
they occur as an addition to, or reduction from, the income tax provision, rather than included in
the estimated effective annual income tax rate. Significant components affecting the tax rate for
fiscal 2009 include R&D and foreign tax credits, the composite state tax rate and non-deductible
stock-based compensation expense.
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.
33
Results of Operations
The following table presents our results of operations as a percentage of total revenues for
the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 31, |
|
|
2008 |
|
2007 |
Revenues: |
|
|
|
|
|
|
|
|
Products |
|
|
57.1 |
% |
|
|
61.4 |
% |
Maintenance |
|
|
31.0 |
|
|
|
28.3 |
|
Services |
|
|
11.9 |
|
|
|
10.3 |
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
100.0 |
|
|
|
100.0 |
|
Cost of revenues: |
|
|
|
|
|
|
|
|
Products |
|
|
6.0 |
|
|
|
3.4 |
|
Maintenance |
|
|
5.9 |
|
|
|
6.3 |
|
Services |
|
|
7.4 |
|
|
|
5.4 |
|
|
|
|
|
|
|
|
|
|
Total cost of revenues |
|
|
19.3 |
|
|
|
15.1 |
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
80.7 |
|
|
|
84.9 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
Research and development |
|
|
19.2 |
|
|
|
21.4 |
|
Sales and marketing |
|
|
53.7 |
|
|
|
60.0 |
|
General and administrative |
|
|
15.7 |
|
|
|
17.7 |
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
88.6 |
|
|
|
99.1 |
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(7.9 |
)% |
|
|
(14.2 |
)% |
|
|
|
|
|
|
|
|
|
Comparison of the Three Months Ended July 31, 2008 and 2007
Revenues
Revenues for the three-months ended July 31, 2008 and 2007 was as follows (in thousands,
except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 31, |
|
|
|
|
|
|
2008 |
|
2007 |
|
Change in Dollars |
|
Change in Percent |
Products |
|
$ |
15,802 |
|
|
$ |
12,205 |
|
|
$ |
3,597 |
|
|
|
29.5 |
% |
Percentage of total revenues |
|
|
57.1 |
% |
|
|
61.4 |
% |
|
|
|
|
|
|
|
|
Maintenance |
|
|
8,568 |
|
|
|
5,630 |
|
|
|
2,938 |
|
|
|
52.2 |
% |
Percentage of total revenues |
|
|
31.0 |
% |
|
|
28.3 |
% |
|
|
|
|
|
|
|
|
Services |
|
|
3,293 |
|
|
|
2,035 |
|
|
|
1,258 |
|
|
|
61.8 |
% |
Percentage of total revenues |
|
|
11.9 |
% |
|
|
10.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
27,663 |
|
|
$ |
19,870 |
|
|
$ |
7,793 |
|
|
|
39.2 |
% |
|
|
|
|
|
|
|
Product Revenues. Product revenues for the three months ended July 31, 2008 included revenues
of $7.9 million from 47 new customers and revenues of $7.9 million from existing customers. New
customer revenues for the three months ended July 31, 2008 increased by $3.4 million compared to
new customer revenues for the three months ended July 31, 2007. Existing customer revenues for the
three months ended July 31, 2008 increased by $0.2 million compared to existing customer revenues
for the three months ended July 31, 2007. There was a net recognition of $0.2 million and $0.8
million of product revenues in the three months ended July 31, 2008 and 2007, respectively, related
to sales transactions that initially included an undelivered product element for which we did not
have VSOE. As of July 31, 2008, deferred product revenues included $2.0 million related to similar
transactions. See the related discussion in Sources of Revenues, Cost of Revenues and Operating
Expenses.
34
Maintenance Revenues. Maintenance revenues increased $2.9 million for the three months ended
July 31, 2008 compared to July 31, 2007, as a result of providing support services to a larger
installed base as well as the incremental maintenance revenues from increased product sales.
Services Revenues. Services revenues increased by $1.3 million for the three months ended
July 31, 2008 compared to July 31, 2007, as a result of increased service billings to a larger
installed base of customers.
Geographic Regions. We sell our product in three geographic regions: Americas; Europe; and
Asia Pacific. Net sales, which include product, maintenance and service revenue, for each region
are summarized in the following table (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
July 31, |
|
|
|
|
|
|
2008 |
|
2007 |
|
Change in Dollars |
|
Change in Percent |
Americas |
|
$ |
21,362 |
|
|
$ |
15,801 |
|
|
$ |
5,561 |
|
|
|
35.2 |
% |
Percentage of total revenue |
|
|
77.2 |
% |
|
|
79.5 |
% |
|
|
|
|
|
|
|
|
Europe |
|
|
4,516 |
|
|
|
3,284 |
|
|
|
1,232 |
|
|
|
37.5 |
% |
Percentage of total revenue |
|
|
16.3 |
% |
|
|
16.5 |
% |
|
|
|
|
|
|
|
|
Asia Pacific |
|
|
1,785 |
|
|
|
785 |
|
|
|
1,000 |
|
|
|
127.4 |
% |
Percentage of total revenue |
|
|
6.5 |
% |
|
|
4.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
27,663 |
|
|
$ |
19,870 |
|
|
$ |
7,793 |
|
|
|
39.2 |
% |
|
|
|
|
|
|
|
Cost of Revenues and Gross Margin
The following table is a summary of cost of product, maintenance, and services revenues in
absolute amounts and as a percentage of total revenues (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
July 31, |
|
|
|
|
|
|
2008 |
|
2007 |
|
Change in Dollars |
|
Change in Percent |
Products |
|
$ |
1,655 |
|
|
$ |
684 |
|
|
$ |
971 |
|
|
|
142.0 |
% |
Percentage of total revenues |
|
|
6.0 |
% |
|
|
3.4 |
% |
|
|
|
|
|
|
|
|
Maintenance |
|
|
1,631 |
|
|
|
1,246 |
|
|
|
385 |
|
|
|
30.9 |
% |
Percentage of total revenues |
|
|
5.9 |
% |
|
|
6.3 |
% |
|
|
|
|
|
|
|
|
Services |
|
|
2,043 |
|
|
|
1,078 |
|
|
|
965 |
|
|
|
89.5 |
% |
Percentage of total revenues |
|
|
7.4 |
% |
|
|
5.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues |
|
$ |
5,329 |
|
|
$ |
3,008 |
|
|
$ |
2,321 |
|
|
|
77.2 |
% |
|
|
|
|
|
|
|
35
The following table is a summary of gross profit for products, maintenance, and services and
their respective gross margins (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
July 31, |
|
|
2008 |
|
2007 |
Gross margin |
|
|
|
|
|
|
|
|
Products |
|
$ |
14,147 |
|
|
$ |
11,521 |
|
Percentage of product revenues |
|
|
89.5 |
% |
|
|
94.4 |
% |
Maintenance |
|
|
6,937 |
|
|
|
4,384 |
|
Percentage of maintenance revenues |
|
|
81.0 |
% |
|
|
77.9 |
% |
Services |
|
|
1,250 |
|
|
|
957 |
|
Percentage of services revenues |
|
|
38.0 |
% |
|
|
47.0 |
% |
|
|
|
Total gross margin |
|
$ |
22,334 |
|
|
$ |
16,862 |
|
Percentage of total revenues |
|
|
80.7 |
% |
|
|
84.9 |
% |
|
|
|
Cost of Product Revenues and Gross Margin. Cost of product revenues increased by $1.0 million
for the three months ended July 31, 2008, primarily due to increased appliance cost of goods of
$0.7 million related to increased appliance sales, as well as a $0.3 million increase related to
royalty obligations associated with product cost of goods sold. Product gross margin as a
percentage of product revenues decreased by 4.9% to 89.5% for the three months ended July 31, 2008,
compared to 94.4% for the three months ended July 31, 2007, due in part to increases in royalty
fees related to increased sales of products that include licensed technology, and mix of lower
margin appliance product sales.
Cost of Maintenance Revenues and Gross Margin. Cost of maintenance revenues increased by $0.4
million for the three months ended July 31, 2008 compared to July 31, 2007, due primarily to
increased compensation related expenses of $0.3 million related to increased headcount in our
technical support organization, and increases in third-party royalty support and maintenance
expenses of $0.1 million. Maintenance gross margin increased by 3.1% as a percentage of
maintenance revenues for the three months ended July 31, 2008 compared to July 31, 2007, 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 services revenues increased by $1.0
million for the three months ended July 31, 2008 compared to July 31, 2007 due to increased
compensation related expenses of $0.5 million related to increased head count and cost per
employee. Additionally, use of third party contractors increased by $0.4 million. Services gross
margin as a percentage of services revenues decreased by 9.0% to 38.0% for the three months ended
July 31, 2008 from 47.0% for the three months ended July 31, 2007, due primarily to an increase in
headcount and related cost per employee, and a decrease in productivity due to training of
employees.
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
July 31, |
|
|
|
|
|
|
2008 |
|
2007 |
|
Change in Dollars |
|
Change in Percent |
Research and development |
|
$ |
5,315 |
|
|
$ |
4,260 |
|
|
$ |
1,055 |
|
|
|
24.8 |
% |
Percentage of total revenues |
|
|
19.2 |
% |
|
|
21.4 |
% |
|
|
|
|
|
|
|
|
Sales and Marketing |
|
|
14,868 |
|
|
|
11,919 |
|
|
|
2,949 |
|
|
|
24.7 |
% |
Percentage of total revenues |
|
|
53.8 |
% |
|
|
60.0 |
% |
|
|
|
|
|
|
|
|
General and administrative |
|
|
4,349 |
|
|
|
3,520 |
|
|
|
829 |
|
|
|
23.6 |
% |
Percentage of total revenues |
|
|
15.7 |
% |
|
|
17.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
$ |
24,532 |
|
|
$ |
19,699 |
|
|
$ |
4,833 |
|
|
|
24.5 |
% |
Percentage of total revenues |
|
|
88.7 |
% |
|
|
99.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
Research and Development Expenses. The increase in research and development expenses for the
three months ended July 31, 2008 of $1.1 million compared to the three months ended July 31, 2007
was primarily attributable to an increase of $0.7 million in compensation expense and an increase
of $0.2 million in stock-based compensation expense, associated with an increase in research and
development personnel from 89 to 105 at the respective period ends, and to an increase of
facilities-related expense of $0.1 million as a result of our expansion of our headquarters in
Cupertino, California.
Sales and Marketing Expenses. The increase in sales and marketing expenses for the three
months ended July 31, 2008 of $2.9 million compared to the three months ended July 31, 2007, was
primarily attributable to an increase of $2.0 million in compensation expense associated with an
increase in sales and marketing personnel from 108 to 135 at the respective period ends. The
increase also included an increase of $0.3 million as a result of an increase in stock-based
compensation expense. In addition, travel and entertainment expenses increased by $0.4 million,
marketing program expenses increased by $0.3 million, and facilities expenses increased
$0.1 million.
General and Administrative Expenses. The increase in general and administrative expenses of
$0.8 million for the three months ended July 31, 2008, compared to the three months ended July 31,
2007, was primarily associated with an increase of $0.6 million in compensation related-expense,
and an increase in professional service expenses of $0.2 million.
Non-Operating Expenses
The following table is a summary of interest income and other expenses, net (in thousands,
except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
July 31, |
|
|
|
|
|
|
2008 |
|
2007 |
|
Change in Dollars |
|
Change in Percent |
Interest income |
|
$ |
404 |
|
|
$ |
148 |
|
|
$ |
256 |
|
|
|
173.0 |
% |
Percentage of total revenues |
|
|
1.5 |
% |
|
|
0.7 |
% |
|
|
|
|
|
|
|
|
Other expense, net |
|
|
(99 |
) |
|
|
(129 |
) |
|
|
30 |
|
|
|
23.3 |
% |
Percentage of total revenues |
|
|
(0.4 |
)% |
|
|
(0.6 |
)% |
|
|
|
|
|
|
|
|
Provision for (benefit from) income taxes |
|
|
(563 |
) |
|
|
118 |
|
|
|
(681 |
) |
|
|
(577.1 |
)% |
Percentage of total revenues |
|
|
(2.0 |
)% |
|
|
0.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-operating expenses |
|
$ |
(258 |
) |
|
$ |
137 |
|
|
$ |
(395 |
) |
|
|
(288.3 |
)% |
Percentage of total revenues |
|
|
(0.9 |
)% |
|
|
0.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income. The increase in interest income of $0.3 million for the three months ended
July 31, 2008 compared to July 31, 2007 was primarily attributable to increased cash and cash
equivalents related to net proceeds received from our IPO.
Other Income (Expense), Net. Other income (expense), net for the three months ended July 31,
2008 compared to July 31, 2007 remained relatively unchanged.
Provision for (Benefit from) Income Taxes. For the three months ended July 31, 2008, we recorded a benefit
for income taxes of ($0.6) million. The effective tax rate for the three months ended July 31,
2008 is 29.7%, and is based on our estimated taxable income for the year, plus certain discrete
items recorded during the quarter. The difference between the provision for (benefit from) 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, which is offset by tax credits. For the three months ended July 31, 2007,
we recorded a provision for income taxes of $0.1 million, primarily related to foreign corporate
income taxes. The effective tax rate for the three months ended July 31, 2007 was (4.2%). The
effective tax rate for the first quarter of 2007 differs from the U.S. federal statutory rate
primarily due to the impact of non-deductible SFAS 123R stock-based compensation expenses and
un-benefited domestic losses.
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
37
generated $3.8 million of cash from our operating activities during the three months ended
July 31, 2008 compared to using $6.9 million of cash from our operating activities for the three
months ended July 31,2007. We generally expect to continue generating positive operating cash flows
on an annual basis. Although, there may be individual quarters in which we use cash as a result of
the timing of receipts or payments. 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 and offering expenses.
At July 31, 2008, we had cash and cash equivalents totaling $74.2 million and accounts
receivable of $17.3 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.
The following table shows our cash flows from operating activities, investing activities and
financing activities for the stated periods:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
July 31, |
|
|
2008 |
|
2007 |
Net cash provided by (used in) operating activities |
|
$ |
3,788 |
|
|
$ |
(6,919 |
) |
Net cash used in investing activities |
|
|
(1,216 |
) |
|
|
(588 |
) |
Net cash used in financing activities |
|
|
(346 |
) |
|
|
(317 |
) |
Operating Activities
Although we have reported a net loss for the three months ended July 31, 2008 and 2007, our
operating activities have provided positive cash flows, 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; |
|
|
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|
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 $3.8 million of cash from operating activities during the three months ended July
31, 2008, primarily as a result of a $9.3 million decrease in accounts receivable due to strong
collections efforts associated with our relatively high accounts receivable balance as of April 30,
2008, and an increase of $1.0 million in other accrued liabilities, offset by a decrease in accrued
compensation and benefits of $6.3 million related to payments of sales commission and performance
bonuses earned in fiscal 2008, and decrease in accounts payable of $0.6 million and deduction in
deferred revenue of $0.5 million. In addition, we had a net loss of $1.3 million for this period,
which included non-cash charges of $1.4 million for stock-based compensation expense and
$0.8 million of depreciation and amortization.
We used $6.9 million of cash from operating activities during the three months ended July 31,
2007, primarily as a result of a $4.7 million increase in accounts receivable due to the growth in
sales and slower than expected collections, a $2.2 million decrease in our accrued compensation and
benefits as a result of our payment of sales commissions and performance bonuses earned in fiscal
38
2007 and a $1.1 million decrease in our accounts payable due to the timing of our payment
obligations, offset by a $2.4 million increase in deferred revenues. In addition, we reported a
net loss of $2.9 million for this quarter, which included non-cash charges of $0.7 million for
stock-based compensation expense and $0.5 million of depreciation and amortization charges.
Investing Activities
During the three months ended July 31, 2008, we used $1.2 million in cash for investing
activities, of which $1.1 million was related to capital expenditures associated with computer
equipment in support of the expansion of our infrastructure and work force. During the three months
ended July 31, 2007, we used $0.6 million in cash for investing activities, substantially all of
which related to capital expenditures associated with computer equipment and furniture and fixtures
for the expansion of our infrastructure and work force.
Financing Activities
During the three months ended July 31, 2008, we used $0.3 million of cash from financing
activities, comprised primarily of $0.5 million in payments for prepaid software licenses used as a
component in our product sales, offset by $0.2 million from net proceeds from the exercise of stock
options. During the three months ended July 31, 2007, cash used in financing activities was
$0.3 million, comprised primarily of $0.5 million in payments for prepaid licenses for software
used as a component in some of our product, offset by $0.2 million from net 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 July 31, 2008, 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.
The following table is a summary of our contractual obligations as of July 31, 2008:
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|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
|
Remainder |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
of FY 2009 |
|
|
FY 2010 |
|
|
FY 2011 |
|
|
FY 2012 |
|
|
Thereafter |
|
|
|
(in thousands) |
|
Operating lease obligations |
|
$ |
11,003 |
|
|
$ |
1,711 |
|
|
$ |
1,967 |
|
|
$ |
1,988 |
|
|
$ |
2,068 |
|
|
$ |
3,269 |
|
Accrued contractual obligations |
|
|
1,764 |
|
|
|
1,601 |
|
|
|
160 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
12,767 |
|
|
$ |
3,312 |
|
|
$ |
2,127 |
|
|
$ |
1,991 |
|
|
$ |
2,068 |
|
|
$ |
3,269 |
|
|
|
|
|
|
|
|
|
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39
Recent Accounting Pronouncements
Refer to the discussion of recent accounting pronouncements in Note 2 Summary of Significant
Accounting Policies in the Notes to the Condensed Consolidated Financial Statements in this
Quarterly Report, which information is incorporated herein by reference.
ITEM 3. 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 and interest rates. 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 $74.2 million as of July 31, 2008, 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.
ITEM 4. 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
potential 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 July 31, 2008, 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.
40
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 Quarterly Report,
our Chief Executive Officer and Chief Financial Officer did not identify any changes in our
internal control over financial reporting during the fiscal quarter covered by this Quarterly
Report that materially affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we are subject to various claims, complaints and legal actions in the
normal course of business. We do not believe we are party to any currently pending litigation, the
outcome of which will have a material adverse effect on our operations or financial position.
ITEM 1A. RISK FACTORS
Risk Related to Our Business and Industry
We have a limited operating history in an emerging market and a history of losses, and we
are unable to predict the extent of any future losses or when, if ever, we will achieve
profitability in the future.
We launched our ESM products in January 2002 and our first Logger product in December 2006.
Because we have a limited operating history, and the market for our products is rapidly evolving,
it is difficult for us to predict our operating results and the ultimate size of the market for our
products. We have a history of losses from operations, incurring losses from operations of $2.2
million, $1.3 million, $0.3 million, and $16.8 million for the three months ended July 31, 2008 and
for the fiscal years ended April 30, 2008, 2007, and 2006, respectively. As of July 31, 2008, our
accumulated deficit was $48.0 million. We expect our operating expenses to increase over the next
several years as we hire additional sales and marketing personnel, expand our channel sales 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 will continue to incur significant losses and will not become profitable. Our historical revenue
growth has been inconsistent, reflects fluctuations not related to performance and should not be
considered indicative of our future performance. See Managements Discussion and Analysis of
Financial Condition and Results of OperationsSources of Revenue, Cost of Revenues and Operating
Expenses. Further, in future periods, our revenues could decline and, accordingly, we may not be
able to achieve profitability and our losses may increase. Even if we do achieve profitability, 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 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. Fiscal 2007 revenues included a substantial portion of the revenues
so deferred from fiscal 2006, as well as a small amount of revenues similarly deferred from prior
years, and fiscal 2008 revenues included $2.9 million of revenues that were deferred from prior
years. See Managements Discussion and Analysis of Financial Condition and Results of
OperationsSources of Revenues, Cost of Revenues and Operating Expenses. We expect that in future
periods the comparison of revenues period-to-period will not be favorably impacted to the same
extent by similar transactions consummated in fiscal 2007 and prior periods. 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
41
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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changes in the renewal rate of maintenance agreements; |
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our ability to estimate warranty claims accurately; |
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the timing of satisfying revenue recognition criteria, including establishing VSOE for
new products and maintaining VSOE for maintenance and services, particularly where we accrue
the associated commission expense in a different period; |
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|
the budgeting, procurement and work cycles of our customers, including customers in the
public sector, which may cause seasonal variation as our business and the market for
compliance and security management software solutions matures; and |
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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
financial services and retail. |
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 product and the short-term
difficulty in adjusting our operating expenses. Because decisions to purchase products such as our
ESM product 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, 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. In addition, we have less experience with
sales of Logger 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 the value of our products, including their
technical capabilities and potential cost savings to the organization. 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 into 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.
42
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 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 recruit additional channel partners and successfully expand 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 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 collectibility concerns at the time of contract execution and product delivery, may
cause our operating results to fluctuate from period to period.
We have less experience with sale, manufacture, delivery, service and support of Logger
and our other appliance products, and we may be unable to successfully forecast demand or fulfill
orders for these appliance products.
We introduced our first 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 maintain insufficient hardware inventory or excess inventory, we may
be unable to timely deliver ordered products or may have substantial inventory expense. In
addition, 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, we may be unable
to fulfill customer orders and our operating results may fluctuate from period to period. If we
underestimate warranty claims for our appliance products, our operating expenses may be higher than
we anticipate, which in turn may adversely affect our results of operations. In addition, if we
change our hardware configuration or manufacturer, some countries may require us to reinitiate
their import certification process. Because our appliance products are new, we have less experience
with warranty claims, resulting in limited ability to forecast warranty expense. 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.
Because we derive a significant 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 significant majority of our product revenues from ArcSight ESM and related
products. We expect this to continue for the foreseeable future. For example, in fiscal 2008 and
2007, sales of such products represented 56% and 89% of product revenues, respectively, with the
balance coming from transactions that included both our ESM products and our appliance products or
included only appliance products. Prior to fiscal 2007, all of our revenues related to our ESM
products. As a result, although we introduced our complementary appliance products in fiscal 2007
to more fully serve the enterprise compliance and security management market, our revenues and
operating results will continue to depend to a large extent on the demand for our ArcSight ESM
product. 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 Quarterly Report on
43
Form 10-Q. 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 Logger product in fiscal 2007 and are currently developing new
versions of this product and our ESM 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 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. 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, may complicate our relationships
with channel and strategic partners and will entail significant risk of failure. Sales of our
Logger product 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 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 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 will
require 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.
44
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 archiving 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 are more competitively
priced, have greater performance or functionality or incorporate technological advances that we
have not yet developed or implemented.
Our competitors include large software companies, software or hardware network infrastructure
companies, smaller software companies offering more narrowly focused enterprise compliance and
security management, log archiving and response products and small and large companies offering
point solutions that compete with components of our platform or individual products offered by us.
Existing competitors for a compliance and security management software platform solution such as
our ESM platform primarily are specialized, privately-held companies, such as Intellitactics and
NetForensics, as well as larger companies such as CA, Cisco, Symantec, EMC (through its acquisition
of Network Intelligence), IBM (through its acquisition of Micromuse and Consul) and Novell (through
its acquisition of e-Security). Current competitors for sales of our Logger product 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.
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. Many companies, in particular large corporate
enterprises, have developed internally software that is an alternative to our enterprise compliance
and security management and log archiving 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. It 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 these 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. We believe that the trend toward consolidation in our
industry will continue. 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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|
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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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|
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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 archiving and response products and managed security services, which intensifies
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, the ability to provide 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 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 our target market. Further, several companies
currently sell software products that our customers and potential customers have broadly adopted,
which may provide 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 trend toward 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 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.
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 system 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
system 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.
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 three months ended July 31, 2008 and in fiscal years ended
April 30, 2008, 2007 and 2006 we derived 21%, 20%, 32% and 38% of our revenues, respectively, from
contracts with agencies of the U.S. federal government. Accordingly:
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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; |
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potential delays or changes in the government appropriations process; and |
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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
in connection with U.S. federal agencies. These laws and regulations may impose added costs on our
business, and failure to comply with these or other applicable regulations and requirements,
including non-compliance in the past, could lead to claims for damages from our channel partners,
penalties, termination of contracts and suspension or debarment from government contracting for a
period of time. Any such damages, penalties, disruption or limitation in our ability to do business
with the U.S. federal 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, which
may impair our ability to optimize our software development costs and compete for non-government
contracts.
Increasingly, software development is being shifted to lower-cost countries, such as India.
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. Consequently, our ability to optimize our software
development by conducting it overseas 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 software off-shore.
If we are unable to develop software 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.
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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 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 platform, 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 platform 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. Because our customers rely on our product,
services 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 or our failure to properly provide
consulting and implementation services and maintenance to our customers 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 ESM 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 platform to interface with these 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.
Our international sales and operations subject us to additional risks that can adversely
affect our operating results.
In the three months ended July 31, 2008 and in fiscal years ended April 30, 2008, 2007 and
2006, we derived 27%, 33%, 23% and 21% 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,
Canada, China, Germany, Hong
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Kong, Japan, the Netherlands, Singapore, South Korea, Spain, the
United Arab Emirates 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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reduced protection for intellectual property rights in some countries; and |
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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 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 propriety 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 five 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 challenged by third parties, and our patent applications may never
issue 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
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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. 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 2009. See
BusinessIntellectual PropertyOracle License Agreement in our Annual Report on Form 10-K for
the fiscal year ended April 30, 2008. Any errors or defects in this third-party software could
result in errors that could harm our business. In addition, licensed software may not
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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 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 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, and we plan to implement the
use of software tools to review our source code for potential inclusion of open source, but we
cannot be sure that all open source 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 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.
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
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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 287 employees as of April 30,
2007 to 371 employees as of July 31, 2008. 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.
Future acquisitions could disrupt our business and harm our financial condition and results of
operations.
We completed the acquisition of substantially all of the assets of Enira Technologies, LLC in
June 2006, and 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. |
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
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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. During the audit of our
financial statements for fiscal 2004, 2005, 2006 and 2007, material weaknesses in our internal
control over financial reporting were identified. While we believe that we have remediated these
material weaknesses, in the future, additional material weaknesses or other areas of our internal
control over financial reporting may be identified that need improvement. Given our history of
material weaknesses, achieving and maintaining effective controls may be particularly challenging
for us.
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, additional 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 will be required to include
in our periodic reports filed with the SEC beginning for our fiscal year ending April 30, 2009
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 are expending significant resources and providing
significant management oversight. We have a substantial effort ahead of us to maintain the
processes that we have added and to implement additional processes, document our system of internal
control over relevant processes, assess their design, remediate any deficiencies identified and
test their operation. As a result, managements attention may be diverted from other business
concerns, which could harm our business, operating results and financial condition. These efforts
will also involve substantial accounting-related costs. 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.
Implementing any appropriate changes to our internal controls may require specific compliance
training of our directors, officers and employees, entail substantial costs in order to modify our
existing accounting systems, and take a significant period of time to complete. These changes may
not, however, be effective in maintaining the adequacy of our internal controls, and any failure to
maintain that adequacy, 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 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.
We also 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.
The Sarbanes-Oxley Act and the rules and regulations of The NASDAQ Stock Market will make it
more difficult and more expensive for us to maintain directors and officers liability insurance,
and we may be required to accept reduced coverage or incur substantially higher costs to maintain
or increase coverage. If we are unable to maintain adequate directors and officers insurance, our
ability to recruit and retain qualified directors, especially those directors who may be considered
independent for purposes of The NASDAQ Stock Market rules, and officers may be curtailed.
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 2013, 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,
53
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, which would
adversely affect 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 with respect to 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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ratings changes by any securities analysts who follow our company; |
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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; |
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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. |
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 technology companies. Stock
prices of many technology companies have 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.
54
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 downgrade our stock or publish inaccurate or unfavorable research about our
business, 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.
Our directors, executive officers and principal stockholders have substantial control over us
and could delay or prevent a change in corporate control.
Our directors, executive officers and holders of more than 5% of our common stock, together
with their affiliates, beneficially own, in the aggregate, 56.2% of our outstanding common stock as
of September 1, 2008. As a result, these stockholders, acting together, would have the ability to
control the outcome of matters submitted to our stockholders for approval, including the election
of directors and any merger, consolidation or sale of all or substantially all of our assets. In
addition, these stockholders, acting together, would have the ability to control the management and
affairs of our company. Accordingly, this concentration of ownership might harm the market price of
our common stock by:
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delaying, deferring or preventing a change in control of us; |
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impeding a merger, consolidation, takeover or other business combination involving us; or |
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discouraging a potential acquirer from making a tender offer or otherwise attempting to
obtain control of us. |
Delaware law and provisions in our restated certificate of incorporation and amended and
restated bylaws 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 chairman of the board, our lead independent director, if any, our chief
executive officer, our president or a majority of our board of directors 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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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. |
55
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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 July 31, 2008, 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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
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Incorporated by Reference |
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Exhibit |
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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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10.01
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Fiscal Year 2009 Management Bonus Plan.
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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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* |
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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 |
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Act of 1933 or the Securities Exchange Act of 1934, except to the extent that ArcSight Inc.
specifically incorporates it by reference. |
56
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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ARCSIGHT, INC.
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Date: September 12, 2008 |
By: |
/s/ Robert Shaw
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Robert Shaw |
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Chief Executive Officer and Chairman of the Board
(Principal Executive Officer) |
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Date: September 12, 2008 |
By: |
/s/ Stewart Grierson
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Stewart Grierson |
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Chief Financial Officer
(Principal Financial Officer) |
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EXHIBIT INDEX
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Incorporated by Reference |
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Exhibit |
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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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10.01
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Fiscal Year 2009 Management Bonus Plan.
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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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* |
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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. |
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