e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
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þ |
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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, 2009
OR
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o |
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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 001-33445
NETEZZA CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
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Delaware
(State or Other Jurisdiction of Incorporation or
Organization)
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04-3527320
(I.R.S. Employer Identification No.) |
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26 Forest Street
Marlborough, MA
(Address of Principal Executive Offices)
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01752
(Zip Code) |
(508) 382-8200
(Registrants Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). o Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o (Do not check if a smaller reporting company)
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Smaller reporting company o
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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). o Yes þ No
As of
August 31, 2009, there were 60,566,746 shares of the registrants common stock outstanding.
PART I. FINANCIAL INFORMATION
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Item 1. |
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Financial Statements |
NETEZZA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)
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July 31, |
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January 31, |
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2009 |
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2009 |
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ASSETS |
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Current assets |
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Cash and cash equivalents |
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$ |
109,697 |
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$ |
111,635 |
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Accounts receivable |
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31,450 |
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34,457 |
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Inventory |
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17,477 |
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18,409 |
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Deferred tax assets, net |
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12,752 |
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12,723 |
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Restricted cash |
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160 |
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379 |
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Prepaid expenses and other current assets |
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3,185 |
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3,160 |
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Total current assets |
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174,721 |
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180,763 |
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Property and equipment, net |
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9,538 |
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9,586 |
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Deferred tax assets, net |
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10,222 |
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9,415 |
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Goodwill |
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2,000 |
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2,000 |
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Intangible assets, net |
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4,595 |
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2,935 |
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Long-term marketable securities |
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49,004 |
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49,222 |
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Restricted cash |
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639 |
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739 |
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Other long-term assets |
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3,621 |
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4,199 |
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Total assets |
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$ |
254,340 |
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$ |
258,859 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities |
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Accounts payable |
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$ |
6,470 |
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$ |
8,424 |
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Accrued expenses |
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6,193 |
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6,301 |
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Accrued compensation and benefits |
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5,581 |
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6,352 |
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Current portion of deferred revenue |
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40,774 |
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46,356 |
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Total current liabilities |
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59,018 |
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67,433 |
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Long-term deferred revenue |
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8,485 |
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11,979 |
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Other long-term liabilities |
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2,825 |
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2,825 |
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Total long-term liabilities |
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11,310 |
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14,804 |
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Total liabilities |
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70,328 |
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82,237 |
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Commitments and contingencies (Note 10) |
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Stockholders equity |
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Preferred stock, $0.001 par value; 5,000,000 shares authorized at July 31, 2009
and January 31, 2009; none outstanding |
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Common stock, $0.001 par value; 500,000,000 shares authorized at
July 31, 2009 and January 31, 2009; 60,374,308 and 59,760,440 shares
issued at July 31, 2009 and January 31, 2009, respectively |
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61 |
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60 |
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Treasury stock, at cost; 139,062 shares at July 31, 2009 and January 31, 2009, respectively |
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(14 |
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(14 |
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Additional paid-in-capital |
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234,146 |
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228,658 |
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Accumulated other comprehensive loss |
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(3,053 |
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(4,461 |
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Accumulated deficit |
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(47,128 |
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(47,621 |
) |
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Total stockholders equity |
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184,012 |
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176,622 |
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Total liabilities and stockholders equity |
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$ |
254,340 |
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$ |
258,859 |
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See accompanying Notes to Condensed Consolidated Financial Statements
1
NETEZZA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
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Three Months Ended July 31, |
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Six Months Ended July 31, |
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2009 |
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2008 |
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2009 |
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2008 |
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Revenue |
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Product |
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$ |
29,969 |
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$ |
35,134 |
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$ |
62,671 |
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$ |
66,460 |
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Services |
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13,965 |
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11,901 |
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26,630 |
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20,151 |
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Total revenue |
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43,934 |
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47,035 |
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89,301 |
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86,611 |
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Cost of revenue |
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Product |
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11,123 |
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14,005 |
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23,467 |
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26,599 |
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Services |
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3,420 |
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2,888 |
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6,895 |
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4,992 |
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Total cost of revenue |
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14,543 |
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16,893 |
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30,362 |
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31,591 |
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Gross margin |
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29,391 |
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30,142 |
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58,939 |
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55,020 |
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Operating expenses |
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Sales and marketing |
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15,729 |
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15,292 |
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30,405 |
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28,622 |
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Research and development |
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9,297 |
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8,014 |
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20,917 |
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15,262 |
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General and administrative |
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3,974 |
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3,669 |
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7,950 |
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6,782 |
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Total operating expenses |
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29,000 |
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26,975 |
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59,272 |
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50,666 |
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Operating income (loss) |
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391 |
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3,167 |
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(333 |
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4,354 |
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Interest income |
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197 |
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1,036 |
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507 |
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2,779 |
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Interest expense |
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25 |
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50 |
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Other income (expense), net |
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247 |
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(86 |
) |
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378 |
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(219 |
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Income before income tax expense |
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$ |
810 |
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$ |
4,117 |
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$ |
502 |
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$ |
6,914 |
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Income tax expense |
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80 |
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|
976 |
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9 |
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1,641 |
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Net income |
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$ |
730 |
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$ |
3,141 |
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$ |
493 |
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$ |
5,273 |
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Net income per share attributable to common stockholders |
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Basic |
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$ |
0.01 |
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$ |
0.05 |
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$ |
0.01 |
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$ |
0.09 |
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Diluted |
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$ |
0.01 |
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$ |
0.05 |
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$ |
0.01 |
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$ |
0.08 |
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Weighted average common shares outstanding basic |
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60,232 |
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58,720 |
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60,104 |
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58,350 |
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Weighted average common shares outstanding diluted |
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62,847 |
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66,569 |
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62,675 |
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|
66,936 |
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See accompanying Notes to Condensed Consolidated Financial Statements
2
NETEZZA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
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Six Months Ended July 31, |
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2009 |
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2008 |
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Cash flows from operating activities |
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Net income |
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$ |
493 |
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$ |
5,273 |
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Adjustments to reconcile net income to net cash
provided by (used in) operating activities |
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Depreciation and amortization |
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3,635 |
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2,319 |
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Stock-based compensation expense |
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4,705 |
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3,616 |
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Benefit from deferred income taxes, net |
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(138 |
) |
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Gain on
bargain purchase from acquisition of business |
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(365 |
) |
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Gain on trading securities |
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(288 |
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Loss on auction rate securities written put right |
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140 |
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Changes in assets and liabilities, net of acquisitions |
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Accounts receivable |
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3,057 |
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|
3,202 |
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Inventory |
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242 |
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|
1,907 |
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Other assets |
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1,642 |
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(641 |
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Accounts payable |
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(2,673 |
) |
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(1,845 |
) |
Accrued compensation and benefits |
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(833 |
) |
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(1,234 |
) |
Accrued expenses |
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(1,277 |
) |
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(78 |
) |
Deferred revenue |
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(9,283 |
) |
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12,787 |
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Net cash provided by (used in) operating activities |
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(943 |
) |
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25,306 |
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Cash flows from investing activities |
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Purchase of investments |
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(7,377 |
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Sales,
redemptions and maturities of investments |
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1,725 |
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41,877 |
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Acquisition of business, net of cash acquired |
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(2,007 |
) |
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(6,201 |
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Purchases of property and equipment |
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(1,821 |
) |
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(1,629 |
) |
Change in other long-term assets |
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(425 |
) |
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(422 |
) |
Decrease (increase) in restricted cash |
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354 |
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(639 |
) |
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Net cash provided by (used in) investing activities |
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(2,174 |
) |
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|
25,609 |
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Cash flows from financing activities |
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Proceeds from issuance of common stock, net |
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|
784 |
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1,892 |
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Net cash provided by financing activities |
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|
784 |
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1,892 |
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Net increase (decrease) in cash and cash equivalents |
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(2,333 |
) |
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|
52,807 |
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Effect of exchange rate changes on cash and cash equivalents |
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|
395 |
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|
60 |
|
Cash and cash equivalents, beginning of year |
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|
111,635 |
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|
46,184 |
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Cash and cash equivalents, end of year |
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$ |
109,697 |
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$ |
99,051 |
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Supplemental disclosure of cash flow information |
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Cash paid for taxes |
|
$ |
288 |
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|
$ |
1,350 |
|
See accompanying Notes to Condensed Consolidated Financial Statements
`
3
NETEZZA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of the Business
Netezza Corporation (the Company) is a leading provider of data warehouse appliances.
The Companys products, the Netezza Performance Server, or NPS, and its recently introduced
TwinFin appliance, integrate database, server and storage platforms in a purpose-built unit to
enable detailed queries and analyses on large volumes of stored data. The results of these queries
and analyses, often referred to as business intelligence, provide organizations with actionable
information to improve their business operations. The Companys data warehouse appliances were
designed specifically for analysis of terabytes or petabytes of data at higher performance levels
and at a lower total cost of ownership with greater ease of use than can be achieved via
traditional data warehouse systems. The Companys data warehouse appliances perform faster, deeper
and more iterative analyses on larger amounts of detailed data, giving customers greater insight
into trends and anomalies in their businesses, thereby enabling them to make better strategic
decisions.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying condensed consolidated financial statements include those of the Company
and its wholly owned subsidiaries, after elimination of all intercompany accounts and transactions.
The Company has prepared the accompanying condensed consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America (GAAP).
The condensed consolidated balance sheet at January 31, 2009 was derived from audited
financial statements, but does not include all disclosures required by GAAP. The accompanying
unaudited financial statements as of July 31, 2009 and for the three and six months ended July 31,
2009 and 2008 have been prepared by the Company, pursuant to the rules and regulations of the
Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally
included in financial statements prepared in accordance with GAAP have been condensed or omitted
pursuant to such rules and regulations. However, the Company believes that the disclosures are
adequate to make the information presented not misleading. These condensed consolidated financial
statements should be read in conjunction with the Companys audited consolidated financial
statements and the notes thereto included in its Annual Report on Form 10-K for the fiscal year
ended January 31, 2009, filed with the SEC on March 26, 2009.
In the opinion of management, all adjustments, consisting only of normal recurring adjustments
necessary to present a fair statement of the Companys financial position as of July 31,
2009, results of operations for the three and six months ended July 31, 2009 and 2008 and cash flows
for the six months ended July 31, 2009 and 2008 have been made. The results of operations for the
three and six months ended July 31, 2009 and the cash flows for the six months ended July 31, 2009
are not necessarily indicative of the results of operations and cash flows that may be expected for
the year ending January 31, 2010 or any future periods.
In June 2009, the Company adopted SFAS No. 165, Subsequent Events (SFAS 165). SFAS 165
establishes general standards of accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued or are available to be issued.
The Company has evaluated subsequent events through September 4, 2009, the date it filed this
Quarterly Report on Form 10-Q with the SEC, and had no material subsequent events to report as of
that date.
The Companys fiscal year ends on January 31. When the Company refers to a particular fiscal
year, the Company is referring to the fiscal year ended January 31 of that year. For example,
fiscal 2010 refers to the fiscal year ending January 31, 2010.
Use of Estimates
4
The preparation of these financial statements in conformity with GAAP requires the
Company to make estimates and judgments that affect the reported amounts of assets, liabilities,
revenue and expenses, and disclosure of contingent assets and liabilities. On an ongoing basis,
management evaluates these estimates and judgments, including those related to revenue recognition,
the write down of inventory to net realizable value, stock-based
compensation, income taxes, goodwill and acquired intangible assets. The Company bases these estimates on historical and
anticipated results and trends and on various other assumptions that the Company believes are
reasonable under the circumstances, including assumptions as to future events. These estimates form
the basis for making judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. By their nature, estimates are subject to an inherent degree
of uncertainty. Actual results may differ from the Companys estimates.
Foreign Currency Translation
The financial statements of the Companys foreign subsidiaries are translated in
accordance with Statement of Financial Accounting Standards (SFAS) No. 52, Foreign Currency
Translation. The functional currency for the Companys foreign subsidiaries is the applicable
local currency. For financial reporting purposes, assets and liabilities of subsidiaries outside
the United States of America are translated into U.S. dollars using period-end exchange rates.
Revenue and expense accounts are translated at the average rates in effect during the period. The
effects of foreign currency translation adjustments are included in accumulated other comprehensive
income as a component of stockholders equity. Transaction losses for the three and six months
ended July 31, 2009 were $0.2 million and $0.2 million, respectively, and for the three and six
months ended July 31, 2008 were $0.1 million and $0.2 million, respectively, and are recorded as
other income (expense), net in the condensed consolidated statements of operations.
Concentration of Credit Risk and Significant Customers
The Company maintains its cash in bank deposit accounts at high quality financial
institutions. The individual balances, at times, may exceed federally insured limits. However, the
Company does not believe that it is subject to unusual credit risk beyond the normal credit risk
associated with commercial banking relationships.
Financial instruments which potentially expose the Company to concentrations of credit
risk consist of accounts receivable. Management believes its credit policies are prudent and
reflect normal industry terms and business risk. At July 31, 2009, one customer accounted for 20%
of accounts receivable. At January 31, 2009, three customers accounted for 15%, 11% and 10%,
respectively, of accounts receivable. No customer accounted for 10% or greater of the Companys
total revenue for the six months ended July 31, 2009, while one customer accounted for 10% or
greater of the Companys total revenue for the six months ended July 31, 2008.
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with SFAS No. 123R,
Share-Based Payment (SFAS 123R). Under the fair value recognition provisions of SFAS 123R,
stock-based compensation cost is measured at the grant date based on the fair value of the award
and is recognized as expense over the vesting period. The Company has selected the Black-Scholes
option pricing model to determine fair value of stock option awards. Determining the fair value of
stock-based awards at the grant date requires judgment, including estimating the expected life of
the stock awards and the volatility of the underlying common stock. Changes to the assumptions may
have a significant impact on the fair value of stock options, which could have a material impact on
the Companys financial statements. In addition, judgment is also required in estimating the amount
of stock-based awards that are expected to be forfeited. Should the Companys actual forfeiture
rates differ significantly from the Companys estimates, the Companys stock-based compensation
expense and results of operations could be materially impacted. The calculation of compensation
cost in accordance with SFAS 123R for options issued prior to the Companys initial public offering
in July 2007 required the Companys Board of Directors, with input from management, to estimate the
fair market value of the Companys common stock on the date of grant of those options. These
estimates of fair market value were determined based upon a number of objective and subjective
factors and were, therefore, inherently subjective estimates.
5
For stock options and restricted stock the Company recognizes compensation cost on a
straight-line basis over the awards vesting periods for those awards that contain only a service
vesting feature. For awards with a performance condition vesting
feature, of which there are none outstanding as of July 31, 2009, the
Company recognizes compensation cost on a graded-vesting basis over
the awards expected vesting periods.
The Company accounts for stock-based compensation expense for non-employees using the
fair value method prescribed by Emerging Issues Task Force (EITF) 96-18, Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services (EITF 96-18) and the Black-Scholes option pricing model, and records the fair
value of non-employee stock options as an expense over the vesting term of the option.
The fair value of each option granted during the three and six months ended July 31, 2009
and 2008 was estimated on the date of grant using the Black-Scholes option-pricing model with the
following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 31, |
|
Six Months Ended July 31, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
Dividend yield |
|
None |
|
None |
|
None |
|
None |
Expected volatility |
|
|
56.8 |
% |
|
|
42.0 |
% |
|
|
56.7 |
% |
|
|
45.4 |
% |
Risk-free interest rate |
|
|
2.41 |
% |
|
|
3.37 |
% |
|
|
1.95 |
% |
|
|
2.70 |
% |
Expected life (in years) |
|
|
5.0 |
|
|
|
5.0 |
|
|
|
5.0 |
|
|
|
5.0 |
|
Weighted-average fair value at grant date |
|
$ |
3.89 |
|
|
$ |
5.30 |
|
|
$ |
3.03 |
|
|
$ |
4.45 |
|
For the three and six months ended July 31, 2009, the expected volatility assumption used
in the Black-Scholes option-pricing model was a blended rate based on the historical trading
activity of the Companys common stock since the initial public offering and an analysis of peer
group volatility. For the three and six months ended July 31, 2008, the Companys expected
volatility assumption was based on peer group volatility. The expected life assumption is based on
the simplified method in accordance with the SECs Staff Accounting Bulletin No. 110. The
simplified method is based on the vesting period and contractual term for each vesting tranche of
awards. The average mid-point between the vesting date and the expiration date for each vesting
period is used as the expected term under this method. The risk-free interest rate used in the
Black-Scholes model is based on the implied yield curve available on U.S. Treasury zero-coupon
issues at the date of grant with a remaining term equal to the Companys expected term assumption.
The Company has never declared or paid a cash dividend and has no current plans to pay cash
dividends. As required under SFAS 123R, management made an estimate of expected forfeitures of
equity awards and is recognizing compensation costs only for those awards expected to vest.
The amounts included in the condensed consolidated statements of operations for the three
and six months ended July 31, 2009 and 2008 relating to stock-based compensation expense under SFAS
123R are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 31, |
|
|
Six Months Ended July 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Cost of product |
|
$ |
11 |
|
|
$ |
43 |
|
|
$ |
22 |
|
|
$ |
86 |
|
Cost of services |
|
|
98 |
|
|
|
66 |
|
|
|
195 |
|
|
|
111 |
|
Sales and marketing |
|
|
816 |
|
|
|
601 |
|
|
|
1,566 |
|
|
|
1,172 |
|
Research and development |
|
|
683 |
|
|
|
559 |
|
|
|
1,317 |
|
|
|
1,000 |
|
General and administrative |
|
|
839 |
|
|
|
673 |
|
|
|
1,582 |
|
|
|
1,233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,447 |
|
|
$ |
1,942 |
|
|
$ |
4,682 |
|
|
$ |
3,602 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income Per Share
The Company computes basic net income per share by dividing its net income for the period
by the weighted average number of common shares outstanding during the period, excluding the
dilutive effects of common stock equivalents. Diluted net income per share includes the dilutive
effect of stock options and warrants to purchase common stock under the treasury stock method.
6
The weighted average shares used to compute net income per share were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 31, |
|
Six Months Ended July 31, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
Weighted average shares used to compute net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
60,232 |
|
|
|
58,720 |
|
|
|
60,104 |
|
|
|
58,350 |
|
Dilutive options to purchase common stock |
|
|
2,615 |
|
|
|
7,849 |
|
|
|
2,571 |
|
|
|
8,586 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
62,847 |
|
|
|
66,569 |
|
|
|
62,675 |
|
|
|
66,936 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following stock options to purchase common stock have been excluded from the
computation of diluted net income per share for the periods presented because including the stock
options would be anti-dilutive.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 31, |
|
Six Months Ended July 31, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase common stock |
|
|
8,007 |
|
|
|
4,788 |
|
|
|
7,672 |
|
|
|
5,694 |
|
Comprehensive Income
Comprehensive income consists of net income, adjustments to stockholders equity for
foreign currency translation adjustments and net unrealized gains or losses from investments. For
the purposes of comprehensive income disclosures, the Company does not record tax provisions or
benefits for the net changes in the foreign currency translation adjustment, as the Company intends
to permanently reinvest undistributed earnings in its foreign subsidiaries in accordance with
Accounting Principles Board (APB) Opinion 23. Accumulated other comprehensive loss consists of
foreign exchange gains and losses and net unrealized gains or losses from investments.
The components of comprehensive income are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 31, |
|
|
Six Months Ended July 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Net income |
|
$ |
730 |
|
|
$ |
3,141 |
|
|
$ |
493 |
|
|
$ |
5,273 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
adjustment, net of tax of
$0 |
|
|
223 |
|
|
|
(2 |
) |
|
|
189 |
|
|
|
31 |
|
Net unrealized gain (loss)
from investments, net of
tax of $0 |
|
|
112 |
|
|
|
1,965 |
|
|
|
1,219 |
|
|
|
(3,104 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
1,065 |
|
|
$ |
5,104 |
|
|
$ |
1,901 |
|
|
$ |
2,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recent Accounting Pronouncements
On February 1, 2009, the Company adopted FASB Staff Position (FSP) No. 157-2,
Effective Date of FASB Statement No. 157, (FSP 157-2). FSP 157-2 delayed the effective date of
SFAS No. 157, Fair Value Measurement (SFAS 157) for all non-financial assets and non-financial
liabilities, items that are recognized or disclosed at fair value in the financial statements on a
non-recurring basis, until the beginning of the first quarter of fiscal 2010. As permitted by FSP
157-2, the Company adopted the remaining provisions of SFAS 157 on February 1, 2009, which did not
have a material impact on the Companys consolidated financial statements.
7
On February 1, 2009, the Company adopted FSP EITF 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities (FSP EITF 03-6-1). This
FSP provides that unvested share-based payment awards that contain nonforfeitable rights to
dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall
be included in the computation of earnings per share pursuant to the two-class method. Upon
adoption, a company is required to retrospectively adjust its earnings per share data (including
any amounts related to interim periods, summaries of earnings and selected financial data) to
conform with the provisions in this FSP. The adoption of FSP EITF 03-6-1 did not have a material
impact on the Companys consolidated financial statements.
On February 1, 2009, SFAS No. 141 (revised 2007), Business Combinations (SFAS 141R) became
effective for the Company. This statement significantly changes the accounting for business
combinations in a number of areas including the treatment of contingent consideration,
contingencies, acquisition costs, in process research and development and restructuring costs. In
addition, under this statement, changes in deferred tax asset valuation allowances and acquired
income tax uncertainties in a business combination after the measurement period will impact income
tax expense. The Companys acquisition of Tizor Systems, Inc. in February 2009 (see Note 5) was
accounted for in accordance with SFAS 141R. SFAS 141R may have a material impact on the Companys
consolidated financial statements if or when the Company enters into future business combinations.
On February 1, 2009, SFAS No. 160, Noncontrolling Interests in Consolidated Financial
Statementsan amendment of ARB No. 51 became effective for the Company. This statement changes
the accounting and reporting for minority interests, which will be recharacterized as
noncontrolling interests and classified as a component of equity. This new consolidation method
significantly changes the accounting for transactions with minority interest holders. As of July
31, 2009, the Company did not have any minority interests.
In June 2009, the Company adopted FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair
Value of Financial Instruments (FSP FAS 107-1 and APB 28-1). This FSP amends SFAS No. 107,
Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of
financial instruments in interim as well as in annual financial statements. This FSP also amends
APB 28, Interim Financial Reporting, to require those disclosures in all interim financial
statements. The adoption of FSP FAS 107-1 and APB 28-1 did not have a material impact on the
Companys consolidated financial statements.
In June 2009, FSP FAS 157-4, Determining Whether a Market Is Not Active and a Transaction Is
Not Distressed, (FSP FAS 157-4) became effective for the Company. FSP FAS 157-4 provides
guidelines for making fair value measurements more consistent with the principles presented in SFAS
157. FSP FAS 157-4, which provides additional authoritative guidance in determining whether a
market is active or inactive and whether a transaction is distressed, is applicable to all assets
and liabilities (i.e., financial and nonfinancial) and will require enhanced disclosures. FSP FAS
157-4 did not have a material impact on the Companys consolidated financial statements.
In June 2009, FSP FAS 115-2 and FSP FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments (FSP FAS 115-2 and FSP FAS 124-2), became effective for the
Company. FSP FAS 115-2 and FSP FAS 124-2 amend the other-than-temporary impairment guidance for
debt and equity securities. The adoption of FSP FAS 115-2 and FSP FAS 124-2 did not have a material
impact on the Companys consolidated financial statements.
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and
the Hierarchy of Generally Accepted Accounting Principles, a replacement of SFAS No. 162 (SFAS
168). SFAS 168 will become effective for the Company for interim and annual periods ending after
September 15, 2009. SFAS 168 does not change GAAP, but combines all authoritative standards, such
as those issued by the FASB, American Institute of Certified Public Accountants (the AICPA) and
EITF, into a comprehensive, topically organized online
database, which is expected to become the single source of authoritative GAAP applicable for
all non-governmental entities, except for rules and interpretive releases of the SEC.
8
From time to time, new accounting pronouncements are issued by the FASB and subsequently
adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company
believes that the impact of recently issued standards, which are not yet effective, will not have a
material impact on the Companys consolidated results of operations and financial condition upon
adoption.
3. Fair Value Measurements
On February 1, 2008, the Company adopted the provisions of SFAS 157, for its financial
assets and liabilities measured at fair value on a recurring basis. On February 1, 2009, as
permitted by FSP 157-2, the Company adopted the remaining provisions of SFAS 157 for all
non-financial assets and non-financial liabilities that are recognized or disclosed at fair value
in the financial statements on a non-recurring basis. The adoption of this accounting pronouncement
did not have a material effect on the Companys consolidated financial statements for financial and
non-financial assets and liabilities and any other assets and liabilities carried at fair value.
SFAS 157 provides a framework for measuring fair value under GAAP and requires expanded
disclosures regarding fair value measurements. SFAS 157 defines fair value as the exchange price
that would be received for an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. SFAS 157 also establishes a fair value hierarchy that
requires an entity to maximize the use of observable inputs, where available, and minimize the use
of unobservable inputs when measuring fair value. The standard describes three levels of inputs
that may be used to measure fair value:
|
|
|
|
|
Level 1
|
|
|
|
Quoted prices in active markets for identical assets or liabilities. |
|
Level 2
|
|
|
|
Observable inputs, other than level 1 prices, such as quoted prices
in active markets for similar assets and liabilities, quoted prices
for identical or similar assets and liabilities in markets that are
not active, or other inputs that are observable or can be
corroborated by observable market data. |
|
Level 3
|
|
|
|
Unobservable inputs that are supported by little or no market
activity and that are significant to the fair value of the assets
or liabilities. This includes certain pricing models, discounted
cash flow methodologies and similar techniques that use significant
unobservable inputs. |
The following table summarizes the composition of the Companys investments at July 31,
2009 and January 31, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classification on Balance Sheet |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Short Term |
|
|
Long Term |
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
Aggregate |
|
|
Marketable |
|
|
Marketable |
|
July 31, 2009 |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
|
Securities |
|
|
Securities |
|
Available-for-Sale Auction Rate Securities |
|
$ |
36,725 |
|
|
$ |
|
|
|
$ |
(2,182 |
) |
|
$ |
34,543 |
|
|
$ |
|
|
|
$ |
34,543 |
|
Trading Auction Rate Securities |
|
$ |
15,725 |
|
|
$ |
|
|
|
$ |
(1,264 |
) |
|
$ |
14,461 |
|
|
$ |
|
|
|
$ |
14,461 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
52,450 |
|
|
$ |
|
|
|
$ |
(3,446 |
) |
|
$ |
49,004 |
|
|
$ |
|
|
|
$ |
49,004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classification on Balance Sheet |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Short Term |
|
|
Long Term |
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
Aggregate |
|
|
Marketable |
|
|
Marketable |
|
January 31, 2009 |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
|
Securities |
|
|
Securities |
|
Available-for-Sale Auction Rate Securities |
|
$ |
38,425 |
|
|
$ |
|
|
|
$ |
(3,402 |
) |
|
$ |
35,023 |
|
|
$ |
|
|
|
$ |
35,023 |
|
Trading Auction Rate Securities |
|
$ |
15,750 |
|
|
$ |
|
|
|
$ |
(1,551 |
) |
|
$ |
14,199 |
|
|
$ |
|
|
|
$ |
14,199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
54,175 |
|
|
$ |
|
|
|
$ |
(4,953 |
) |
|
$ |
49,222 |
|
|
$ |
|
|
|
$ |
49,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table details the fair value measurements within the fair value hierarchy of the
Companys financial assets and liabilities at July 31, 2009 (in thousands):
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting |
|
|
|
Total Fair Value at |
|
|
Date Using |
|
|
|
July 31, 2009 |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
$ |
100,793 |
|
|
$ |
100,793 |
|
|
$ |
|
|
|
$ |
|
|
Certificates of deposit |
|
|
799 |
|
|
|
799 |
|
|
|
|
|
|
|
|
|
Auction rate securities |
|
|
49,004 |
|
|
|
|
|
|
|
|
|
|
|
49,004 |
|
Put right related to auction rate securities |
|
|
1,183 |
|
|
|
|
|
|
|
|
|
|
|
1,183 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
151,779 |
|
|
$ |
101,592 |
|
|
$ |
|
|
|
$ |
50,187 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts |
|
$ |
43 |
|
|
$ |
|
|
|
$ |
43 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
43 |
|
|
$ |
|
|
|
$ |
43 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table reflects the activity for the Companys major classes of assets
measured at fair value using level 3 inputs (in thousands):
|
|
|
|
|
|
|
Auction Rate |
|
|
|
Securities |
|
|
|
|
|
|
Balance as of January 31, 2009 |
|
$ |
49,222 |
|
Unrealized gain included in accumulated other comprehensive loss |
|
|
1,107 |
|
Unrealized gain included in other income (expense), net |
|
|
361 |
|
Sales or
redemptions of securities |
|
|
(1,700 |
) |
|
|
|
|
Balance as of April 30, 2009 |
|
$ |
48,990 |
|
|
|
|
|
Unrealized gain included in accumulated other comprehensive loss |
|
|
112 |
|
Unrealized loss included in other income (expense), net |
|
|
(73 |
) |
Sales or
redemptions of securities |
|
|
(25 |
) |
|
|
|
|
Balance as of July 31, 2009 |
|
$ |
49,004 |
|
|
|
|
|
At July 31, 2009, auction rate securities (ARS) represented 32% of total financial
assets measured at fair value.
At July 31, 2009, the Company grouped money market funds and certificates of deposit
using a level 1 valuation because market prices were readily available. At July 31, 2009, the
foreign currency forward contract valuation inputs were based on quoted prices and quoted pricing
intervals from public data and did not involve management judgment. Accordingly, these have been
classified within level 2 of the fair value hierarchy. At July 31, 2009, the fair value of the
Companys assets grouped using a level 3 valuation consisted of ARS, most of which were AAA-rated
bonds collateralized by federally guaranteed student loans. ARS are long-term variable rate bonds
tied to short-term interest rates that are reset through a Dutch auction process that typically
occurs every 7 to 35 days. Historically, the carrying value (par value) of the ARS approximated
fair market value due to the resetting of variable interest rates.
Beginning in late February 2008, the auctions for ARS then held by the Company were
unsuccessful. As a result, the interest rates on ARS reset to the maximum rate per the applicable
investment offering statements. The Company will not be able to liquidate affected ARS until a
future auction on these investments is successful, a buyer is found outside the auction process,
the securities are called or refinanced by the issuer, or the securities mature. Due to these
liquidity issues, the Company performed a discounted cash flow analysis to determine the estimated
10
fair value of these investments. The discounted cash flow analysis performed by the Company
considered the timing of expected future successful auctions, the impact of extended periods of
maximum interest rates, collateralization of underlying security investments and the
creditworthiness of the issuer. The discounted cash flow analysis at July 31, 2009 included the
following assumptions:
|
|
|
|
|
Expected Term |
|
3 Years |
Illiquidity Discount |
|
|
1.5-1.8 |
% |
Discount Rate |
|
|
2.98 |
% |
The discount rate was determined using a proxy based upon the current market rates for
successful auctions within the AAA-rated ARS market. The expected term was based on managements
estimate of future liquidity. The illiquidity discount was based on the levels of federal insurance
or FFELP backing for each security, with a greater percentage of FFELP backing resulting in a lower
illiquidity discount.
On November 7, 2008, the Company accepted an offer from UBS AG (UBS), one of the
Companys brokers, which provided the Company with rights (the Put Right) to sell UBS $15.8
million of its ARS investments at par, which were purchased through UBS, at any time during a
two-year period beginning June 30, 2010. In addition, UBS agreed to provide a no net cost loan
equal to 75% of the par value of the Companys ARS positions with UBS should the Company desire
such a loan before June 30, 2010. Before accepting the Put Right, the Company had the intent and
ability to hold these securities until a successful auction or another liquidating event occurred
and had previously recognized the unrealized loss as a temporary impairment and recorded the
decline in value in accumulated other comprehensive loss. As a result of accepting the Put Right,
the Company has entered into a separate financial instrument that has been recorded as an asset
that is initially measured at its fair value. The Company has elected to apply the fair value
option in SFAS No. 159, The Fair Value Option for Financial Assets and Liabilities (SFAS 159),
to the Put Right and accordingly will record future changes in fair value of the Put Right through
earnings. The Company also elected to reclassify the ARS investment subject to the Put Right from
available-for-sale to trading securities and accordingly will record future changes in fair value
through earnings. The Company recorded the changes in the fair value of the Put Right during the
three and six months ended July 31, 2009 of approximately $155,000 and approximately $(141,000),
respectively, as unrealized gain (loss) in the other income (expense), net section of its
condensed consolidated statement of operations. The Put Right represents the right to sell the
corresponding ARS back to UBS at par beginning June 30, 2010 and has therefore been classified as a
long-term asset in the Companys consolidated balance sheet. As part of assessing the fair value of
the Put Right in future periods, the Company will continue to assess the economic ability of UBS to
meet its obligation under the Put Right.
In accordance with FSP FAS 115-2 and FSP FAS 124-2, the Company considered the following
factors in determining whether the impairment related to its available-for-sale securities was
other-than-temporary or temporary: (i) the intent of the Company to sell the security; (ii) whether
it is more likely than not that the Company will be required to sell the security before recovering
its cost; and (iii) whether or not the Company is expected to recover the securitys entire
amortized cost basis. The Company specifically noted that it had a cash and cash equivalent balance
of approximately $109.7 million in investments other than ARS, and that the Company expected to
continue to generate positive cash flow on an annual basis.
Additionally, the Company believed that the present value of expected future cash flows consisting of interest
payments and the return of principal was sufficient to recover the
amortized cost basis of the securities and expected
to collect these cash flows. Therefore, the Company did not believe that the decline in value of its available-for-sale
securities was other than temporary, or that any portion of the
temporary decline was the result of a credit loss.
As a result, as of July 31, 2009, the
Company recorded an unrealized loss of $2.2 million related to the temporary impairment of the
available-for-sale securities, which was included in accumulated other comprehensive loss within
stockholders equity.
4. Inventory
Inventory consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
July 31, |
|
|
January 31, |
|
|
|
2009 |
|
|
2009 |
|
Raw materials |
|
$ |
1,841 |
|
|
$ |
770 |
|
Finished goods |
|
|
15,636 |
|
|
|
17,639 |
|
|
|
|
|
|
|
|
|
|
$ |
17,477 |
|
|
$ |
18,409 |
|
|
|
|
|
|
|
|
11
5. Acquisition
On February 18, 2009, the Company acquired by merger all of the outstanding capital stock
of Tizor Systems, Inc. (Tizor), a privately held provider of advanced enterprise data auditing
and protection solutions for data centers. The results of Tizors operations have been included in
the consolidated financial statements of the Company since that date.
The aggregate purchase price was approximately $3.1 million in cash. Acquisition-related
costs of approximately $0.2 million were included in general and administrative expenses in the
Companys statement of operations for the six months ended July 31, 2009. The acquisition was
accounted for using the acquisition method of accounting in accordance with SFAS 141R. The
following table summarizes the allocation of the purchase price (in thousands):
|
|
|
|
|
Total purchase consideration: |
|
|
|
|
Cash paid |
|
$ |
3,138 |
|
|
|
|
|
|
|
|
|
|
Fair value of purchase consideration |
|
$ |
3,138 |
|
|
|
|
|
|
|
|
|
|
Allocation of the purchase consideration: |
|
|
|
|
Cash and cash equivalents |
|
$ |
1,131 |
|
Accounts receivable |
|
|
23 |
|
Prepaid expenses and other assets |
|
|
254 |
|
Property and equipment |
|
|
141 |
|
Deferred tax assets, net |
|
|
736 |
|
Identifiable intangible assets |
|
|
2,160 |
|
|
|
|
|
|
|
|
|
|
Total assets acquired |
|
|
4,445 |
|
|
|
|
|
Total liabilities assumed |
|
|
942 |
|
Gain on bargain purchase |
|
|
365 |
|
|
|
|
|
|
|
|
|
|
Total net assets acquired |
|
$ |
3,138 |
|
|
|
|
|
The purchase price allocation resulted in the recognition of a gain on bargain purchase of
approximately $0.4 million, which is recorded as other income (expense), net in the condensed
consolidated statements of operations. The gain on bargain purchase resulted from the value of the
identifiable net assets acquired exceeding the value of the purchase consideration. The purchase
price allocation did not result in the recognition of goodwill.
The following table reflects the fair value of the acquired identifiable intangible
assets and related estimates of useful lives (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Fair |
|
|
Useful Life |
|
|
|
Value |
|
|
(Years) |
|
Developed technology |
|
$ |
1,560 |
|
|
|
5 |
|
In-process technology |
|
|
350 |
|
|
|
5 |
|
Customer relationships |
|
|
160 |
|
|
|
5 |
|
Trademark and tradename |
|
|
90 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
12
Acquired in-process technology was initially accounted for as an indefinite-lived intangible
asset. The technology reached technical feasibility in the three months ended April 30, 2009 and is
being amortized over its estimated useful life.
The following table presents the pro forma statements of operations obtained by combining the
historical consolidated statements of operations of the Company and Tizor for the three and six
months ended July 31, 2009 and 2008, giving effect to the merger as if it occurred on May 1, 2009
and 2008 and February 1, 2009 and 2008, respectively (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
July 31, |
|
July 31, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
Pro forma revenue |
|
$ |
43,934 |
|
|
$ |
47,296 |
|
|
$ |
89,356 |
|
|
$ |
87,677 |
|
Pro forma operating income (loss) |
|
$ |
391 |
|
|
$ |
1,270 |
|
|
$ |
(1,079 |
) |
|
$ |
996 |
|
Pro forma net income (loss) |
|
$ |
730 |
|
|
$ |
1,622 |
|
|
$ |
(254 |
) |
|
$ |
2,358 |
|
Pro forma basic net income (loss) per share |
|
$ |
0.01 |
|
|
$ |
0.03 |
|
|
$ |
(0.00 |
) |
|
$ |
0.04 |
|
Pro forma diluted net income (loss) per share |
|
$ |
0.01 |
|
|
$ |
0.02 |
|
|
$ |
(0.00 |
) |
|
$ |
0.04 |
|
The pro forma net income (loss) and net income (loss) per share for each period presented
primarily includes adjustments for amortization of intangibles and interest income. This pro forma
information does not purport to indicate the results that would have actually been obtained had the
acquisition been completed on the assumed dates, or which may be realized in the future.
6. Goodwill and Acquired Intangible Assets
Goodwill
The carrying amount of goodwill of the Company was $2.0 million as of July 31, 2009 and
as of January 31, 2009. The Companys goodwill resulted from the acquisition of NuTech Solutions,
Inc. in May 2008. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets (SFAS
142), goodwill is not amortized, but instead is reviewed for impairment at least annually in the
fourth quarter or more frequently when events and circumstances occur indicating that the recorded
goodwill may be impaired. The Companys annual goodwill impairment test did not result in an
impairment in fiscal 2009.
There was no change in the carrying amount of goodwill during the six months ended July
31, 2009.
Acquired Intangible Assets
The carrying amount of acquired identifiable intangible assets was $4.6 million as of
July 31, 2009 and $2.9 million as of January 31, 2009. Intangible assets acquired in business
combinations of $3.4 million on a cost basis are recorded under the purchase method of accounting
at their estimated fair values at the date of acquisition. Intangible assets acquired in business
combinations of $2.2 million on a cost basis are recorded under the acquisition method of
accounting at their estimated fair values at the date of acquisition. The Company amortizes
acquired intangible assets over their estimated useful lives.
Acquired intangible assets consist of the following as of July 31, 2009 (in thousands):
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
Cost |
|
|
Amortization |
|
|
Net |
|
Developed technology
|
|
$ |
3,210 |
|
|
$ |
(390 |
) |
|
$ |
2,820 |
|
Order backlog
|
|
|
300 |
|
|
|
(184 |
) |
|
|
116 |
|
Customer relationships
|
|
|
1,460 |
|
|
|
(280 |
) |
|
|
1,180 |
|
Trademark and tradename
|
|
|
590 |
|
|
|
(111 |
) |
|
|
479 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,560 |
|
|
$ |
(965 |
) |
|
$ |
4,595 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of acquired intangible assets was approximately $0.3 million and $0.2
million for the three months ended July 31, 2009 and 2008, respectively, and $0.5 million and $0.2
million for the six months ended July 31, 2009 and 2008, respectively.
The following is the expected future amortization expense of the Companys acquired intangible
assets as of July 31, 2009 for the respective fiscal years ending January 31 (in thousands):
|
|
|
|
|
2010 (remaining six months) |
|
$ |
538 |
|
2011 |
|
|
958 |
|
2012 |
|
|
918 |
|
2013 |
|
|
920 |
|
2014 |
|
|
918 |
|
Thereafter |
|
|
343 |
|
|
|
|
|
Total |
|
$ |
4,595 |
|
|
|
|
|
The weighted average useful life of acquired intangible assets is 6 years.
7. Accrued Expenses
Accrued expenses consist of the following (in thousands) as of:
|
|
|
|
|
|
|
|
|
|
|
July 31, |
|
|
January 31, |
|
|
|
2009 |
|
|
2009 |
|
Accrued license payable |
|
$ |
1,022 |
|
|
$ |
973 |
|
Sales meetings and events |
|
|
536 |
|
|
|
950 |
|
Legal/audit/compliance |
|
|
783 |
|
|
|
682 |
|
Rent/phone/utilities |
|
|
893 |
|
|
|
869 |
|
Partner fees |
|
|
603 |
|
|
|
192 |
|
Inventory items |
|
|
577 |
|
|
|
985 |
|
Other |
|
|
1,779 |
|
|
|
1,650 |
|
|
|
|
|
|
|
|
|
|
$ |
6,193 |
|
|
$ |
6,301 |
|
|
|
|
|
|
|
|
14
8. Stock Incentive Plans
Non-employee Awards
The Company issues equity instruments to non-employees, including warrants and options to
purchase common stock. In accordance with EITF 96-18, the Company measures and records the value of
the shares over the period of time services are provided. Stock-based compensation expense for
non-employees for the three months ended July 31, 2009 and 2008 was approximately $17,000 and
$7,000, respectively. Stock-based compensation expense for non-employees for the six months ended
July 31, 2009 and 2008 was approximately $23,000 and $14,000, respectively.
At July 31, 2009, non-employees held nonstatutory options to purchase 22,500 shares of
common stock, of which 11,875 were fully vested and exercisable.
Restricted Common Stock
During fiscal 2009 and during the six months ended July 31, 2009, the Company awarded its
non-employee directors shares of restricted common stock under the Companys 2007 Stock Incentive
Plan. The vesting term of these awards is one year, assuming continued service. The vested shares
under these awards cannot be sold until the directors separation from the Company, or upon an
earlier acquisition of the Company. The Company amortizes the fair market value of the awards at
the time of the grant to expense over the period of vesting. Recipients of restricted stock have
the right to vote such shares and may also receive dividends. The fair value of restricted stock
awards is determined based on the number of shares granted and the market value of the Companys
common stock on the grant date, adjusted for any forfeiture factor.
The following table summarizes the Companys restricted stock activity during the six
months ended July 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Average Grant |
|
|
Shares |
|
Par value |
|
Date Fair Value |
Non-vested as of January 31, 2009 |
|
|
27,708 |
|
|
$ |
0.001 |
|
|
$ |
12.99 |
|
Granted |
|
|
84,808 |
|
|
$ |
0.001 |
|
|
$ |
7.07 |
|
Vested |
|
|
(27,708 |
) |
|
$ |
0.001 |
|
|
$ |
12.99 |
|
Cancelled |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested as of July 31, 2009 |
|
|
84,808 |
|
|
$ |
0.001 |
|
|
$ |
7.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
The following table summarizes stock option activity for the six months ended July 31,
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
Shares |
|
Number of |
|
Weighted |
|
Average |
|
Aggregate |
|
|
Available for |
|
Options |
|
Average |
|
Remaining |
|
Intrinsic |
|
|
Grant |
|
Outstanding |
|
Exercise Price |
|
Life in Years |
|
Value |
Outstanding at January 31, 2009 |
|
|
116,471 |
|
|
|
10,474,631 |
|
|
$ |
6.44 |
|
|
|
|
|
|
|
|
|
Additional shares authorized |
|
|
6,086,748 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted |
|
|
(2,094,950 |
) |
|
|
2,094,950 |
|
|
$ |
6.07 |
|
|
|
|
|
|
|
|
|
Restricted shares granted |
|
|
(84,808 |
) |
|
|
|
|
|
$ |
0.00 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
(529,060 |
) |
|
$ |
1.48 |
|
|
|
|
|
|
|
|
|
Forfeited, cancelled or expired (1) |
|
|
187,775 |
|
|
|
(347,187 |
) |
|
$ |
7.96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at July 31, 2009 |
|
|
4,211,236 |
|
|
|
11,693,334 |
|
|
$ |
6.56 |
|
|
6.28 years |
|
$36.9 million |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at July 31, 2009 |
|
|
|
|
|
|
4,388,499 |
|
|
$ |
5.02 |
|
|
6.00 years |
|
$20.2 million |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at July 31, 2009 |
|
|
|
|
|
|
11,327,795 |
|
|
$ |
6.52 |
|
|
6.28 years |
|
$36.1 million |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
(1) |
|
Options cancelled under the Companys 2000 Stock
Incentive Plan (the 2000 Plan) after July 24, 2007
are not considered available for grant, as the Company
is no longer granting options under this plan. During
the six months ended July 31, 2009, options for 159,412
shares granted under the 2000 Plan were cancelled. |
The aggregate intrinsic value in the table above was calculated as the difference between
the exercise price of the stock options and the fair value of the underlying common stock as of
July 31, 2009, which was $9.04 per share. The aggregate intrinsic value of options exercised for
the six months ended July 31, 2009 and 2008 was $3.1 million and $12.8 million, respectively.
At July 31, 2009, unrecognized compensation expense related to unvested stock options and
unvested restricted shares was $27.1 million and $0.4 million, respectively, which is expected to
be recognized over a weighted-average period of 3.3 and 0.7 years, respectively.
9. Income Taxes
The Company recorded income tax expense of approximately $0.1 million and approximately
$1.0 million for the three months ended July 31, 2009 and 2008, respectively and income tax expense
of approximately $9,000 and $1.6 million for the six months ended July 31, 2009 and 2008,
respectively. The Companys effective income tax rate was 10% and 24% for the three months ended
July 31, 2009 and 2008, respectively and 2% and 24% for the six months ended July 31, 2009 and
2008, respectively. The effective income tax rate is based upon the estimated income for the year,
the estimated composition of the income in different jurisdictions and adjustments, if any, in the
applicable quarterly periods for potential tax consequences, benefits, resolution of tax audits or
other tax contingencies. For the three and six months ended July 31, 2009, the effective income tax
rate varied from the U.S. federal statutory tax rate of 35%, primarily due to the effects of
accounting for share-based compensation in accordance with SFAS 123R, the utilization of federal
and state tax credits and the effects of purchase accounting from the Companys acquisition of
Tizor Systems, Inc. The Companys income tax provision for the three and six months ended July 31,
2009 consisted of federal, state and foreign taxes owed in relation to income generated. The
Companys income tax provision for the three and six months ended July 31, 2008 consisted primarily
of taxes owed in relation to income generated by its foreign subsidiaries. The federal and state
provision for the three and six months ended July 31, 2008 included amounts in relation to the
Companys income generated in the U.S., reduced by the utilization of available net operating loss
(NOL) carryforwards and tax credits that were recorded on the balance sheet with a full valuation
allowance prior to their utilization.
The Company continued to provide a full valuation allowance for net operating losses for
NuTech Solutions, Inc., acquired by Netezza in May 2008, with operations in Germany and Poland, as
the Company believes it is more likely than not that the future tax benefits from accumulated net
operating losses will not be realized. The Company continues to assess the need for the valuation
allowance at each balance sheet date based on all available evidence. However, it is possible that
the more likely than not criterion could be met in a future period, which could result in the
reversal of a significant portion or all of the valuation allowance. Any reversal of the valuation
allowance associated with the NuTech acquisition would be recorded as a tax benefit.
10. Commitments and Contingencies
Guarantees and Indemnification Obligations
The Company enters into standard indemnification agreements in the ordinary course of
business. Pursuant to these agreements, the Company indemnifies and agrees to reimburse the
indemnified party for losses incurred by the indemnified party, generally the Companys customers,
in connection with any patent, copyright, trade secret or other proprietary right infringement
claim by any third party with respect to the Companys products. The term of these indemnification
agreements is generally perpetual. Based on historical information and information known as of July
31, 2009, the Company does not expect it will incur any significant liabilities under these
indemnification agreements.
16
Warranty
The Company provides warranties on most products and has established a reserve for
warranty based on identified warranty costs. The warranty accrual is based upon the Companys
historical experience and expected future costs. The accrual includes amounts accrued for at the
time of shipment, adjustments for changes in estimated costs of warranties on systems shipped in
the period and changes in estimated costs of warranties on systems shipped in prior periods. While
the Company continues its warranty service on most products, warranty service has generally been
superseded by coverage provided under simultaneous maintenance and support service contracts. As
maintenance and support service revenues are deferred and recorded ratably over the service period,
any costs of product replacement are incurred and recorded in the same period, thereby reducing the
need for a specific warranty reserve. The reserve is included as part of accrued expenses (Note 7)
in the accompanying balance sheets.
Activity related to the warranty accrual was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 31, |
|
|
Six Months Ended July 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Balance at beginning of period |
|
$ |
264 |
|
|
$ |
1,068 |
|
|
$ |
747 |
|
|
$ |
1,141 |
|
Provision |
|
|
180 |
|
|
|
506 |
|
|
|
444 |
|
|
|
948 |
|
Warranty usage * |
|
|
(264 |
) |
|
|
(626 |
) |
|
|
(1,011 |
) |
|
|
(1,141 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
180 |
|
|
$ |
948 |
|
|
$ |
180 |
|
|
$ |
948 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Warranty usage includes expiration of product warranty. |
11. Industry Segment, Geographic Information and Significant Customers
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
evaluated regularly by the chief operating decision-maker, or decision-making group, in deciding
how to allocate resources and in assessing performance. The Company is organized as, and operates
in, one reportable segment: the development and sale of data warehouse appliances. The Companys
chief operating decision-maker is its Chief Executive Officer. The Companys Chief Executive
Officer reviews financial information presented on a consolidated basis, accompanied by information
about revenue by geographic region, for purposes of evaluating financial performance and allocating
resources. The Company and its Chief Executive Officer evaluate performance based primarily on
revenue in the geographic locations in which the Company operates. Revenue is attributed by
geographic location based on the location of the end customer.
Revenue, classified by the major geographic areas in which the Companys customers are
located, was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 31, |
|
|
Six Months Ended July 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
United States |
|
$ |
36,629 |
|
|
$ |
34,396 |
|
|
$ |
70,321 |
|
|
$ |
60,807 |
|
International |
|
|
7,305 |
|
|
|
12,639 |
|
|
|
18,980 |
|
|
|
25,804 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
43,934 |
|
|
$ |
47,035 |
|
|
$ |
89,301 |
|
|
$ |
86,611 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the Companys long-lived assets, consisting of the net
book value of the Companys property and equipment, by geographic location (in thousands):
17
|
|
|
|
|
|
|
|
|
|
|
July 31, |
|
|
January 31, |
|
|
|
2009 |
|
|
2009 |
|
United States |
|
$ |
9,366 |
|
|
$ |
9,369 |
|
International |
|
|
172 |
|
|
|
217 |
|
|
|
|
|
|
|
|
Total |
|
$ |
9,538 |
|
|
$ |
9,586 |
|
|
|
|
|
|
|
|
ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement
The following discussion and analysis of our financial condition and results of operations
should be read in conjunction with the unaudited condensed consolidated financial statements and
the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited
consolidated financial statements and notes thereto and managements discussion and analysis of
financial condition and results of operations included in the Companys Annual Report on Form 10-K
for the year ended January 31, 2009, which was filed with the Securities and Exchange Commission
(SEC) on March 26, 2009. This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of 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 below, and those discussed in
the section titled Risk Factors, set forth in Part II, Item 1A of this Quarterly Report on Form
10-Q. The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as
of the date of this Quarterly Report on Form 10-Q. We anticipate that subsequent events and
developments will cause our views to change. However, while we may elect to update these
forward-looking statements at some point in the future, we have no current intention of doing so
except to the extent required by applicable law. You should, therefore, not rely on these
forward-looking statements as representing our views as of any date subsequent to the date of this
Report on Form 10-Q.
Recent Developments
In August 2009, we announced our newest data warehouse appliance, the TwinFin appliance,
which is the first in a family of new blade server-based appliances, and has recently become
generally available for customer shipments.
We expect that sales of the TwinFin appliance will generate a significant portion of our anticipated revenues in the third quarter of fiscal 2010 and that sales of our new family of blade server-based data warehouse appliances, of which the TwinFin appliance is the first member, will generate most of our anticipated product revenues in subsequent fiscal quarters.
Overview
We were founded in August 2000 to develop data warehouse appliances that enable real-time
business intelligence. Our appliances integrate database, server and storage platforms in a
purpose-built unit to enable detailed queries and analyses on large volumes of stored data. The
results of these queries and analyses provide organizations with actionable information to improve
their business operations. The amount of data that is being generated and stored by organizations
is exploding. As the volume of data continues to grow, enterprises have recognized the value of
analyzing such data to significantly improve their operations and competitive position. This
increasing amount of data and the importance of data analysis have led to a heightened demand for
data warehouses that provide the critical framework for data-driven enterprise decision-making and
business intelligence. Many traditional data warehouse systems were initially designed to aggregate
and analyze smaller quantities of data, using general-purpose database, server and storage
platforms patched together as a data warehouse system. Such patchwork architectures are often used
by default to store and analyze data, despite the fact that they are not optimized to handle
terabytes of constantly growing and changing data and as a result, are not as effective in handling
the in-depth analyses that large businesses are now requiring of their data warehouse systems. The
18
increasing number of users accessing the data warehouse and the sophistication of the queries
employed by these users is making the strain of using these legacy systems even more challenging
for many organizations.
Business intelligence solutions are still in their early stages of growth and their
continued adoption and growth in the marketplace remain uncertain. Additionally, our appliance
approach requires our customers to run their data warehouses in new and innovative ways and often
requires our customers to replace their existing equipment and supplier relationships, which they
may be unwilling to do, especially in light of the often critical nature of the components and
systems involved and the significant capital and other resources they may have previously invested.
Furthermore, purchases of our products involve material changes to established purchasing patterns
and policies. Even if prospective customers recognize the need for our products, they may not
select our appliance solution because they choose to wait for the introduction of products and
technologies that serve as a replacement or substitute for, or represent an improvement over, our
appliance solutions. Therefore, our future success also depends on our ability to maintain our
leadership position in the data warehouse market and to proactively address the needs of the market
and our customers to further drive the adoption of business intelligence and to sustain our
competitive advantage versus competing approaches to business intelligence and alternate product
offerings.
Recently, there has been a significant deterioration in economic conditions in many of
the countries and regions in which we do business. These economic conditions have caused some of
our current or prospective customers to reduce their information technology spending, causing them
to modify, delay or cancel plans to purchase our products. In addition, some of our traditional
competitors have introduced their own integrated data warehousing solutions which may cause our
sales cycles to be delayed and may have an adverse impact on our business, operating results and
financial condition.
We are currently headquartered in Marlborough, Massachusetts. Our personnel and
operations are also located throughout the United States, as well as in the United Kingdom,
Germany, Australia, Japan, Korea, Canada, Poland, France, Ireland and Singapore. We expect to
continue to add personnel in the United States and internationally to provide additional geographic
sales and technical support coverage.
Revenue
We derive our revenue from sales of products and related services. We sell our data
warehouse appliances worldwide to large global enterprises, mid-market companies and government
agencies through our direct sales force as well as indirectly via distribution partners. To date,
we have derived the substantial majority of our revenue from customers located in the United
States. For the six months ended July 31, 2009 and 2008, U.S. customers accounted for approximately
79% and 70% of our overall revenue, respectively. For fiscal 2009, 2008 and 2007, U.S. customers
accounted for approximately 74%, 80% and 76% our revenue, respectively.
Product Revenue. The significant majority of our revenue is generated through the sale of
our appliances, primarily to companies in the following vertical industries: telecommunications,
digital media, retail, financial services, outsourced analytics, government and health and life
sciences. Our future revenue growth will depend in significant part upon further sales of our
appliances to our existing customer base. In addition, increasing our sales to new customers in
existing vertical industries we currently serve and in other vertical industries that depend upon
high-performance data analysis is an important element of our strategy. We consider the further
development of our direct and indirect sales channels in domestic and international markets to be a
key to our future revenue growth and the global acceptance of our products. Our future revenue
growth will also depend on our ability to sustain the high levels of customer satisfaction
generated by providing high-touch, high-quality support. In addition, the market for our products
is characterized by rapid technological change, frequent new product introductions and evolving
industry standards. Our future revenue growth is dependent on the successful development and
introduction of new products and enhancements, including the market acceptance of our new TwinFin
appliance. Such new introductions and enhancements could reduce demand for our existing products
and cause customers to delay purchasing decisions until such new products and enhancements are
introduced. To address these risks we will seek to expand our sales and marketing efforts, continue
to pursue research and development as well as acquisition opportunities to expand and enhance our
product offering.
Services Revenue. We sell product maintenance, installation, training and professional
services to our customers. The percentage of our total revenue derived from services for the six
months ended July 31, 2009 and 2008 was 30% and 23%, respectively, and was 24% in fiscal 2009 and
19% in each of fiscal 2008 and 2007.
19
Cost of Revenue and Gross Profit
Cost
of product revenue consists primarily of amounts paid to our contract manufacturers, in
connection with the procurement of hardware components and assembly of those components into our
appliance systems. Neither we nor our contract manufacturers enter into long-term supply contracts
for our hardware components, which can cause our cost of product revenue to fluctuate. These
product costs are recorded when the related product revenue is recognized. Cost of revenue also
includes shipping, warehousing and logistics expenses, warranty reserves and inventory write-downs
to write down the carrying value of inventory to the lower of cost or market. Shipping,
warehousing, logistics costs and inventory write-downs are recognized as incurred. Estimated
warranty costs are recorded when the related product revenue is recognized.
Cost of services revenue consists primarily of salaries and employee benefits for our
support staff and worldwide installation and technical account management teams and amounts paid to
third parties to provide on-site hardware service.
Our gross profit has been and will continue to be affected by a variety of factors,
including the relative mix of product versus services revenue; our mix of direct versus indirect
sales (as sales through our indirect channels may have lower average selling prices and gross
profit); and changes in the average selling prices of our products and services, which can be
adversely affected by competitive pressures. Additional factors affecting gross profit include the
timing of new product introductions, which may reduce demand for our existing product as customers
await the arrival of new products and could also result in additional reserves against older
product inventory; cost reductions through redesign of existing
products; and the cost of our
systems hardware. The data warehouse market is highly
competitive and we expect this competition to intensify in the future, especially as we move into
additional vertical industries. If our market share in such industries increases, we expect pricing
pressure to increase, which will reduce product gross margins.
If our customer base continues to grow, it will be necessary for us to continue to make
significant upfront investments in our customer service and support infrastructure to support this
growth. The rate at which we add new customers will affect the level of these upfront investments.
The timing of these additional expenditures could materially affect our cost of revenue, both in
absolute dollars and as a percentage of total revenue, in any particular period. This could cause
downward pressure on gross margins.
Operating Expenses
Operating expenses consist of sales and marketing, research and development, and general
and administrative expenses. Personnel-related costs are the most significant component of each of
these expense categories. Our headcount increased to 392 employees at July 31, 2009 from 381
employees at January 31, 2009.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of salaries and employee benefits, sales
commissions, marketing program expenses and shared overhead and fringe costs, which consist
primarily of allocated facilities expenses and allocated corporate employee benefits. We plan to
continue to invest in sales and marketing by increasing the number of our sales personnel
worldwide, expanding our domestic and international sales and marketing activities, and further
building brand awareness. Accordingly, we expect sales and marketing expenses to continue to
increase in total dollars although we expect these expenses to decrease as a percentage of total
revenue. Generally, sales personnel are not immediately productive and thus sales and marketing
expenses related to new sales hires are not immediately accompanied by higher revenue. Hiring
additional sales personnel may reduce short-term operating margins until the sales personnel become
productive and generate revenue. Accordingly, the timing of hiring sales personnel and the rate at
which they become productive will affect our future performance.
Research and Development Expenses
Research and development expenses consist primarily of salaries and employee benefits,
product prototype expenses, shared overhead and fringe costs, which consist primarily of allocated
facilities expenses and allocated corporate employee benefits, and depreciation of equipment used
in research and development activities. In addition to our U.S. development teams, we use an
offshore development team employed by a contract engineering firm in
20
Pune, India. Research and development expenses are recorded as incurred. We devote substantial
resources to the development of additional functionality for existing products and the development
of new products. We intend to continue to invest significantly in our research and development
efforts because we believe they are essential to maintaining and increasing our competitive
position. The timing of these additional investments could materially affect our research and
development expenses, both in absolute dollars and as a percentage of total revenue, in any
particular period.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and employee benefits,
shared overhead and fringe costs, which consist primarily of allocated facilities expenses and
allocated corporate employee benefits, fees for professional services such as legal, accounting and
compliance, investor relation expenses and insurance premiums, including premiums related to
director and officer insurance. We expect general and administrative expenses to continue to
increase in total dollars and to increase slightly as a percentage of revenue in fiscal 2010 as we
continue to invest in infrastructure to support continued growth.
Other
Interest Income and Interest Expense
Interest income and interest expense primarily consists of interest income on investments
and cash balances and interest expense associated with other long-term liabilities. In addition,
interest income includes realized gains and losses on marketable securities.
Other Income (Expense), Net
Other income (expense), net primarily consists of losses or gains on translation of
non-U.S. dollar transactions into U.S. dollars, changes in the fair value of foreign currency
forward contracts, changes in the fair value of the auction rate securities put right, unrealized
losses or gains on trading securities, gains on bargain purchase resulting from acquisitions and
losses or gains on disposal of fixed assets.
Critical Accounting Policies and Use of Estimates
Our consolidated financial statements are prepared in accordance with generally accepted
accounting principles in the United States, which we refer to as GAAP. These accounting principles
require us to make certain estimates, judgments and assumptions that can affect the reported
amounts of assets and liabilities as of the dates of the consolidated financial statements, the
disclosure of contingencies as of the dates of the consolidated financial statements, and the
reported amounts of revenue and expenses during the periods presented. We evaluate these estimates,
judgments and assumptions on an ongoing basis. Although we believe that our estimates, judgments
and assumptions are reasonable under the circumstances, actual results may differ from those
estimates.
We believe that of our significant accounting policies, the following accounting policies
involve the most judgment and complexity:
|
|
|
revenue recognition; |
|
|
|
|
stock-based compensation; |
|
|
|
|
inventory valuation; |
|
|
|
|
accounting for income taxes; |
|
|
|
|
valuation of investments; and |
|
|
|
|
valuation of goodwill and acquired intangible assets. |
Accordingly, we believe the policies set forth above are the most critical to aid in
fully understanding and evaluating our financial condition and results of operations. If actual
results or events differ materially from the estimates, judgments and assumptions used by us in
applying these policies, our reported financial condition and
21
results of operations could be materially affected. Additional information about these
critical accounting policies may be found in the Managements Discussion and Analysis of Financial
Condition and Results of Operations section included in our Annual Report on Form 10-K for the
fiscal year ended January 31, 2009. The critical accounting policies described in our Annual Report
on Form 10-K for the fiscal year ended January 31, 2009 have not materially changed.
22
Results of Operations
The following table sets forth our consolidated results of operations for the periods shown.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 31, |
|
|
Six Months Ended July 31, |
|
|
Percentage Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Six Months |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
Ended July 31, |
|
|
Ended July 31, |
|
|
|
(in thousands) |
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product |
|
$ |
29,969 |
|
|
$ |
35,134 |
|
|
$ |
62,671 |
|
|
$ |
66,460 |
|
|
|
-15 |
% |
|
|
-6 |
% |
Services |
|
|
13,965 |
|
|
|
11,901 |
|
|
|
26,630 |
|
|
|
20,151 |
|
|
|
17 |
% |
|
|
32 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
43,934 |
|
|
|
47,035 |
|
|
|
89,301 |
|
|
|
86,611 |
|
|
|
-7 |
% |
|
|
3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product |
|
|
11,123 |
|
|
|
14,005 |
|
|
|
23,467 |
|
|
|
26,599 |
|
|
|
-21 |
% |
|
|
-12 |
% |
Services |
|
|
3,420 |
|
|
|
2,888 |
|
|
|
6,895 |
|
|
|
4,992 |
|
|
|
18 |
% |
|
|
38 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue |
|
|
14,543 |
|
|
|
16,893 |
|
|
|
30,362 |
|
|
|
31,591 |
|
|
|
-14 |
% |
|
|
-4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
29,391 |
|
|
|
30,142 |
|
|
|
58,939 |
|
|
|
55,020 |
|
|
|
-2 |
% |
|
|
7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
15,729 |
|
|
|
15,292 |
|
|
|
30,405 |
|
|
|
28,622 |
|
|
|
3 |
% |
|
|
6 |
% |
Research and development |
|
|
9,297 |
|
|
|
8,014 |
|
|
|
20,917 |
|
|
|
15,262 |
|
|
|
16 |
% |
|
|
37 |
% |
General and administrative |
|
|
3,974 |
|
|
|
3,669 |
|
|
|
7,950 |
|
|
|
6,782 |
|
|
|
8 |
% |
|
|
17 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
29,000 |
|
|
|
26,975 |
|
|
|
59,272 |
|
|
|
50,666 |
|
|
|
8 |
% |
|
|
17 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
391 |
|
|
|
3,167 |
|
|
|
(333 |
) |
|
|
4,354 |
|
|
|
-88 |
% |
|
|
-108 |
% |
Interest income |
|
|
197 |
|
|
|
1,036 |
|
|
|
507 |
|
|
|
2,779 |
|
|
|
-81 |
% |
|
|
-82 |
% |
Interest expense |
|
|
25 |
|
|
|
|
|
|
|
50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net |
|
|
247 |
|
|
|
(86 |
) |
|
|
378 |
|
|
|
(219 |
) |
|
|
-387 |
% |
|
|
-273 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense |
|
|
810 |
|
|
|
4,117 |
|
|
|
502 |
|
|
|
6,914 |
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
80 |
|
|
|
976 |
|
|
|
9 |
|
|
|
1,641 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
730 |
|
|
$ |
3,141 |
|
|
$ |
493 |
|
|
$ |
5,273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
Total revenue was $43.9 million and $47.0 million in the three months ended July 31, 2009 and
2008, respectively, representing a decrease of 7%. Total revenue was $89.3 million and $86.6
million in the six months ended July 31, 2009 and 2008, respectively, representing an increase of
3%.
Product revenue was $30.0 million and $35.1 million for the three months ended July 31, 2009 and
2008, respectively, representing a decrease of 15%. This decrease was primarily the result of
decreased sales volume to existing customers and reflected the overall macroeconomic conditions
during the quarter. Product revenue related to existing customer sales decreased to 37% of total
product revenue from 55% in the three months ended July 31, 2008. The number of new customers added
in the three months ended July 31, 2009, was 20, bringing our total installed base of customers to
305. Product revenue related to new customers increased by $2.8 million in the three months ended
July 31, 2009, representing 63% of total product revenue from 45% of total product revenue in the
three months ended July 31, 2008. Geographically, 88% of our product revenue was from customers in
the United States and 12% was from international customers for the three months ended July 31,
2009, as compared to 76% of our product revenue from customers in the United States and 24% from
international customers for the three months ended July 31, 2008.
Product revenue was $62.7 million and $66.5 million for the six months ended July 31, 2009 and
2008, respectively, representing a decrease of 6%. This decrease was primarily the result of
decreased sales volume to new customers and reflected the overall macroeconomic conditions during
the period. We added 34 new customers during the six months ended July 31, 2009 compared to 49 new
customers during the six months ended July 31, 2008. Product revenue related to new customers
decreased by $5.8 million in the six months ended July 31, 2009, representing 50% of total product
revenue from 56% of total product revenue in the six months ended July 31, 2008. Product revenue
related to existing customer sales increased to 50% of total product revenue from 44% in the six
months ended July 31, 2008, as existing customers purchased additional systems and/or additional
capacity on their existing systems. Geographically, 82% of our product revenue was from customers
in the United States and 18%
23
was from international customers for the six months ended July 31,
2009, as compared to 71% of our product revenue from customers in the United States and 29% from
international customers for the six months ended July 31, 2008.
Services revenue was $14.0 million and $11.9 million for the three months ended July 31, 2009
and 2008, respectively, representing an increase of 17%. Services revenue was $26.6 million and
$20.2 million for the six months ended July 31, 2009 and 2008, respectively, representing an
increase of 32%. This increase for the fiscal year 2010 periods was the result of maintenance and
support services for an expanding installed customer base as a result of new product sales during
the period, and accompanying sales of new maintenance and support contracts, combined with the
renewal of maintenance and support contracts by existing customers. All of our customers to date
have purchased first-year annual maintenance and support services and substantially all of our
customers renewed their maintenance and support agreements.
Gross Margin
Total gross margin was 67% and 64% for the three months ended July 31, 2009 and 2008,
respectively and 66% and 64% for the six months ended July 31, 2009 and 2008, respectively. These
increases in gross margin were primarily the result of increases in product gross margin, but are
not necessarily sustainable or indicative of any future trends.
Product gross margin was 63% and 60% for the three months ended July 31, 2009 and 2008,
respectively and 63% and 60% for the six months ended July 31, 2009 and 2008, respectively. These
increases for the fiscal year 2010 periods were due primarily to a reduction in the cost of our
hardware components and sales of previously fully reserved systems not initially anticipated to be
saleable inventory due to the timing of our new product introduction, partially offset by an
increase in inventory write-downs.
Services gross margin was 76% for both the three months ended July 31, 2009 and 2008, and 74%
and 75% for the six months ended July 31, 2009 and 2008, respectively. The decrease in the services
gross margin for the six months ended July 31, 2009 was primarily due to increases in salaries and
employee benefits due to additional headcount.
Sales and Marketing Expenses
Sales and marketing expenses increased $0.4 million, or 3%, to $15.7 million for the three
months ended July 31, 2009 from $15.3 million for the three months ended July 31, 2008. As a
percentage of revenue, sales and marketing expenses were 36% and 33% for the three months ended
July 31, 2009 and 2008, respectively. The increase in sales and marketing expenses of $0.4 million
for the three months ended July 31, 2009 was primarily due to increases of $1.1 million in salaries
and employee benefits due to additional headcount, $0.2 million in stock-based compensation expense
and $0.2 million in marketing programs primarily related to our new TwinFin appliance. These
increases were partially offset by a decrease of $0.8 million in sales commissions and $0.3 million
in partner referral fees as a result of the decrease in product revenue during the quarter.
Sales and marketing expenses increased $1.8 million, or 6%, to $30.4 million for the six
months ended July 31, 2009 from $28.6 million for the six months ended July 31, 2008. As a
percentage of revenue, sales and marketing expenses were 34% and 33% for the six months ended July
31, 2009 and 2008, respectively. The increase in sales and marketing expenses of $1.8 million for
the six months ended July 31, 2009 was primarily due to increases of $2.6 million in salaries and
employee benefits due to additional headcount, $0.4 million in stock-based compensation expense,
$0.5 million in shared overhead and fringe costs and $0.3 million in marketing programs primarily
related to our new TwinFin appliance. These increases were partially offset by a decrease of $1.2
million in sales commissions and $0.8 million in partner referral fees as a result of the decrease
in product revenue during the period.
The number of sales and marketing employees increased to 147 at July 31, 2009, from 135 at
July 31, 2008, as we continue to expand our sales force to provide better geographic distribution
and market penetration.
24
Research and Development Expenses
Research and development expenses increased $1.3 million, or 16%, to $9.3 million for the
three months ended July 31, 2009 from $8.0 million for the three months ended July 31, 2008. As a
percentage of revenue, research and development expenses were 21% and 17% for the three months
ended July 31, 2009 and 2008, respectively.
The increase in research and development expenses of $1.3 million for the three months ended
July 31, 2009 was due primarily to increases of $1.5 million in salaries and employee benefits due
to additional headcount hired primarily for development of our TwinFin appliance , $0.2 million in
shared overhead and fringe costs and $0.1 million in stock-based compensation expense, partially
offset by decreases of $0.3 million in offshore consulting costs and $0.2 million in prototype
expense that resulted from the completion of the initial phase of development of our TwinFin
appliance.
Research and development expenses increased $5.6 million, or 37%, to $20.9 million for the six
months ended July 31, 2009 from $15.3 million for the six months ended July 31, 2008. As a
percentage of revenue, research and development expenses were 23% and 18% for the six months ended
July 31, 2009 and 2008, respectively, primarily as a result of investment in new product
development.
The increase in research and development expenses of $5.6 million for the six months ended
July 31, 2009 was due primarily to increases of $2.6 million in salaries and employee benefits due
to additional headcount, $2.2 million in prototype expense relating to product development for our
TwinFin appliance, $0.4 million in shared overhead and fringe costs, $0.3 million in stock-based
compensation expense, and $0.3 million in depreciation expense, partially offset by a decrease of
$0.2 million in offshore consulting costs.
The number of research and development employees increased to 156 at July 31, 2009 from 107 at
July 31, 2008. These investments help us broaden and improve the development of new technology and
product enhancements, including the development of our TwinFin appliance. The offshore development
team from our contract engineering firm also increased to 72 people at July 31, 2009 from 65 people
at July 31, 2008, in order to take advantage of the cost efficiencies associated with offshore
research and development resources.
General and Administrative Expenses
General and administrative expenses increased $0.3 million, or 8%, to $4.0 million for the
three months ended July 31, 2009 from $3.7 million for the three months ended July 31, 2008. As a
percentage of revenue, general and administrative expenses were 9% and 8% for the three months
ended July 31, 2009 and 2008, respectively. The increase in general and administrative expenses of
$0.3 million for the three months ended July 31, 2009 was due primarily to increases of $0.5
million in tax, legal, insurance and consulting costs, $0.2 million in stock-based compensation
expense and $0.1 million in office rent and office costs, partially offset by a decrease of $0.5
million in shared overhead and fringe costs.
General and administrative expenses increased $1.2 million, or 17%, to $8.0 million for the
six months ended July 31, 2009 from $6.8 million for the six months ended July 31, 2008. As a
percentage of revenue, general and administrative expenses were 9% and 8% for the six months ended
July 31, 2009 and 2008, respectively. The
increase in general and administrative expenses of $1.2 million for the six months ended July
31, 2009 was due primarily to increases of $0.8 million in salaries and employee benefits, $0.8
million in tax, legal, insurance and consulting costs, $0.4 million in stock-based compensation
expense, $0.2 million in costs associated with an acquisition, and $0.1 million in office rent and
office costs, partially offset by a decrease of $1.1 million in shared overhead and fringe costs.
The number of general and administrative employees was 32 at both July 31, 2009 and July 31,
2008, and may change from time to time to ensure that we have appropriate infrastructure to support
the growth of our organization and to support the demands of public company compliance.
Interest Income and Interest Expense
We recorded $0.2 million of interest income, net, for the three months ended July 31, 2009 as
compared to $1.0 million for the three months ended July 31, 2008. Interest income, net, for the
three months ended July 31, 2009 was comprised of interest income of $0.2 million and interest
expense of approximately $25,000. Interest
25
income, net, for the three months ended July 31, 2008
was comprised of interest income of $1.0 million and interest expense of $0. Interest income
decreased $0.8 million in the three months ended July 31, 2009 as compared to the three months
ended July 31, 2008, primarily due to lower rates of return on our cash, cash equivalents and
investments primarily invested in money market funds and auction rate securities.
We recorded $0.5 million of interest income, net, for the six months ended July 31, 2009 as
compared to $2.8 million for the six months ended July 31, 2008. Interest income, net, for the six
months ended July 31, 2009 was comprised of interest income of $0.5 million and interest expense of
approximately $50,000. Interest income, net, for the six months ended July 31, 2008 was comprised
of interest income of $2.8 million and interest expense of $0. Interest income decreased $2.3
million in the six months ended July 31, 2009 as compared to the six months ended July 31, 2008,
primarily due to lower rates of return on our cash, cash equivalents and investments primarily
invested in money market funds and auction rate securities.
Other Income (Expense), Net
We incurred other income, net, of approximately $247,000 for the three months ended July 31,
2009 as compared to other expense, net, of approximately $86,000 for the three months ended July
31, 2008. The components of other income, net, for the three months ended July 31, 2009 were a gain
on bargain purchase resulting from an acquisition, a gain on the change in fair value of our
auction rate security put right, losses on trading securities, transaction losses for activities in
our foreign subsidiaries and losses associated with changes in the fair value of foreign currency
forward contracts. The components of other expense, net in the three months ended July 31, 2008
were transaction losses for activities in our foreign subsidiaries.
We incurred other income, net, of approximately $378,000 for the six months ended July 31,
2009 as compared to other expense, net, of approximately $219,000 for the six months ended July 31,
2008. The components of other income, net, for the six months ended July 31, 2009 were a gain on
bargain purchase resulting from an acquisition, gains on trading securities, transaction gains for
activities in our foreign subsidiaries, gains associated with changes in the fair value of foreign
currency forward contracts and a loss on the change in fair value of our auction rate security put
right. The components of other expense, net in the six months ended July 31, 2008 were transaction
losses for activities in our foreign subsidiaries.
Provision for Income Taxes
We recorded an income tax expense of approximately $80,000 for the three months ended July 31,
2009, as compared to a provision for income taxes of $1.0 million for the three months ended July
31, 2008. We recorded an income tax expense of approximately $9,000 for the six months ended July
31, 2009, as compared to a provision for income taxes of $1.6 million for the six months ended July
31, 2008.
For the three months ended July 31, 2009, our effective tax rate was 10%, compared to an
effective tax rate of 24% for the three months ended July 31, 2008. For the three months ended July
31, 2009, our effective income tax rate varied from the statutory tax rate of 35% mainly due to the
effects of accounting for share-based compensation, the utilization of federal tax credits and the
effects of purchase accounting from our acquisition of Tizor Systems,
Inc. Our effective tax rate for the three months ended July 31, 2009 varied from the same
period of 2008, primarily due to the reversal of our full valuation allowance recorded against our
deferred tax assets in the fourth quarter of 2009.
For the six months ended July 31, 2009, our effective tax rate was 2%, compared to an
effective tax rate of 24% for the six months ended July 31, 2008. For the six months ended July 31,
2009, our effective income tax rate varied from the statutory tax rate of 35% mainly due to the
effects of accounting for share-based compensation, the utilization of federal tax credits and
effects of purchase accounting from our acquisition of Tizor Systems, Inc. Our effective tax rate
for the six months ended July 31, 2009 varied from the same period of 2008, primarily due to the
reversal of our full valuation allowance recorded against our deferred tax assets in the fourth
quarter of 2009.
Our income tax provision for the three and six months ended July 31, 2009 consisted of
federal, state and foreign taxes owed on our income generated. Our income tax provision for the
three and six months ended July 31, 2008 consisted primarily of taxes owed in relation to the
income generated by our foreign subsidiaries. The federal
26
and state provision for that period
included amounts in relation to our income generated in the United States, reduced by the
utilization of available net operating loss, or NOL, carryforwards and tax credits that were
recorded on the balance sheet with a full valuation allowance prior to their utilization.
We currently expect our annual effective income tax rate, exclusive of discrete items, to be
in the range of 25% to 29% for fiscal 2010.
Liquidity and Capital Resources
As of July 31, 2009, our principal sources of liquidity were cash and cash equivalents of
$109.7 million, and accounts receivable of $31.5 million.
Since our inception, we have funded our operations using a combination of issuances of
convertible preferred stock, which provided us with aggregate net proceeds of $73.3 million, cash
collections from customers and a term loan credit facility and a revolving credit facility with
Silicon Valley Bank. In July 2007, we raised $113.0 million of proceeds, net of underwriting
discounts and expenses, in our initial public offering. In the future, we anticipate that our
primary sources of liquidity will be cash generated from our operating activities.
Our principal uses of cash historically have consisted of payroll and other operating
expenses, repayments of borrowings, our acquisition of NuTech Solutions, Inc. in May 2008 and Tizor
Systems, Inc. in February 2009, purchases of property and equipment primarily to support the
development of new products, and purchases of inventory to support our sales and the volume of
evaluation units located at customer locations that enable our customers and prospective customers
to test our equipment prior to purchasing.
At July 31, 2009, we held ARS with a par value totaling $52.5 million. These ARS, most of
which are AAA-rated bonds collateralized by federally guaranteed student loans, are long-term
variable rate bonds tied to short-term interest rates that are reset through a Dutch auction
process that typically occurs every 7 to 35 days. Historically, the carrying value (par value) of
the ARS approximated fair market value due to the resetting of variable interest rates. Beginning
in late February 2008, the auctions for ARS then held by us were unsuccessful. As a result, the
interest rates on the investments reset to the maximum rate per the applicable investment offering
statements. We will not be able to liquidate the affected ARS until a future auction on these
investments is successful, a buyer is found outside the auction process, the securities are called
or refinanced by the issuer, or the securities mature. Due to these liquidity issues, we performed
a discounted cash flow analysis to determine the estimated fair value of these investments. The
discounted cash flow analysis performed by us considered the timing of expected future successful
auctions, the impact of extended periods of maximum interest rates, collateralization of underlying
security investments and the creditworthiness of the issuer. The discounted cash flow analysis at
July 31, 2009 assumes a discount rate of 2.98%, expected term of three years and an illiquidity
discount of 1.5-1.8%. The discount rate was determined using a proxy based upon the current market
rates for successful auctions within the AAA-rated ARS market. The expected term was based on
managements estimate of future liquidity. The illiquidity discount was based on the levels of
federal insurance or FFELP backing for each security, with a greater percentage of FFELP backing
resulting in a lower illiquidity discount. As a result, we have estimated as of July 31, 2009, an
aggregate loss of $3.5 million, of which $2.2 million was related to the impairment of ARS deemed
to be temporary and
included in accumulated other comprehensive income (loss) within stockholders equity and of
which $1.3 million was related to impairment of ARS classified as trading securities and included
in other income (expense), net in the condensed consolidated statement of operations.
If we had used a term of one year or five years and a discount rate of 2.10% and 4.03%
respectively, the gross unrealized loss would have been $0.8 million or $7.3 million, respectively.
If we had used a term of three years and a discount rate of 2.10% or 4.03%, the gross unrealized
loss would have been $2.2 million or $4.9 million, respectively. If we had used a term of three
years and illiquidity discounts of 1.0% or 2.0%, the gross unrealized loss would have been $2.7
million or $4.1 million, respectively. Based on our ability to access our cash and short-term
investments and our expected cash flows, we do not anticipate the current lack of liquidity for
these ARS will have a material impact on our ability to operate our business.
27
The following table shows our cash flows from operating activities, investing activities and
financing activities for the stated periods:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended July 31, |
|
|
2009 |
|
2008 |
|
|
(in thousands) |
Net cash provided by (used) in operating activities |
|
$ |
(943 |
) |
|
$ |
25,306 |
|
Net cash provided by (used in) investing activities |
|
|
(2,174 |
) |
|
|
25,609 |
|
Net cash provided by financing activities |
|
|
784 |
|
|
|
1,892 |
|
Cash Provided by (Used in) Operating Activities
Net cash used in operating activities was $0.9 million for the six months ended July 31, 2009
and primarily consisted of a decrease in deferred revenues of $9.3 million, a decrease in accounts
payable of $2.7 million, a decrease in accrued expenses of $1.3 million and a decrease in accrued
compensation and benefits of $0.8 million. These uses of cash were partially offset by a decrease
in accounts receivable of $3.1 million, primarily due to the timing of billing and collections of
customer invoices, and a decrease in other assets of $1.6 million. In addition, for the six months
ended July 31, 2009, we had stock-based compensation expense of $4.7 million and depreciation and
amortization expense of $3.6 million, each of which is a non-cash expense.
Net cash provided by operating activities was $25.3 million for the six months ended July 31,
2008 and primarily consisted of an increase in deferred revenues of $12.8 million primarily due to
increased deferred maintenance revenue which was a result of additional product sales, net income
of $5.3 million, a decrease in accounts receivable of $3.2 million primarily due to the receipt of
customer payments, and a decrease in inventory of $1.9 million. In addition, in the six months
ended July 31, 2008 we had stock-based compensation expense of $3.6 million and depreciation and
amortization expense of $2.3 million, each of which is a non-cash expense. These sources of cash
were partially offset by a decrease in accounts payable of $1.8 million, a decrease in accrued
expenses and accrued compensation and benefits of $1.3 million and an increase in other assets of
$0.6 million.
Cash Provided by (Used in) Investing Activities
Net cash used in investing activities was $2.2 million for the six months ended July 31, 2009,
comprised primarily of $2.0 million, net of cash acquired, used to acquire Tizor Systems, Inc., and
$1.8 million of capital expenditures related primarily to new product development. These uses of
cash were partially offset by $1.7 million of sales and maturities of our investments.
Net cash provided by investing activities was $25.6 million for the six months ended July 31,
2008, which primarily consisted of $41.9 million of sales and maturities of our investments. These
proceeds were partially offset by $7.4 million used to purchase our investments, $6.2 million used
to acquire NuTech Solutions, Inc., $1.6 million of capital expenditures, and $1.1 million used to
purchase other assets.
Cash Provided by Financing Activities
Net cash provided by financing activities was $0.8 million and $1.9 million for the six months
ended July 31, 2009 and 2008, respectively, each of which consisted of proceeds received from the
issuance of common stock upon the exercise of stock options.
Contractual Obligations
The following is a summary of our contractual obligations as of July 31, 2009:
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
More than |
Contractual Obligations |
|
Total |
|
1 Year |
|
1 - 3 Years |
|
3 - 5 Years |
|
5 Years |
|
|
(in thousands) |
Operating lease obligations |
|
|
12,435 |
|
|
|
2,758 |
|
|
|
4,338 |
|
|
|
3,558 |
|
|
|
1,781 |
|
Purchase obligations (1) |
|
|
10,252 |
|
|
|
10,252 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term obligations including
current portion of long-term obligations |
|
|
2,000 |
|
|
|
1,000 |
|
|
|
1,000 |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Purchase obligations primarily represent the value of purchase orders issued to our contract
manufacturers for the procurement of assembled appliance systems for the next three months. |
The table above does not reflect unrecognized tax benefits of $3.9 million, the timing of
which is uncertain.
We believe that our cash and cash equivalents of $109.7 million as of July 31, 2009 will be
sufficient to fund our projected operating requirements for the next twelve months. Our future
operating requirements will depend on many factors, including the rate of revenue growth and the
expansion of our sales and marketing and product development activities. However, to the extent
that our cash and cash equivalents and our cash flow from operating activities are insufficient to
fund our future activities, we may need to raise additional funds through bank credit arrangements
or a secondary public offering.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance
sheet arrangements, as defined under SEC rules, such as relationships with unconsolidated entities
or financial partnerships, which are often referred to as structured finance or special purpose
entities, established for the purpose of facilitating financing transactions that do not have to be
reflected on our balance sheet.
Recent Accounting Pronouncements
On
February 1, 2009, we adopted FSP 157-2, Effective Date of FASB
Statement No. 157. FSP 157-2 delayed the effective date of SFAS No. 157, Fair Value Measurement
for all non-financial assets and non-financial liabilities, items that are recognized or disclosed
at fair value in the financial statements on a non-recurring basis, until the beginning of the
first quarter of fiscal 2010. As permitted by FSP 157-2, we adopted the remaining provisions of
SFAS 157 on February 1, 2009, which did not have a material impact on our consolidated financial
statements.
On February 1, 2009, we adopted FSP EITF 03-6-1, Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities. This FSP provides that unvested
share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents
(whether paid or unpaid) are participating securities and shall be included in the computation of
earnings per share pursuant to the two-class method. Upon adoption, a company is required to
retrospectively adjust its earnings per share data (including any amounts related to interim
periods, summaries of earnings and selected financial data) to conform with the
provisions in this FSP. The adoption of FSP EITF 03-6-1 did not have a material impact on our
consolidated financial statements.
On February 1, 2009, SFAS No. 141 (revised 2007), Business Combinations became effective for
us. This statement significantly changes the accounting for business combinations in a number of
areas including the treatment of contingent consideration, contingencies, acquisition costs, in
process research and development and restructuring costs. In addition, under this statement,
changes in deferred tax asset valuation allowances and acquired income tax uncertainties in a
business combination after the measurement period will impact income tax expense. Our acquisition
of Tizor Systems, Inc. in February 2009 was accounted for in accordance with SFAS 141R. SFAS 141R
may have a material impact on our consolidated financial statements if or when we enter into future
business combinations.
29
On February 1, 2009, SFAS No. 160, Noncontrolling Interests in Consolidated Financial
Statementsan amendment of ARB No. 51 became effective for us. This statement changes the
accounting and reporting for minority interests, which will be recharacterized as noncontrolling
interests and classified as a component of equity. This new consolidation method significantly
changes the accounting for transactions with minority interest holders. As of July 31, 2009, we did
not have any minority interests.
In June 2009, we adopted FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of
Financial Instruments. This FSP amends SFAS No. 107, Disclosures about Fair Value of Financial
Instruments, to require disclosures about fair value of financial instruments in interim as well
as in annual financial statements. This FSP also amends APB 28, Interim Financial Reporting, to
require those disclosures in all interim financial statements. The adoption of FSP FAS 107-1 and
APB 28-1 did not have a material impact on our consolidated financial statements.
In June 2009, FSP FAS 157-4, Determining Whether a Market Is Not Active and a Transaction Is
Not Distressed, became effective for us. FSP FAS 157-4 provides guidelines for making fair value
measurements more consistent with the principles presented in SFAS 157, Fair Value Measurement.
FSP FAS 157-4, which provides additional authoritative guidance in determining whether a market is
active or inactive and whether a transaction is distressed, is applicable to all assets and
liabilities (i.e., financial and nonfinancial) and will require enhanced disclosures. FSP FAS 157-4
did not have a material impact on our consolidated financial statements.
In June 2009, FSP FAS 115-2 and FSP FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments, became effective for us. FSP FAS 115-2 and FSP FAS 124-2 amend
the other-than-temporary impairment guidance for debt and equity securities. The adoption of FSP
FAS 115-2 and FSP FAS 124-2 did not have a material impact on our consolidated financial
statements.
In June 2009, we adopted SFAS No. 165, Subsequent Events. SFAS 165 establishes general
standards of accounting for and disclosure of events that occur after the balance sheet date but
before financial statements are issued or are available to be issued. The disclosures required by
SFAS 165 are reflected in Note 2 of our consolidated financial statements.
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and
the Hierarchy of Generally Accepted Accounting Principles, a replacement of SFAS No. 162. SFAS 168
will become effective for us for interim and annual periods ending after September 15, 2009. SFAS
168 does not change GAAP, but combines all authoritative standards, such as those issued by the
FASB, AICPA and EITF, into a comprehensive, topically organized online database, which is expected
to become the single source of authoritative GAAP applicable for all non-governmental entities,
except for rules and interpretive releases of the SEC.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Risk
Our international sales and marketing operations incur expenses that are denominated in
foreign currencies. These expenses could be materially affected by currency fluctuations. Our
exposures are to fluctuations in exchange rates for the U.S. dollar versus the British pound,
Australian dollar, the euro, the Canadian dollar, the Polish zloty, the Korean won and the Japanese
yen. Changes in currency exchange rates could adversely affect our consolidated results of
operations or financial position. Additionally, our international sales and marketing operations
maintain
cash balances denominated in foreign currencies. In order to decrease the inherent risk
associated with translation of foreign cash balances into our reporting currency, we have not
maintained excess cash balances in foreign currencies. As of July 31, 2009, we had $5.5 million of
cash in foreign accounts. We enter into derivative transactions, specifically foreign currency
forward contracts, to manage our exposure to fluctuations in foreign exchange rates that arise,
primarily from our foreign currency-denominated receivables and payables. The contracts are in
British pounds, Australian dollars, Japanese yen and euros, typically have maturities of one month
and require an exchange of foreign currencies for U.S. dollars at maturity of the contracts at
rates agreed to at inception of the contracts. We do not enter into or hold derivatives for trading
or speculative purposes. Generally, we do not designate foreign currency forward contracts as
hedges for accounting purposes, and changes in the fair value of these instruments are recognized
immediately in current earnings. Because we enter into forward contracts only as an economic hedge,
any gain or loss on the underlying foreign-denominated balance would be offset by the loss or
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gain
on the forward contract. Gains and losses on forward contracts and foreign denominated receivables
and payables are included in other income (expense), net.
At July 31, 2009, we had outstanding foreign currency forward contracts with an aggregate
notional value of $8.6 million, denominated in British pounds and Japanese yen. The mark-to-market
effect associated with these contracts was a net unrealized loss of approximately $43,000 at July
31, 2009. Net realized gains and losses associated with exchange rate fluctuations on forward
contracts and the underlying foreign currency exposure being hedged were immaterial for all periods
presented.
Interest Rate Risk
We had an unrestricted cash and cash equivalents balance of $109.7 million at July 31, 2009,
which was held for working capital purposes. We do not enter into investments for trading or
speculative purposes. We do not believe that we have any material exposure to changes in the fair
value of these investments as a result of changes in interest rates. Declines in interest rates,
however, will reduce future investment income.
Our exposure to market risk for changes in interest rates relates primarily to our investment
portfolio. We place our investments with high quality issuers and, by policy, limit the amount of
risk by investing primarily in money market funds, high-quality corporate obligations and
certificates of deposit.
At July 31, 2009, we held ARS with a par value of $52.5 million that have experienced failed
auctions, which has prevented us from liquidating those investments. As a result, we have
classified these investments as long-term assets in our consolidated balance sheet as of July 31,
2009 and recorded an unrealized loss of $3.5 million related to the impairment of the ARS. See Note
3 to the accompanying financial statements for a description of how we value these ARS. Our
valuation of the ARS is sensitive to market conditions and managements judgment and could change
significantly based on the assumptions used. If we had used a term of one year or five years and a
discount rate of 2.10% and 4.03% respectively, the gross unrealized loss would have been $0.8
million or $7.3 million, respectively. If we had used a term of three years and a discount rate of
2.10% or 4.03%, the gross unrealized loss would have been $2.2 million or $4.9 million,
respectively. If we had used a term of three years and illiquidity discounts of 1.0% or 2.0%, the
gross unrealized loss would have been $2.7 million or $4.1 million, respectively. Based on our
ability to access our cash and short-term investments and our expected cash flows, we do not
anticipate the current lack of liquidity on these ARS will have a material impact on our ability to
operate our business.
Item 4. Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial
officer, evaluated the effectiveness of our disclosure controls and procedures as of July 31, 2009.
The term disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other
procedures of a company that are designed to ensure that information required to be disclosed by a
company in the reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the SECs rules and forms. Disclosure
controls and procedures include, without limitation, controls and procedures designed to ensure
that information required to be disclosed by a company in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the companys management, including its
principal executive and principal financial officers,
or persons performing similar functions, as appropriate to allow timely decisions regarding
required disclosure. Management recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving their objectives and
management necessarily applies its judgment in evaluating the cost-benefit relationship of possible
controls and procedures. Based on the evaluation of our disclosure controls and procedures as of
July 31, 2009, our chief executive officer and chief financial officer concluded that, as of such
date, our disclosure controls and procedures were effective at the reasonable assurance level.
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No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) occurred during the three months ended July 31, 2009 that has
materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
PART II. OTHER INFORMATION
ITEM 1A. Risk Factors
There are risks and uncertainties that could cause our actual results to differ materially from the
results contemplated by the forward-looking statements contained in this Quarterly Report on Form
10-Q. Because of the these factors, as well as other variables affecting our operating results,
past financial performance should not be considered as a reliable indicator of future performance
and investors should not use historical trends to anticipate results or trends in future periods.
These risks are not the only ones facing us. Please also see Cautionary Statement in Part I, Item
2 of this Quarterly Report on Form 10-Q. The following discussion highlights certain risks which
may affect future operating results. These are the risks and uncertainties we believe are most
important for our existing and potential stockholders to consider. Additional risks and
uncertainties not presently known to us, which we currently deem immaterial or which are similar to
those faced by other companies in our industry or business in general, may also impair our business
operations. If any of the following risks or uncertainties actually occurs, our business, financial
condition and operating results would likely suffer.
Risks Related to Our Business and Industry
Adverse changes in economic conditions and reduced information technology spending may negatively
impact our business.
Our business depends on the overall demand for information technology and on the economic
health of our current and prospective customers and the geographic regions in which we operate. In
addition, the purchase of our products is often discretionary and may involve a significant
commitment of capital and other resources. Over the past year, there has been a significant
deterioration in economic conditions in many of the countries and regions in which we do business.
These economic conditions have caused some of our current or prospective customers to reduce their
information technology spending, causing them to modify, delay or cancel plans to purchase our
products. If our customers continue to reduce their information technology spending, or otherwise
modify, delay or cancel plans to purchase our products, our operating results will be adversely
affected.
We have a history of losses, and we may not maintain profitability in the future.
We have been profitable for the last two fiscal years, generating net income of $31.5 million
in fiscal 2009 and $2.0 million in fiscal 2008, but we had not been profitable in any prior fiscal
period. Although we reported net income of $0.7 million for the second quarter of fiscal 2010, we
experienced a net loss of $0.2 million for the first quarter of fiscal 2010. As of July 31, 2009,
our accumulated deficit was $47.1 million. We expect to make significant additional expenditures to
facilitate the expansion of our business, including expenditures in the areas of sales, research
and development, and customer service and support. Furthermore, we may encounter unforeseen issues
that require us to incur additional costs. As a result of these increased expenditures, we will
have to generate and sustain increased revenue to maintain profitability. Accordingly, we may not
be able to maintain profitability and we may incur significant losses in the future.
Our operating results may fluctuate significantly from quarter to quarter and may fall below
expectations in any particular fiscal quarter, which could adversely affect the market price of our
common stock.
Our operating results are difficult to predict and may fluctuate from quarter to quarter due
to a variety of factors, many of which are outside of our control. As a result, comparing our
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. If our revenue or operating results fall
below the expectations of investors or any securities analysts that follow our company in any
period, the price of our common stock would likely decline.
In addition to other risk factors listed in this Risk Factors section, factors that may
cause our operating results to fluctuate include:
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the impact of the recent economic downturn on customer purchases; |
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the impact of new competitors or new competitive offerings; |
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the typical recording of a significant portion of our quarterly sales in the final month
of the quarter, whereby small delays in completion of sales transactions could have a
significant impact on our operating results for that quarter; |
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the relatively high average selling price of our products and our dependence on a
limited number of customers for a substantial portion of our revenue in any quarterly
period, whereby the loss of or delay in a customer order could significantly reduce our
revenue for that quarter; for instance, one customer accounted for 16% of our total
revenues during fiscal 2009 and our ten largest customers accounted for approximately 39%
of our revenues in fiscal 2009; |
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the possibility of seasonality in demand for our products; |
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the addition of new customers or the loss of existing customers; |
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the rates at which customers purchase additional products or additional capacity for
existing products from us; |
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changes in the mix of products and services sold; |
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the rates at which customers renew their maintenance and support contracts with us; |
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our ability to enhance our products with new and better functionality that meet customer
requirements; |
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the timing of recognizing revenue as a result of revenue recognition rules, including
due to the timing of delivery and receipt of our products; |
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the length of our product sales cycle; |
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the productivity and growth of our sales force; |
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service interruptions with any of our single source suppliers or manufacturing partners; |
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changes in pricing by us or our competitors, or the need to provide discounts to win
business; |
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the timing of our product releases or upgrades or similar announcements by us or our
competitors; |
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the timing of investments in research and development related to new product releases or
upgrades; |
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our ability to control costs, including operating expenses and the costs of the
components used in our products; |
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volatility in our stock price, which may lead to higher stock compensation expenses
pursuant to Statement of Financial Accounting Standards No. 123R, Share-Based Payment,
which first became effective for us in fiscal 2007 and requires that employee stock-based
compensation be measured based on fair value on grant date and treated as an expense that
is reflected in our financial statements over the recipients service period; |
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future accounting pronouncements and changes in accounting policies; |
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costs related to the acquisition and integration of companies, assets or technologies; |
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technology and intellectual property issues associated with our products; and |
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general economic trends, including changes in information technology spending or
geopolitical events such as war or incidents of terrorism. |
Most of our operating expenses do not vary directly with revenue and are difficult to adjust
in the short term. As a result, if revenue for a particular quarter is below our expectations, we
could not proportionately reduce operating expenses for that quarter, and therefore this revenue
shortfall would have a disproportionate effect on our expected operating results for that quarter.
Our limited operating history and the rapid development of the data warehouse market make it
difficult to evaluate our current business and future prospects, and may increase the risk of your
investment.
Our company has only been in existence since August 2000. We first began shipping products in
February 2003 and much of our growth has occurred in the past five fiscal years. Our limited
operating history and the rapid development of the data warehouse market in which we operate makes
it difficult to evaluate our current business and our future prospects. As a result, we cannot be
certain that we will sustain our growth or maintain profitability. We will encounter risks and
difficulties frequently experienced by early-stage companies in rapidly-evolving industries. These
risks include the need to:
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attract new customers and maintain current customer relationships; |
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continue to develop and upgrade our data warehouse solutions; |
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respond quickly and effectively to competitive pressures; |
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offer competitive pricing or provide discounts to customers in order to win
business; |
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manage our expanding operations; |
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maintain adequate control over our expenses; |
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maintain adequate internal controls and procedures; |
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maintain our reputation, build trust with our customers and further establish our
brand; and |
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identify, attract, retain and motivate qualified personnel. |
If we fail to successfully address these needs, our business, operating results and financial
condition may be adversely affected.
We depend on a single product family, our data warehouse appliance family, for nearly all of our
revenue, so we are particularly vulnerable to any factors adversely affecting the sale of that
product family.
Nearly all of our revenue is derived from sales and service of our data warehouse appliance
product family, and we expect that this product family will account for substantially all of our
revenue for the foreseeable future. If the data warehouse market declines or our data warehouse
appliance products fail to maintain or achieve greater market acceptance, we will not be able to
grow our revenues sufficiently to maintain profitability.
If our new data warehouse appliance, the TwinFin appliance, does not achieve widespread market
acceptance, our operating results will suffer.
In August 2009, we announced our new TwinFin appliance, which has recently become generally
available for customer shipments. We expect that sales of the TwinFin
appliance will generate a significant portion of our anticipated
revenues in the third quarter of fiscal 2010 and that sales of our new family of blade
server-based data warehouse appliances, of which the TwinFin appliance is the first member, will generate most of our anticipated product
revenues in subsequent fiscal quarters.
Our future sales and operating results will depend, to a significant extent, on the successful
deployment and marketing of the TwinFin appliance. In order to achieve market penetration for the
TwinFin appliance, we may be required to incur additional expenses in marketing and sales in
advance of the realization of expected sales. There can be no assurance that the TwinFin appliance
will achieve widespread acceptance in the market. If we incur delays in the manufacture and
shipment of the TwinFin appliance or customer testing and verification takes longer than
anticipated, or the TwinFin appliance does not achieve our planned levels of sales or the TwinFin
appliance does not achieve performance specifications, our operating results will suffer and our
competitive position could be impaired.
If we lose key personnel, or if we are unable to attract and retain highly-qualified personnel on a
cost-effective basis, it will be more difficult for us to manage our business and to identify and
pursue growth opportunities.
Our success depends substantially on the performance of our key senior management, technical,
and sales and marketing personnel. Each of our employees may terminate his or her relationship with
us at any time and the loss of the services of such persons could have an adverse effect on our
business.
There may be departures of our key management personnel from time to time and our continued
success will depend on our ability to attract or develop highly qualified managerial personnel and
fully integrate them into our business, which may be time-consuming and may result in additional
disruptions to our operations. In addition, our success depends in significant part on our ability
to develop and enhance our products, which requires talented hardware and software engineers with
specialized skills, and on our ability to maintain and grow an effective sales force. We experience
intense competition for highly qualified managerial, technical, and sales and marketing personnel
and we cannot ensure that we will be able to successfully attract, assimilate, or retain such
personnel in the future.
If we are unable to develop and introduce new products and enhancements to existing products, if
our new products and enhancements to existing products do not achieve market acceptance, or if we
fail to manage product transitions, we may fail to increase, or may lose, market share.
The market for our products is characterized by rapid technological change, frequent new
product introductions and evolving industry standards. Our future growth depends on our successful
development and introduction of new products, such as our recently announced TwinFin appliance, and
enhancements to existing products that achieve
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acceptance in the market. Due to the complexity of our products, which include integrated
hardware and software components, any new products and product enhancements would be subject to
significant technical risks that could impact our ability to introduce those products and
enhancements in a timely manner. In addition, such new products or product enhancements may not
achieve market acceptance despite our expending significant resources to develop them. If we are
unable, for technological or other reasons, to develop, introduce and enhance our products in a
timely manner in response to changing market conditions or evolving customer requirements, or if
these new products and product enhancements do not achieve market acceptance due to competitive or
other factors, our operating results and financial condition could be adversely affected.
Product introductions and certain enhancements of existing products by us in future periods
may also reduce demand for our existing products or could delay purchases by customers awaiting
arrival of our new products. As new or enhanced products are introduced, we must successfully
manage the transition from older products in order to minimize disruption in customers ordering
patterns, avoid excessive levels of older product inventories and ensure that sufficient supplies
of new products can be delivered in a timely manner to meet customer demand.
We face intense and growing competition from leading technology companies as well as from emerging
companies. Our inability to compete effectively with any or all of these competitors could impact
our ability to achieve our anticipated market penetration and achieve or sustain profitability.
The data warehouse market is highly competitive and we expect competition to intensify in the
future. This competition may make it more difficult for us to sell our products, and may result in
increased pricing pressure, reduced profit margins, increased sales and marketing expenses and
failure to increase, or the loss of, market share, any of which would likely seriously harm our
business, operating results and financial condition.
Currently, our most significant competition includes companies which typically sell several if
not all elements of a data warehouse environment as individual products, including database
software, servers, storage and professional services. These competitors are often leaders in many
of these segments including EMC Corporation, Hewlett-Packard Company, International Business
Machines Corporation, Oracle Corporation, Sun Microsystems, Inc., Sybase, Inc. and Teradata
Corporation. In addition, a large number of fast growing companies have recently entered the
market, many of them selling integrated appliance offerings similar to our products. Additionally,
as the benefits of an appliance solution have become evident in the marketplace, many of our
competitors have also begun to bundle their products into appliance-like offerings that more
directly compete with our products. We also expect additional competition in the future from new
and existing companies with whom we do not currently compete directly. As our industry evolves, our
current and potential competitors may establish cooperative relationships among themselves or with
third parties, including software and hardware companies with whom we have partnerships and whose
products interoperate with our own, that could acquire significant market share, which could
adversely affect our business. We also face competition from internally developed systems. Any of
these competitive threats, alone or in combination with others, could seriously harm our business,
operating results and financial condition.
Many of our competitors have greater market presence, longer operating histories, stronger
name recognition, larger customer bases and significantly greater financial, technical, sales and
marketing, manufacturing, distribution and other resources than we have. In addition, many of our
competitors have broader product and service offerings than we do. These companies may attempt to
use their greater resources to better position themselves in the data warehouse market including by
pricing their products at a discount or bundling them with other products and services in an
attempt to rapidly gain market share. Moreover, many of our competitors have more extensive
customer and partner relationships than we do, and may therefore be in a better position to
identify and respond to market developments or changes in customer demands. Potential customers may
also prefer to purchase from their existing suppliers rather than a new supplier regardless of
product performance or features. We cannot assure you that we will be able to compete successfully
against existing or new competitors.
In addition, some of our traditional competitors have introduced their own integrated data
warehousing solutions which may cause our sales cycles to be delayed and may have an adverse impact
on our business, operating results and financial condition.
Our success depends on the continued recognition of the need for business intelligence in the
marketplace and on the adoption by our customers of data warehouse appliances, often as
replacements for existing systems, to
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enable business intelligence. If we fail to improve our products to further drive this market
migration as well as to successfully compete with alternative approaches and products, our business
would suffer.
Due to the innovative nature of our products and the new approaches to business intelligence
that our products enable, purchases of our products often involve the adoption of new methods of
database access and utilization on the part of our customers. This may entail the acknowledgement
of the benefits conferred by business intelligence and the customer-wide adoption of business
intelligence analysis that makes the benefits of our system particularly relevant. Business
intelligence solutions are still in their early stages of growth and their continued adoption and
growth in the marketplace remain uncertain. Additionally, our appliance approach requires our
customers to run their data warehouses in new and innovative ways and often requires our customers
to replace their existing equipment and supplier relationships, which they may be unwilling to do,
especially in light of the often critical nature of the components and systems involved and the
significant capital and other resources they may have previously invested. Furthermore, purchases
of our products involve material changes to established purchasing patterns and policies. Even if
prospective customers recognize the need for our products, they may not select our data warehouse
appliance solutions because they choose to wait for the introduction of products and technologies
that serve as a replacement or substitute for, or represent an improvement over, our data warehouse
appliance solutions. Therefore, our future success also depends on our ability to maintain our
leadership position in the data warehouse market and to proactively address the needs of the market
and our customers to further drive the adoption of business intelligence and to sustain our
competitive advantage versus competing approaches to business intelligence and alternate product
offerings.
Claims that we infringe or otherwise misuse the intellectual property of others could subject us to
significant liability and disrupt our business, which could have a material adverse effect on our
business and operating results.
Our competitors protect their intellectual property rights by means such as trade secrets,
patents, copyrights and trademarks. We have not conducted an independent review of patents issued
to third parties. Although we have not been involved in any litigation related to intellectual
property rights of others, from time to time we receive letters from other parties alleging, or
inquiring about, breaches of their intellectual property rights. We may in the future be sued for
violations of other parties intellectual property rights, and the risk of such a lawsuit will
likely increase as our size and the number and scope of our products increase, as our geographic
presence and market share expand and as the number of competitors in our market increases. Any such
claims or litigation could:
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be time-consuming and expensive to defend, whether meritorious or not; |
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cause shipment delays; |
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divert the attention of our technical and managerial resources; |
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require us to enter into royalty or licensing agreements with third parties, which may
not be available on terms that we deem acceptable, if at all; |
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prevent us from operating all or a portion of our business or force us to redesign our
products, which could be difficult and expensive and may degrade the performance of our
products; |
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subject us to significant liability for damages or result in significant settlement
payments; and/or |
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require us to indemnify our customers, distribution partners or suppliers. |
Any of the foregoing could disrupt our business and have a material adverse effect on our
operating results and financial condition.
Our products must interoperate with our customers information technology infrastructure, including
customers software applications, networks, servers and data-access protocols, and if our products
do not do so successfully, we may experience a weakening demand for our products.
To be competitive in the market, our products must interoperate with our customers
information technology infrastructure, including software applications, network infrastructure and
servers supplied by a variety of other vendors, many of whom are competitors of ours. Our products
currently interoperate with a number of business intelligence and data-integration applications
provided by vendors including IBM and Oracle, among others. When new or updated versions of these
software applications are introduced, we must sometimes develop updated versions of our software
that may require assistance from these vendors to ensure that our products effectively interoperate
with these applications. If these vendors do not provide us with assistance on a timely basis, or
decide not to work with us for competitive or other reasons, including due to consolidation with
our competitors, we may be unable to
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ensure such interoperability. Additionally, our products interoperate with servers, network
infrastructure and software applications predominantly through the use of data-access protocols.
While many of these protocols are created and maintained by independent standards organizations,
some of these protocols that exist today or that may be created in the future are, or could be,
proprietary technology and therefore require licensing the proprietary protocols specifications
from a third party or implementing the protocol without specifications. Our development efforts to
provide interoperability with our customers information technology infrastructures require
substantial capital investment and the devotion of substantial employee resources. We may not
accomplish these development efforts quickly, cost-effectively or at all. If we fail for any reason
to maintain interoperability, we may experience a weakening in demand for our products, which would
adversely affect our business, operating results and financial condition.
If we fail to enhance our brand, our ability to expand our customer base will be impaired and our
operating results may suffer.
We believe that developing and maintaining awareness of the Netezza brand is critical to
achieving widespread acceptance of our products and is an important element in attracting new
customers and shortening our sales cycle. We expect the importance of brand recognition to increase
as competition further develops in our market. Successful promotion of our brand will depend
largely on the effectiveness of our marketing efforts and our ability to provide customers with
reliable and technically sophisticated products at competitive prices. If customers do not perceive
our products and services to be of high value, our brand and reputation could be harmed, which
could adversely impact our financial results. Despite our best efforts, our brand promotion efforts
may not yield increased revenue sufficient to offset the additional expenses incurred in our
brand-building efforts.
We may not receive significant revenues from our current research and development efforts for
several years, if at all.
Investment in product development often involves a long payback cycle. We have made and expect
to continue making significant investments in research and development and related product
opportunities. Accelerated product introductions and short product life cycles require high levels
of expenditures for research and development that could adversely affect our operating results if
not offset by revenue increases. We believe that we must continue to dedicate a significant amount
of resources to our research and development efforts to maintain our competitive position. However,
we do not expect to receive significant revenues from these investments for several years, if at
all.
Our sales cycles can be long and unpredictable, and our sales efforts require considerable time and
expense, which contribute to the unpredictability and variability of our financial performance and
may adversely affect our profitability.
The timing of our revenue is difficult to predict as we experience extended sales cycles, due
in part to our need to educate our customers about our products and participate in extended product
evaluations and the high purchase price of our products. In addition, product purchases are often
subject to a variety of customer considerations that may extend the length of our sales cycle,
including customers acceptance of our approach to data warehouse management and their willingness
to replace their existing solutions and supplier relationships, timing of their budget cycles and
approval processes, budget constraints, extended negotiations, and administrative, processing and
other delays, including those due to general economic factors. As a result, our sales cycle extends
to more than nine months in some cases and it is difficult to predict when or if a sale to a
potential customer will occur. Furthermore, the introduction of new products, such as the recent
introduction of our TwinFin appliance, may further extend the length of our sales cycle because of
additional customer testing, verification and acceptance criteria for the new product. All of these
factors can contribute to fluctuations in our quarterly financial performance and increase the
likelihood that our operating results in a particular quarter will fall below investor
expectations. In addition, the provision of evaluation units to customers may require significant
investment in inventory in advance of sales of these units, which sales may not ultimately
transpire. If we are unsuccessful in closing sales after expending significant resources, or if we
experience delays for any of the reasons discussed above, our future revenues and operating
expenses may be materially adversely affected.
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Our company has grown rapidly and we may be unable to manage our growth effectively.
Between January 31, 2005 and July 31, 2009, the number of our employees increased from 140 to
392 and our installed base of customers grew from 15 to 305. In addition, during that time period
our number of office locations has increased from 3 to 18. We anticipate that further expansion of
our organization and operations will be required to achieve our growth targets. Our rapid growth
has placed, and is expected to continue to place, a significant strain on our management and
operational infrastructure. Our failure to continue to enhance our management personnel and
policies and our operational and financial systems and controls in response to our growth could
result in operating inefficiencies that could impair our competitive position and would increase
our costs more than we had planned. If we are unable to manage our growth effectively, our
business, our reputation and our operating results and financial condition will be adversely
affected.
Our ability to sell to U.S. federal government agencies is subject to evolving laws and policies
that could have a material adverse effect on our growth prospects and operating results, and our
contracts with the U.S. federal government may impose requirements that are unfavorable to us.
In the six months ended July 31, 2009, and the fiscal years ended January 31, 2009 and 2008,
we derived approximately 14%, 3% and 3%, respectively, of our revenue
from sales made by resellers and various integrators to U.S. federal government
agencies, and which amount may increase substantially in future periods. The demand for data warehouse
products and services by federal government agencies may be affected by laws and policies that
might restrict agencies collection, processing, and sharing of certain categories of information.
Our ability to profitably sell products to government agencies is also subject to changes in agency
funding priorities and contracting procedures and our ability to comply with applicable government
regulations and other requirements.
The restrictions on federal government data management include, for example, the Privacy Act,
which requires agencies to publicize their collection and use of personal data and implement
procedures to provide individuals with access to that information; the Federal Information Security
Management Act, which requires agencies to develop comprehensive data privacy and security measures
that may increase the cost of maintaining certain data; and the E-government Act, which requires
agencies to conduct privacy assessments before acquiring certain information technology products or
services and before initiating the collection of personal information or the aggregation of
existing databases of personal information. These restrictions, any future restrictions, and public
or political pressure to constrain the governments collection and processing of personal
information may adversely affect the governments demand for our products and services and could
have a material adverse effect on our growth prospects and operating results.
Federal agency funding for information technology programs is subject to annual appropriations
established by Congress and spending plans adopted by individual agencies. Accordingly, government
purchasing commitments normally last no longer than one year. The amounts of available funding in
any year may be reduced to reflect budgetary constraints, economic conditions, or competing
priorities for federal funding. Constraints on federal funding for information technology could
harm our ability to sell products to government agencies, causing fluctuations in our revenues from
this segment from period to period and resulting in a weakening of our growth prospects, operating
results and financial condition.
Our contracts with government agencies may subject us to certain risks and give the government
rights and remedies not typically found in commercial contracts, including rights that allow the
government to, for example:
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terminate contracts for convenience at any time without cause; |
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obtain detailed cost or pricing information; |
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receive most favored customer pricing; |
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perform routine audits; |
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impose equal employment and hiring standards; |
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require products to be manufactured in specified countries; |
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restrict non-U.S. ownership or investment in our company; and |
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pursue administrative, civil or criminal remedies for contractual violations. |
Moreover, some of our contracts allow the government to use, or permit others to use, patented
inventions that we developed under those contracts, and to place conditions on our right to retain
title to such inventions. Likewise, some of our government contracts allow the government to use or
disclose software or technical data that we develop or deliver under the contract without
constraining subsequent uses of those data. Third parties authorized by the government to use our
patents, software and technical data may emerge as alternative sources for the products
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and services we offer to the government and may enable the government to negotiate lower
prices for our products and services. If we fail to assert available protections for our patents,
software, and technical data, our ability to control the use of our intellectual property may be
compromised, which may benefit our competitors, reduce the prices we can obtain for our products
and services, and harm our financial condition.
Our international operations are subject to additional risks that we do not face in the United
States, which could have an adverse effect on our operating results.
In the six months ended July 31, 2009, and the fiscal years ended January 31, 2009 and 2008,
we derived approximately 21%, 26% and 20%, respectively, of our revenue from customers based
outside the United States, and we currently have sales personnel in ten different foreign
countries. We expect our revenue and operations outside the United States will continue to expand
in the future. Our international operations are subject to a variety of risks that we do not face
in the United States, including:
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difficulties in staffing and managing our foreign offices and the increased travel,
infrastructure and legal and compliance costs associated with multiple international
locations; |
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general economic conditions in the countries in which we operate, including seasonal
reductions in business activity in the summer months in Europe, during Lunar New Year in
parts of Asia and in other periods in various individual countries; |
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longer payment cycles for sales in foreign countries and difficulties in enforcing
contracts and collecting accounts receivable; |
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additional withholding taxes or other taxes on our foreign income, and tariffs or other
restrictions on foreign trade or investment; |
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imposition of, or unexpected adverse changes in, foreign laws or regulatory
requirements, many of which differ from those in the United States; |
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increased length of time for shipping and acceptance of our products; |
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difficulties in repatriating overseas earnings; |
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increased exposure to foreign currency exchange rate risk; |
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tariffs and trade barriers, import/export controls, and other regulatory or contractual
limitations on our ability to sell or develop our products in certain foreign markets; |
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reduced protection for intellectual property rights in some countries; |
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costs and delays associated with developing products in multiple languages; and |
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political unrest, war, incidents of terrorism, or responses to such events. |
Our overall success in international markets depends, in part, on our ability to succeed in
differing legal, regulatory, economic, social and political conditions. We may not be successful in
developing and implementing policies and strategies that will be effective in managing these risks
in each country where we do business. Our failure to manage these risks successfully could harm our
international operations, reduce our international sales and increase our costs, thus adversely
affecting our business, operating results and financial condition.
Our future revenue growth will depend in part on our ability to further develop our indirect sales
channel, and our inability to effectively do so will impair our ability to grow our revenues.
Our future revenue growth will depend in part on the continued development of our indirect
sales channel to complement our direct sales force. Our indirect sales channel includes resellers,
systems integration firms and analytic service providers. In the six months ended July 31, 2009,
and the fiscal years ended January 31, 2009 and 2008, we derived approximately 18%, 21% and 14%,
respectively, of our revenue from our indirect sales channel. We plan to continue to invest in our
indirect sales channel by expanding upon and developing new relationships with resellers, systems
integration firms and analytic service providers. While the development of our indirect sales
channel is a priority for us, we cannot predict the extent to which we will be able to attract and
retain financially stable, motivated indirect channel partners. Additionally, due in part to the
complexity and innovative nature of our products, our channel partners may not be successful in
marketing and selling our products. Our indirect sales channel may be adversely affected by
disruptions in relationships between our channel partners and their customers, as well as by
competition between our channel partners or between our channel partners and our direct sales
force. In addition our reputation could suffer as a result of the conduct and manner of marketing
and sales by our channel partners. Our agreements with our channel partners are generally not
exclusive and may be terminated without
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cause. If we fail to effectively develop and manage our indirect channel for any of these
reasons, we may have difficulty attaining our growth targets.
Our ability to sell our products and retain customers is highly dependent on the quality of our
maintenance and support services offerings, and our failure to offer high-quality maintenance and
support could have a material adverse effect on our operating results.
Most of our customers purchase maintenance and support services from us, which represents a
significant portion of our revenue (approximately 30% of our revenue for the six months ended July
31, 2009, 24% of our revenue in the fiscal year ended January 31, 2009 and 19% of our revenue in
the fiscal year ended January 31, 2008). Customer satisfaction with our maintenance and support
services is critical for the successful marketing and sale of our products and the success of our
business. In addition to our support staff and installation and technical account management teams,
we have developed service relationships with third parties to provide on-site hardware service to
our customers. Although we believe these third parties and any other third-party service provider
we utilize in the future will offer a high level of service consistent with our internal customer
support services, we cannot assure you that they will continue to devote the resources necessary to
provide our customers with effective technical support. In addition, if we are unable to renew our
service agreements with these third parties we utilize in the future or such agreements are
terminated, we may be unable to establish alternative relationships on a timely basis or on terms
acceptable to us, if at all. If we or our service partners are unable to provide effective
maintenance and support services, it could adversely affect our ability to sell our products and
harm our reputation with current and potential customers.
Our products are highly technical and may contain undetected software or hardware defects, which
could cause data unavailability, loss or corruption that might result in liability to our customers
and harm to our reputation and business.
Our products are highly technical and complex and are often used to store and manage data
critical to our customers business operations. Our products may contain undetected errors, defects
or security vulnerabilities that could result in data unavailability, loss or corruption or other
harm to our customers. Some errors in our products may only be discovered after the products have
been installed and used by customers. Any errors, defects or security vulnerabilities discovered in
our products after commercial release or that are caused by another vendors products with which we
interoperate but are nevertheless attributed to us by our customers, as well as any computer virus
or human error on the part of our customer support or other personnel, that result in a customers
data being misappropriated, unavailable, lost or corrupted could have significant adverse
consequences, including:
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loss of customers; |
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negative publicity and damage to our reputation; |
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diversion of our engineering, customer service and other resources; |
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increased service and warranty costs; and |
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loss or delay in revenue or market acceptance of our products. |
Any of these events could adversely affect our business, operating results and financial
condition. In addition, there is a possibility that we could face claims for product liability,
tort or breach of warranty, including claims from both our customers and our distribution partners.
The cost of defending such a lawsuit, regardless of its merit, could be substantial and could
divert managements attention from ongoing operations of the company. In addition, if our business
liability insurance coverage proves inadequate with respect to a claim or future coverage is
unavailable on acceptable terms or at all we may be liable for payment of substantial damages. Any
or all of these potential consequences could have an adverse impact on our operating results and
financial condition.
It is difficult to predict our future capital needs and we may be unable to obtain additional
financing that we may need, which could have a material adverse effect on our business, operating
results and financial condition.
We believe that our current balance of cash, cash equivalents and investments, together with
cash expected to be generated from operations, will be sufficient to fund our projected operating
requirements, including anticipated capital expenditures, for at least the next twelve months.
However, we may need to raise additional funds if we are presented with unforeseen circumstances or
opportunities in order to, among other things:
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develop or enhance our products; |
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support additional capital expenditures; |
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respond to competitive pressures; |
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fund operating losses in future periods; or |
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take advantage of acquisition or expansion opportunities. |
Any required additional financing may not be available on terms acceptable to us, or at all.
If we raise additional funds by issuing equity securities, you may experience significant dilution
of your ownership interest, and the newly issued securities may have rights senior to those of the
holders of our common stock. If we raise additional funds by obtaining loans from third parties,
the terms of those financing arrangements may include negative covenants or other restrictions on
our business that could impair our operational flexibility and would also require us to fund
additional interest expense, which would harm our profitability. Holders of debt would also have
rights, preferences or privileges senior to those of holders of our common stock.
A substantial portion of our long-term marketable securities is invested in highly rated auction
rate securities. Failures in these auctions may affect our liquidity.
A substantial percentage of our marketable securities portfolio is invested in highly rated
auction rate securities collateralized by student loans with the majority of such collateral being
guaranteed by the United States government. Auction rate securities are securities that are
structured to allow for short-term interest rate resets but with contractual maturities that can be
well in excess of ten years. At the end of each reset period, which typically occurs every 7 to 35
days, investors can sell or continue to hold the securities at par. Beginning in late February
2008, due to market conditions, the auction process for our auction rate securities failed. Such
failures resulted in the interest rate on these investments resetting to predetermined rates in
accordance with their underlying loan agreements which are, in some instances, lower than the
current market rate of interest. In the event we need to liquidate our investments in these types
of securities, we will not be able to do so until a future auction on these investments is
successful, the issuer redeems the outstanding securities, a buyer is found outside the auction
process, the securities mature, or there is a default requiring immediate repayment from the
issuer. In the future, should the auction rate securities we hold be subject to additional auction
failures and/or we determine that the decline in value of auction rate securities are other than
temporary, we would recognize a loss in our consolidated statement of operations, which could be
material. In addition, any future failed auctions may adversely impact the liquidity of our
investments. Furthermore, if one or more issuers of the auction rate securities held in our
portfolio are unable to successfully close future auctions and their credit ratings deteriorate, we
may be required to adjust the carrying value of these investments through an impairment charge,
which could be material.
Due to our inability to sell these securities at auction since late February 2008, on November
7, 2008, we accepted an offer from UBS AG, an investment broker through which we purchased par
value $15.8 million of auction rate securities, that grants us the right to sell to UBS $15.8
million of our total $52.5 million auction rate securities position, at par, at any time during a
two-year period beginning June 30, 2010, which we refer to as the put right. Nevertheless, the put
right only provides us with the opportunity to liquidate a portion of our auction rate securities
position and to the extent we are not able to liquidate the remainder of our auction rate
securities, our lack of access to the underlying value of such securities could have a material
impact on our income and results in operations.
If we are unable to protect our intellectual property rights, our competitive position could be
harmed or we could be required to incur significant expenses to enforce our rights.
Our success is dependent in part on obtaining, maintaining and enforcing our intellectual
property and other proprietary rights. We rely on a combination of trade secret, patent, copyright
and trademark laws and contractual provisions with employees and third parties, all of which offer
only limited protection. Despite our efforts to protect our intellectual property and proprietary
information, we may not be successful in doing so, for several reasons. We cannot be certain that
our pending patent applications will result in the issuance of patents or whether the examination
process will require us to narrow our claims. Even if patents are issued to us, they may be
contested, or our competitors may be able to develop similar or superior technologies without
infringing our patents.
Although we enter into confidentiality, assignments of proprietary rights and license
agreements, as appropriate, with our employees and third parties, including our contract
engineering firm, and generally control access to and distribution of our technologies,
documentation and other proprietary information, we cannot be certain that the
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steps we take to prevent unauthorized use of our intellectual property rights are sufficient
to prevent their misappropriation, particularly in foreign countries where laws or law enforcement
practices may not protect our intellectual property rights as fully as in the United States.
Even in those instances where we have determined that another party is breaching our
intellectual property and other proprietary rights, enforcing our legal rights with respect to such
breach may be expensive and difficult. We may need to engage in litigation to enforce or defend our
intellectual property and other proprietary rights, which could result in substantial costs and
diversion of management resources. Further, many of our current and potential competitors are
substantially larger than we are and have the ability to dedicate substantially greater resources
to defending any claims by us that they have breached our intellectual property rights.
Our products may be subject to open source licenses, which may restrict how we use or distribute
our solutions or require that we release the source code of certain technologies subject to those
licenses.
Some of our proprietary technologies incorporate open source software. For example, the open
source database drivers that we use may be subject to an open source license. The GNU General
Public License and other open source licenses typically require that source code subject to the
license be released or made available to the public. Such open source licenses typically mandate
that proprietary software, when combined in specific ways with open source software, become subject
to the open source license. We take steps to ensure that our proprietary software is not combined
with, or does not incorporate, open source software in ways that would require our proprietary
software to be subject to an open source license. However, few courts have interpreted the open
source licenses, and the manner in which these licenses may be interpreted and enforced is
therefore subject to uncertainty. If these licenses were to be interpreted in a manner different
than we interpret them, we may find ourselves in violation of such licenses. While our customer
contracts prohibit the use of our technology in any way that would cause it to violate an open
source license, our customers could, in violation of our agreement, use our technology in a manner
prohibited by an open source license.
In addition, we rely on multiple software engineers to design our proprietary products and
technologies. Although we take steps to ensure that our engineers do not include open source
software in the products and technologies they design, we may not exercise complete control over
the development efforts of our engineers and we cannot be certain that they have not incorporated
open source software into our proprietary technologies. In the event that portions of our
proprietary technology are determined to be subject to an open source license, we might be required
to publicly release the affected portions of our source code, which could reduce or eliminate our
ability to commercialize our products.
As part of our business strategy, we engage in acquisitions, which could disrupt our business,
cause dilution to our stockholders, reduce our financial resources and result in increased
expenses.
We acquired NuTech Solutions, Inc. in May 2008 and Tizor Systems, Inc. in February 2009 (see
Note 5 to our accompanying financial statements). In the future, we may acquire additional
companies, assets or technologies in an effort to complement our existing offerings or enhance our
market position. Any acquisitions we make could subject us to a number of risks, including:
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the purchase price we pay could significantly deplete our cash reserves, impair our
future operating flexibility or result in dilution to our existing stockholders; |
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we may find that the acquired company, assets or technology do not further improve our
financial and strategic position as planned; |
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we may find that we overpaid for the company, asset or technology, or that the economic
conditions underlying our acquisition have changed; |
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we may have difficulty integrating the operations and personnel of the acquired company; |
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we may have difficulty retaining the employees with the technical skills needed to
enhance and provide services with respect to the acquired assets or technologies; |
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the acquisition may be viewed negatively by customers, financial markets or investors; |
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we may have difficulty incorporating the acquired technologies or products with our
existing product lines; |
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we may encounter difficulty entering and competing in new product or geographic markets; |
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we may encounter a competitive response, including price competition or intellectual
property litigation; |
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we may have product liability, customer liability or intellectual property liability
associated with the sale of the acquired companys products; |
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we may be subject to litigation by terminated employees or third parties; |
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we may incur debt, one-time write-offs, such as acquired in-process research and
development costs, and restructuring charges; |
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we may acquire goodwill and other intangible assets that are subject to impairment
tests, which could result in future impairment charges; |
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our ongoing business and managements attention may be disrupted or diverted by
transition or integration issues and the complexity of managing geographically or
culturally diverse enterprises; and |
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our due diligence process may fail to identify significant existing issues with the
target companys product quality, product architecture, financial disclosures, accounting
practices, internal controls, legal contingencies, intellectual property and other matters. |
These factors could have a material adverse effect on our business, operating results and
financial condition.
In addition, from time to time we may enter into negotiations for acquisitions or investments
that are not ultimately consummated. Such negotiations could result in significant diversion of
management time, as well as substantial out-of-pocket costs, any of which could have a material
adverse effect on our business, operating results and financial condition.
We are subject to governmental export controls that could impair our ability to compete in
international markets.
Our products are subject to U.S. export control
laws and regulations and their distribution outside the United States may be subject to export licensing or the conditions of a regulatory exception to
an export licensing requirement.
In addition, various countries regulate the import of certain encryption technology and have enacted laws that
could limit our ability to distribute our products or could limit our customers ability to deploy
our products in those countries. The introduction of new products, such as our new TwinFin
appliance, changes in our products or changes in export regulations 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 certain countries altogether. Any change in export regulations or
related legislation, shift in approach to the enforcement or scope of existing regulations or
change in the countries, persons or technologies targeted by these regulations could result in
decreased use of our products by, or in our decreased ability to export or sell our products to,
existing or potential customers with international operations. It may be costly to implement systems and procedures to comply with these
restrictions, and we may incur penalties, including limits on foreign distribution, for any transactions that we conduct in violation of these regulations.
Any decreased use of our products or
limitation on our ability to export or sell our products would likely adversely affect our
business, operating results and financial condition.
We rely on contract manufacturers to assemble our products, and our failure to manage our
relationship with our contract manufacturers successfully could negatively impact our ability to
sell our products.
We currently rely on a single contract manufacturer to assemble our NPS products, manage our
NPS product supply chain and participate in negotiations regarding NPS component costs and we rely
on a different contract manufacturer to assemble our new TwinFin appliance, manage our TwinFin
appliance supply chain and participate in negotiations regarding TwinFin appliance costs. While we
believe that our use of these contract manufacturers provides benefits to our business, our
reliance on them reduces our control over the assembly process, exposing us to risks, including
reduced control over quality assurance, production costs and product supply. These risks could
become more acute if we are successful in our efforts to increase revenue. If we fail to manage our
relationships with these contract manufacturers effectively, or if the contract manufacturers
experience delays, disruptions, capacity constraints or quality control problems in its operations,
our ability to ship products to our customers could be impaired and our competitive position and
reputation could be harmed. In addition, we are required to provide forecasts to the contract
manufacturers regarding product demand and production levels. If we inaccurately forecast demand
for our products, we may have excess or inadequate inventory or incur cancellation charges or
penalties, which could adversely impact our operating results and financial condition.
Additionally, the contract manufacturer for our NPS products can terminate our agreement for
any reason upon 90 days notice or for cause upon 30 days notice, and the contract manufacturer
for our TwinFin appliance can terminate our agreement for any reason upon 60 days notice. If we
are required to change contract manufacturers
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or assume
internal manufacturing operations due to any termination of the agreements with our
contract manufacturers, we may lose revenue, experience manufacturing delays, incur increased costs
or otherwise damage our customer relationships. We cannot guarantee that we will be able to
establish alternative manufacturing relationships on acceptable terms or at all.
We depend on a continued supply of components for our products from third-party suppliers, and if
shortages of these components arise, we may not be able to secure enough components to build new
products to meet customer demand or we may be forced to pay higher prices for these components.
We rely on a limited number of suppliers for several key components utilized in the assembly
of our products, including disk drives and microprocessors. Although in many cases we use standard
components for our products, some of these components may only be purchased or may only be
available from a single supplier. In addition, we maintain relatively low inventory and acquire
components only as needed, and neither we nor our contract manufacturers enter into long-term
supply contracts for these components and none of our third-party suppliers is obligated to supply
products to us for any specific period or in any specific quantities, except as may be provided in
a particular purchase order. Our industry has experienced component shortages and delivery delays
in the past, and we may experience shortages or delays of critical components in the future as a
result of strong demand in the industry or other factors. If shortages or delays arise, we may be
unable to ship our products to our customers on time, or at all, and increased costs for these
components that we could not pass on to our customers would negatively impact our operating
margins. For example, new generations of disk drives are often in short supply, which may limit our
ability to procure these disk drives. In addition, disk drives represent a significant portion of
our cost of revenue, and the price of various kinds of disk drives is subject to substantial
volatility in the market. Many of the other components required to build our systems are also
occasionally in short supply. Therefore, we may not be able to secure enough components at
reasonable prices or of acceptable quality to build new products, resulting in an inability to meet
customer demand or our own operating goals, which could adversely affect our customer
relationships, business, operating results and financial condition.
We currently rely on a contract engineering firm for quality assurance and product integration
engineering.
In addition to our internal research and development staff, we have contracted with Persistent
Systems Pvt. Ltd. located in Pune, India, to employ a dedicated team of over 72 engineers focused
on certain aspects of our product development. Persistent Systems can terminate our agreement for
any reason upon 15 days notice. If we were required to change our contract engineering firm,
including due to a termination of the agreement with Persistent Systems, we may experience delays,
incur increased costs or otherwise damage our customer relationships. We cannot assure you that we
will be able to establish an alternative contract engineering firm relationship on acceptable terms
or at all.
Future interpretations of existing accounting standards could adversely affect our operating
results.
Generally Accepted Accounting Principles in the United States, or GAAP, are subject to
interpretation by the Financial Accounting Standards Board, or FASB, the American Institute of
Certified Public Accountants, or AICPA, the SEC and various other bodies formed to promulgate and
interpret appropriate accounting principles. A change in these principles or interpretations could
have a significant effect on our reported operating results, and they could affect the reporting of
transactions completed before the announcement of a change. For example, we recognize our product
revenue in accordance with AICPA Statement of Position, or SOP 97-2, Software Revenue
Recognition, and related amendments and interpretations contained in SOP 98-9, Software Revenue
Recognition with Respect to Certain Transactions. The AICPA and its Software Revenue Recognition
Task Force continue to issue interpretations and guidance for applying the relevant accounting
standards to a wide range of sales contract terms and business arrangements that are prevalent in
software licensing arrangements and arrangements for the sale of hardware products that contain
more than an insignificant amount of software. Future interpretations of existing accounting
standards, including SOP 97-2 and SOP 98-9, or changes in our business practices could result in
delays in our recognition of revenue that may have a material adverse effect on our operating
results. For example, we may in the future have to defer recognition of revenue for a transaction
that involves:
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undelivered elements for which we do not have vendor-specific objective evidence of fair
value; |
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requirements that we deliver services for significant enhancements and modifications to
customize our software for a particular customer; or |
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material acceptance criteria. |
Because of these factors and other specific requirements under GAAP for recognition of
software revenue, we must include specific terms in customer contracts in order to recognize
revenue when we initially deliver products or perform services. Negotiation of such terms could
extend our sales cycle, and, under some circumstances, we may accept terms and conditions that do
not permit revenue recognition at the time of delivery.
If we fail to maintain an effective system of internal controls, we might not be able to report our
financial results accurately or prevent fraud; in that case, our stockholders could lose confidence
in our financial reporting, which could negatively impact the price of our stock.
Effective internal controls are necessary for us to provide reliable financial reports and
prevent fraud. SEC rules require that we maintain effective internal control over financial
reporting and disclosure controls and procedures. In particular, for the fiscal year ended January
31, 2009, we performed system and process evaluation and testing of our internal controls over
financial reporting to allow management and our independent registered public accounting firm to
report on the effectiveness of our internal control over financial reporting, as required by
Section 404 of the Sarbanes-Oxley Act and SEC rules. Our compliance with these rules will continue
to require that we incur substantial expense and expend significant management time on
compliance-related issues. Even if we conclude, and our independent registered public accounting
firm concurs, that our internal control over financial reporting provides reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with GAAP, because of its inherent limitations, internal control
over financial reporting may not prevent or detect fraud or misstatements. Failure to implement
required new or improved controls, or difficulties encountered in their implementation, could harm
our operating results or cause us to fail to meet our reporting obligations. If we or our
independent registered public accounting firm discover a material weakness in our internal control,
the disclosure of that fact, even if quickly remedied, could reduce the markets confidence in our
financial statements and harm our stock price. In addition, a delay in compliance with these rules
could subject us to a variety of administrative sanctions, including ineligibility for short form
registration, action by the SEC, the suspension or delisting of our common stock from the NYSE and
the inability of registered broker-dealers to make a market in our common stock, which would
further reduce our stock price and could harm our business.
Risks Related to our Common Stock
The trading price of our common stock is likely to be volatile.
The trading price of our common stock will be susceptible to fluctuations in the market due to
numerous factors, many of which may be beyond our control, including:
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changes in operating performance and stock market valuations of other technology
companies generally or those that sell data warehouse solutions in particular; |
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actual or anticipated fluctuations in our operating results; |
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the financial guidance that we may provide to the public, any changes in such guidance,
or our failure to meet such guidance; |
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changes in financial estimates by securities analysts, our failure to meet such
estimates, or failure of analysts to initiate or maintain coverage of our stock; |
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the publics response to our press releases or other public announcements by us,
including our filings with the SEC; |
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announcements by us or our competitors of significant technical innovations, customer
wins or losses, acquisitions, strategic partnerships, joint ventures or capital
commitments; |
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introduction of technologies or product enhancements that reduce the need for our
products; |
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the loss of key personnel; |
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the development and sustainability of an active trading market for our common stock; |
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lawsuits threatened or filed against us; |
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future sales of our common stock by our officers or directors; and |
45
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other events or factors affecting the economy generally, including those resulting from
political unrest, war, incidents of terrorism or responses to such events. |
The trading price of our common stock might also decline in reaction to events that affect
other companies in our industry even if these events do not directly affect us.
Some companies that have had volatile market prices for their securities have had securities
class actions filed against them. If a suit were filed against us, regardless of its merits or
outcome, it would likely result in substantial costs and divert managements attention and
resources. This could have a material adverse effect on our business, operating results and
financial condition.
If securities or industry analysts do not publish research or publish unfavorable research about
our business, our stock price and trading volume could decline.
The trading market for our common stock depends in part on any research reports that
securities or industry analysts publish about us or our business. In the event securities or
industry analysts cover our company and one or more of these analysts downgrade our stock or
publish unfavorable reports about our business, our stock price would likely decline. In addition,
if any securities or industry analysts cease coverage of our company or fail to publish reports on
us regularly, demand for our stock could decrease, which could cause our stock price and trading
volume to decline.
Provisions in our certificate of incorporation and by-laws and Delaware law might discourage, delay
or prevent a change in control of our company or changes in our management and, therefore, may
negatively impact the trading price of our common stock.
Provisions of our certificate of incorporation and our by-laws may discourage, delay or
prevent a merger, acquisition or other change in control that stockholders may consider favorable,
including transactions in which you might otherwise receive a premium for your shares of our common
stock. These provisions may also prevent or frustrate attempts by our stockholders to replace or
remove our management. These provisions:
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establish a classified board of directors so that not all members of our board are
elected at one time; |
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provide that directors may only be removed for cause; |
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authorize the issuance of blank check preferred stock that our board of directors
could issue to increase the number of outstanding shares and to discourage a takeover
attempt; |
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eliminate the ability of our stockholders to call special meetings of stockholders; |
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prohibit stockholder action by written consent, which has the effect of requiring all
stockholder actions to be taken at a meeting of stockholders; |
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provide that the board of directors is expressly authorized to make, alter or repeal our
by-laws; and |
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establish advance notice requirements for nominations for election to our board of
directors or for proposing matters that can be acted upon by stockholders at stockholder
meetings. |
In addition, Section 203 of the Delaware General Corporation Law may discourage, delay or
prevent a change in control of our company by prohibiting stockholders owning in excess of 15% of
our outstanding voting stock from merging or combining with us during a specified period unless
certain approvals are obtained.
Insiders own a significant portion of our outstanding common stock and will therefore have
substantial control over us and will be able to influence corporate matters.
Our executive officers, directors and their affiliates beneficially own, in the aggregate,
approximately 20% of our outstanding common stock. As a result, our executive officers, directors
and their affiliates are able to exercise significant influence over all matters requiring
stockholder approval, including the election of directors and approval of significant corporate
transactions, such as a merger or other sale of our company or its assets. This concentration of
ownership could limit your ability to influence corporate matters and may have the effect of
delaying or preventing another party from acquiring control over us.
46
Item 4. Submission of Matters to a Vote of Security Holders
We held our 2009 Annual Meeting of Stockholders on June 5, 2009. At the 2009 Annual Meeting,
our stockholders elected two directors, approved an amendment to our 2007 Stock Incentive Plan to
increase the number of shares issuable under the plan by 4,000,000 and ratified the appointment of
PricewaterhouseCoopers LLP as our independent registered public accounting firm for the fiscal year
ending January 31, 2010.
Of the 59,835,355 shares of our common stock issued and outstanding on April 13, 2009, the
record date of the 2009 Annual Meeting, 54,018,212 shares (90.3%) were present or represented by
proxy at the meeting. The matters acted upon at the 2009 Annual Meeting, and the voting tabulation
for each matter, are as follows:
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(1) |
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Election of two class II directors, each to serve for a term ending at our 2012
Annual Meeting of Stockholders or until his respective successor has been duly elected and
qualified: |
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Nominees for Election as a Class II Director |
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Votes For |
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Votes Withheld |
Francis A. Dramis, Jr. |
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50,409,763 |
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3,608,449 |
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Jitendra S. Saxena |
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50,496,532 |
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3,521,680 |
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(2) |
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Amendment of our 2007 Stock Incentive Plan to increase the number of shares available
for issuance under the plan by 4,000,000 to 10,102,427 shares in the aggregate: |
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Shares For |
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28,206,588 |
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Shares Against |
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18,340,087 |
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Abstentions |
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11,250 |
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Broker Non-Votes |
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7,460,287 |
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(3) |
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Ratification of the selection of PricewaterhouseCoopers LLP as our independent
registered public accounting firm for the fiscal year ending January 31, 2010: |
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Shares For |
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53,699,479 |
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Shares Against |
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277,200 |
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Abstentions |
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41,533 |
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Broker Non-Votes |
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0 |
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47
Item 6. Exhibits
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Exhibit No. |
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Description |
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10.1
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2007 Stock Incentive Plan, as amended, as filed with the Companys
definitive proxy statement on Schedule 14A, filed with the SEC on April 23,
2009 and incorporated herein by reference. |
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10.2
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Form of Director Restricted Stock Agreement under 2007 Stock Incentive Plan. |
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31.1
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Certification of Chief Executive Officer, pursuant to Securities Exchange
Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. |
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31.2
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Certification of Chief Financial Officer, pursuant to Securities Exchange
Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. |
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32.1
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Certification of Chief Executive Officer and Chief Financial Officer
pursuant to Securities Exchange Act Rules 13a-14(b) and 15d-14(b), as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
48
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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Netezza Corporation
(Registrant)
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Date: September 4, 2009 |
By: |
/s/ Patrick J. Scannell, Jr.
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Patrick J. Scannell, Jr. |
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Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer) |
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49