e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, DC
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
January 31, 2010
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number:
001-33445
Netezza Corporation
(Exact Name of Registrant as
Specified in Its Charter)
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Delaware
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04-3527320
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(State or Other Jurisdiction
of
Incorporation or Organization)
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(I.R.S. Employer
Identification No.)
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26 Forest Street
Marlborough, MA
(Address of Principal
Executive Offices)
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01752
(Zip Code)
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Registrants telephone number, including area code:
(508) 382-8200
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, par value $0.001 per share
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 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). Yes o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§ 229.405) is not contained herein, and will not be
contained, to the best of the registrants knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
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.
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Large
accelerated
filer o
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Accelerated
filer þ
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Non-accelerated
filer o
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Smaller
reporting
company o
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
As of July 31, 2009 (the last trading date of the
registrants second quarter of fiscal 2010), the aggregate
market value of common stock (the only outstanding class of
common equity of the registrant) held by nonaffiliates of the
registrant was $393.6 million based on a total of
43,538,892 shares of common stock held by nonaffiliates and
on a closing price of $9.04 per share on such date for the
common stock as reported on NYSE.
As of March 31, 2010, 61,450,303 shares of common
stock were outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
The registrant intends to file a definitive proxy statement
pursuant to Regulation 14A within 120 days of the end
of the fiscal year ended January 31, 2010. Portions of such
proxy statement are incorporated by reference in Part III
of this
Form 10-K.
NETEZZA
CORPORATION
ANNUAL
REPORT ON
FORM 10-K
FOR FISCAL YEAR 2010
TABLE OF
CONTENTS
PART 1
FORWARD-LOOKING
STATEMENTS
Forward-looking statements in our public filings or other public
statements are subject to known and unknown risks, uncertainties
and other factors that may cause our actual results, performance
or achievements to be materially different from any future
results, performance or achievements expressed or implied by
such forward-looking statements or other public statements.
These forward-looking statements are only predictions. We have
described in the Risk Factors section in this Annual
Report on
Form 10-K
the principal risks and uncertainties that we believe could
cause actual results to differ from these forward-looking
statements. All statements other than statements of historical
facts, including statements regarding our future results of
operations and financial position, business strategy and plans
and objectives of management for future operations, are
forward-looking statements. In many cases, you can identify
forward-looking statements by terms such as may,
will, should, expects,
plans, anticipates, could,
intends, target, projects,
contemplates, believes,
estimates, predicts,
potential or continue or other similar
words.
The forward-looking statements in this Annual Report on
Form 10-K
represent our views as of the date of this Annual Report on
Form 10-K.
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
specifically disclaim any obligation to do so. You should,
therefore, not rely on these forward-looking statements as
representing our views as of any date subsequent to the date of
this Annual Report on
Form 10-K.
Company
Overview
Netezza Corporation (we, us,
Netezza, or the Company) is a leading
provider of data warehouse, analytic and monitoring appliances.
Our
TwinFintm
and
Skimmertm
data warehouse products, which replace our NPS family of data
warehouses, integrate database, server and storage platforms in
purpose-built units to enable detailed queries and analyses on
large volumes of stored data. We also offer our
Mantra®
database activity-monitoring appliances that provide a solution
for the monitoring and auditing of access to this critical
stored data. The results of these queries and analyses on this
critical data, often referred to as business intelligence,
provide organizations with actionable information to improve
their business operations. As more information is recorded and
communicated electronically, the amount of data generated and
the potential utility of the business intelligence that can be
extracted from this data are increasing significantly. We
designed our data warehouse and analytic appliances specifically
for analysis of terabytes to 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.
As with our previous generations of appliances, the TwinFin
appliance performs faster, deeper and more iterative analyses on
larger amounts of detailed data, giving our customers greater
insight into trends and anomalies in their businesses, thereby
enabling better strategic decision-making. The TwinFin appliance
can scale with an enterprises requirements from moderately
sized systems to the largest configurations. The Skimmer
appliance is a smaller version of the TwinFin and is typically
deployed by our customers as a development system to enable them
to design and test new applications and queries prior to
deploying them to a TwinFin Series production system. The
Skimmer appliance is also sized and priced for adoption by
mid-market customers and partners.
Unlike traditional data warehouse systems, which patch together
general-purpose database, server and storage platforms that were
not originally designed for analytical processing of large
amounts of constantly changing data, our TwinFin and Skimmer
appliances are purpose-built to deliver:
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Performance and price-performance in terms of data query
response times through our proprietary streaming technology.
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Massive scalability through our proprietary Asymmetric Massively
Parallel Processing, or AMPP, architecture.
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Simplicity of installation, operation and administration.
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Cost effectiveness through the use of commodity blade-server and
storage components packaged in a single unified solution.
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Our products integrate easily through open, industry-standard
interfaces with leading data access and analytics, data
integration and data protection tools to enable quick and
accurate business intelligence. Our customers have reported
faster query performance, lower costs of ownership, faster
return on investment and improved analytic productivity as a
result of using our products.
We sell our data warehouse, analytic and monitoring appliances
worldwide to large global enterprises, mid-market companies and
government agencies through our direct sales force as well as
indirectly via distribution partners. As of January 31,
2010, our total installed base of customers was 325. Our
customers span multiple vertical industries and include
data-intensive companies and government agencies.
We announced the availability of our TwinFin and Skimmer systems
in mid-2009. These products represent our fourth generation of
data warehouse and analytic appliances. They provide improved
performance, price-performance, scalability, and data densities
over our previous systems and are based on industry-standard
commodity blade-server, storage and networking subsystems.
We also sell the Mantra data auditing (also referred to as
database activity-monitoring) appliance that enables enterprises
to meet their data compliance and security needs with a
comprehensive level of discovery and categorization of sensitive
information across their data servers. The Mantra appliance is
able to provide continuous monitoring and auditing of access to
critical data assets along with analysis, detection and
prevention against non-compliant activity. Our customers across
our market verticals use the Mantra appliance to provide
reporting for a
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wide range of data compliance regulations, such as internal
control requirements under the Sarbanes-Oxley Act of 2002,
Payment Card Industry Standard (PCI), and many other regulatory
requirements.
We were incorporated in Delaware on August 18, 2000 as
Intelligent Data Engines, Inc. and changed our name to Netezza
Corporation in November 2000. Our corporate headquarters are
located at 26 Forest Street, Marlborough, Massachusetts 01752,
and our telephone number is
(508) 382-8200.
Our website address is www.netezza.com. We are not,
however, including the information contained on our website, or
information that may be accessed through links on our website,
as part of, or incorporating it by reference into, this Annual
Report on
Form 10-K.
Financial information regarding our reporting segment is
contained in Selected Financial Data in Item 6 of
Part II, Managements Discussion and Analysis of
Financial Condition and Results of Operations in Item 7 of
Part II, and Note 16 to our Consolidated Financial
Statements included in Item 8 of Part II of this
Annual Report on
Form 10-K.
Our fiscal year ends January 31. When we refer to a
particular year, we are referring to the fiscal year ended
January 31 of that year. For example, fiscal 2010 refers to the
fiscal year ended January 31, 2010.
Industry
Background
Proliferation
of Data
Data is one of the most valued assets within an organization.
The amount of data that is being generated and kept for
availability and analysis by organizations is exploding. The
timely and comprehensive analysis of this vast amount of data is
vital to organizations in a variety of vertical industries,
including:
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Communications. The communications industry is
characterized by intense competition and customer attrition, or
churn. Targeted marketing opportunities and the
rapid response to behavior trends are paramount to the success
of communications service providers in retaining existing
customers and attracting new customers. Customer relationship
management, or CRM, analyses need to be constantly and quickly
performed to enable service providers to market to at-risk
customers before they churn, offer new products and services to
those most likely to buy, and identify and manage key customer
relationships. Other key analytical needs of communications
service providers include call data record analysis for revenue
assurance, billing and least-cost routing, fraud detection and
network management.
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Digital Media. For online businesses, the
process of collecting, analyzing and reporting data about page
visits, otherwise known as click stream analysis, is required
for constant monitoring of website performance and customer
pattern changes. In addition to needing to address the
operational and customer relationship challenges faced by
traditional retailers, digital media businesses must also
analyze hundreds of millions or even billions of click stream
data records to track and respond to customer behavior patterns
in real time. Additionally, with online advertising now a major
revenue generator, many digital media businesses and their
advertisers need to understand who is looking at the
advertisements and their actions as a result of viewing the
advertisements. Fast analysis of online activity can enable
better cross-selling of products, prevent customers from
abandoning shopping carts or leaving the web site, and mitigate
click stream fraud.
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Retail. With thousands of products and
millions of customers, many retailers need sophisticated systems
to track, manage and optimize customer and supplier
relationships. Targeted marketing programs often require the
analysis of millions of customer transactions. To prevent supply
shortages large retailers must integrate and analyze customer
transaction data, vendor delivery schedules and supply chain
data, including the proliferation of RFID data. Other useful
analyses for retail companies include market basket
analysis of the items customers buy in a given shopping session,
customer loyalty programs for frequent buyers,
overstock/understock and supply chain optimization.
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Financial Services. Financial services
institutions generate terabytes of data related to millions of
client purchases, banking transactions and contacts with
marketing, sales and customer service across multiple channels.
This data contains crucial business information on client
preferences and buying behavior, and can reveal insights that
enable stronger customer relationship management and increase
the lifetime value of the customer. In addition, risk management
and portfolio management applications require analysis of vast
amounts of rapidly changing data for fraud prevention and loan
analysis. With extensive compliance and
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regulatory requirements, financial institutions are required to
retain an ever-increasing amount of data and need to make this
data available for detailed reporting on a periodic basis.
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Outsourced Analytics. The primary purpose of
these companies is providing business intelligence support to
enterprises on an outsourced basis. Outsourced analytic
providers serving many industries, including retail,
telecommunications, healthcare and others, provide clients with
domain expertise in database-driven marketing and customer
segmentation. Since their clients are looking for faster
turn-arounds for more sophisticated reports on continuously
increasing amounts of data, these companies require solutions
that will scale better with lower cost of ownership to meet
their clients service-level agreements, while improving
their own profitability.
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Government. As some of the largest creators
and consumers of data, government agencies around the world need
to access, analyze and share vast amounts of
up-to-date
data quickly and efficiently. These agencies face a broad range
of challenges, including identifying terrorist threats and
reducing fraud, waste and abuse. Iterative analysis on many
terabytes of data with high performance is crucial for achieving
these missions.
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Health and Life Sciences. Healthcare providers
seek to analyze terabytes of operational and patient care data
to measure drug effectiveness and interactions, improve quality
of care and streamline operations through more cost-effective
services. Pharmaceutical companies rely on data analysis to
speed new drug development and increase marketing effectiveness.
In the future, these companies plan to incorporate large amounts
of genomic data into their analyses in order to tailor drugs for
more personalized medicine.
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The significant growth of enterprise data is fueling a need for
additional storage and other information technology
infrastructure to maintain and manage it. These technology needs
are being further driven by a steady decline in data storage
prices, which makes storing large data sets more economical.
As the volume of data continues to grow, enterprises have
recognized the value in analyzing such data to significantly
improve their operations and competitive position. They have
also realized that frequent analysis of data at a more detailed
level is more meaningful than periodic analysis of sampled data.
In addition, companies are making analytic capabilities more
widely available to a broad range of users across the enterprise
for both strategic and tactical decision-making. These factors
have driven the demand for data warehouses that provide the
critical framework for data-driven enterprise decision-making by
way of business intelligence.
Growing
Role of the Data Warehouse
A data warehouse consists of three main elements
database, server, and storage and interacts with
external systems to acquire and retain raw data, receive query
instructions and provide analytical results. The data warehouse
acts as a data repository for the enterprise integrating
information from many departments, and more importantly, enables
analytics through the querying of the data to deliver specific
information used to monitor, measure and manage business
performance and to drive future business decisions. The goal of
a data warehouse is to enable a business to better understand
its competitive position, internal efficiency and productivity
and customers behavior patterns and it is the primary
infrastructure that enables these strategic business processes.
The need for more robust, yet cost-effective, data warehouse
solutions across multiple industries is being accelerated by the
following:
Growth in Users of Business Intelligence. The
need for detailed analytics is becoming more mainstream
throughout the enterprise as well as in the extended
enterprise, which includes suppliers, partners and
customers. As the number of users accessing the data warehouse
increases, and the queries being processed include a broader mix
of strategic and tactical analyses, demand for data warehouse
solutions multiplies. This is a change from prior years when
business intelligence analysis within an organization was
primarily performed by a small number of analysts and IT
professionals.
Increasing Number and Sophistication of Data
Queries. As enterprises continue to recognize the
utility of the analyses data warehouses enable, the quantity and
sophistication of data queries continue to increase. In addition
to traditional reporting and analysis on historical data for
past patterns, companies increasingly want to leverage their
data to predict future patterns and behavior. Without more
powerful data warehouse
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capabilities to meet this demand, significant data latency
problems can ensue. A data warehouse solution can contain
several billion rows of data within its resident database
causing even one sophisticated data query to take as long as
several hours to several days to perform using some traditional
data warehouse systems.
Need for Real-time Data Availability. As data
continues to proliferate, the increased time required to load
this data into the warehouse is continually shrinking the time
window for querying warehoused data. As a growing number of
users from business units across the enterprise analyze data for
tactical, operational decisions, many organizations need to have
their data warehouses available for query and analysis at all
times even as fresh data is being constantly loaded. This
creates increasing requirements for simultaneous data load and
query performance.
Advanced Analytical Techniques. As the
economic and competitive environments of our customers continue
to push them to be able to respond to, and even anticipate,
threats and opportunities for their enterprises, more and more
of them are looking to employ the use of advanced techniques in
the form of predictive analytics and optimization. Whether used
for customer relations, social network analysis, detection of
fraudulent behavior patterns, or fleet or inventory flow
management, these advanced techniques are becoming critical to
the success of their enterprises. In order to provide the most
accurate, actionable analyses, enterprises need to perform these
techniques on the full data set, rather than sampling their
data. This leads them to want to perform these advanced analyses
inside the data warehouse, where the large data sets are stored,
rather than moving extremely large volumes of data to a separate
storage and computational platform. As a result, more and more
enterprises are looking for the capability to perform
in-database analytics that go far beyond the
standard query processing of traditional data
warehouse systems.
Limitations
of Traditional Data Warehouse Systems
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, they are not as effective in handling the in-depth
analyses that large businesses are now requiring of their data
warehouse systems. The 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.
We believe traditional data warehouse systems do not fully
address the key requirements of todays business
intelligence environments and the needs of customers for the
following reasons:
Inefficient Execution of Complex and Ad Hoc
Queries. Most traditional systems read data from
storage, bring it across an input/output, or I/O, interface and
load it into memory for processing. This approach is extremely
inefficient for processing millions or even billions of rows of
data in order to execute complex queries or ad hoc
queries, which are queries created to obtain information as the
need arises, often as other queries are reviewed. The result is
significant delays in data movement and query processing, which
can slow response times to many hours or even days. This delay
often eliminates any potential benefit of the query results as
conclusions are reached too late to be actionable.
Difficult and Costly Procurement Process. Most
traditional data warehouse systems require multiple product and
service contracts from several suppliers. The customer must
manage the procurement of costly servers, storage, cabling,
database and operating systems software licenses, systems
management tools, and installation and integration services.
This a la carte approach results in higher costs and
a lack of accountability from suppliers and dramatically
increases the complexity of the environment. Additionally, these
disparate products are often not easily integrated with other
business intelligence applications or other hardware or software
products that a customer may incorporate into its data
warehouse, resulting in additional hardware, implementation,
training, maintenance and support costs.
Complex Infrastructure Installation and
Deployment. A traditional data warehouse is a
complex environment that must be assembled and configured on
site. Installation can take weeks, requiring assembly, testing,
debugging and fine-tuning of system parameters. Traditional data
warehouse systems depend on
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elaborate tuning and data manipulation to generate the
performance required by the user. Data loads into the system
need to be balanced, indexes created, and disk partitions and
logical volumes defined. The entire process can take from weeks
to several months, typically requiring extensive professional
services engagements.
Slow Response to Changing Business Needs. As
the data warehouse grows and queries and analyses increase in
volume and complexity, the tuning and configuration needs of the
data warehouse solution further increase, creating ongoing costs
in hardware, software and services for the user. In addition,
business requirements are constantly changing and the data
warehouse needs to evolve to meet these changing requirements.
Most traditional data warehouses have customized data models
that define the structure and relationships of the data;
therefore, when data formats or query requirements change, these
solutions require extensive reconfiguration and tuning,
resulting in delays and extra personnel costs.
Costly Ongoing Administration and
Maintenance. Managing a traditional data
warehouse system is a complex and time-intensive task. Dedicated
database administrators are required to monitor and maintain the
system. Often, separate administrative teams are dedicated to
distinct solution components such as database, server, and
storage platforms. Additionally, many traditional systems come
with separate management programs for each component, lowering
the efficacy of the management of the overall data warehouse.
Inefficient Power, Cooling and Footprint
Requirements. As data warehouses grow
dramatically with the proliferation of data, the costs of space,
power and cooling are becoming serious concerns in data center
management. Because traditional systems are often a patchwork of
general-purpose components, significant footprint size and
energy consumption issues arise, at odds with ongoing efforts of
many businesses to centralize and shrink data center square
footage and increase energy efficiency.
Limited Scalability. Most traditional systems
have a difficult time increasing capacity to meet increased user
demand and the growing amounts of stored data due to their
architectures and technology. In these instances, the I/O
limitations become particularly acute. In addition, there are
difficulties associated with procurement, installation and
integration of additional capacity with existing infrastructure.
As a result, significant time and effort must be dedicated to
retune the system to reflect the new parameters. In most cases,
it is impossible to achieve linear scalability, which means that
performance will not scale at the same rate as data growth or
system capacity.
Limited Advanced Analytics
Capabilities. Historically, most traditional data
warehouse systems have come from a heritage built around the
Structured Query Language (SQL) and have limited facilities to
accommodate advanced analytical techniques, or at least to do so
while providing adequate execution performance for todays
enterprise needs. When faced with this problem in traditional
systems, customers most often are required to use additional
storage and processing for advanced analytical needs and to
extract large volumes of data from their data warehouse systems
to do so. This creates additional delay or latency in the
processing of data, making the analysis less timely than it
should be; creates additional cost for the enterprise in the
form of additional computing power and storage for the
additional processing; adds to the operational and
administrative complexity for the enterprise; and could lead to
less accurate analysis if, for expediency sake, enterprises
choose to use data samples rather than full data sets in their
analyses.
Limited Data Auditing Capabilities. Data
warehouse systems, like any other databases, often store
sensitive data. Particularly since some data warehouse systems
centralize large volumes of data, they can face a high level of
risk from the disclosure or manipulation of sensitive data.
Historically, most traditional data warehouse systems have had
limited ability to discover, audit, monitor or protect the data
they store from malicious access. With the advent of compliance
regulations (like internal control requirements under the
Sarbanes Oxley Act, PCI and others), data audit reports have
become an imperative in many organizations. Additionally, many
enterprises have implemented data governance initiatives to
understand, monitor and regulate who has access to specific
data. Data auditing capabilities in most data warehouses are
limited because they require logging of transactional activity
which adversely affects system performance. Additionally, these
techniques create high volumes of data that needs to be stored
and managed. Finally, such projects require significant manual
work in reporting and analysis of logged data. As data warehouse
systems become more strategic in terms of the data they collect
and analyze, data auditing also needs to become transparent and
automated to allow high levels of trust, security, and
governance.
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As a consequence of these limitations, the rapid growth of
enterprise data, and the growing need to utilize this data to
address business requirements, we believe there is a significant
market opportunity for a purpose-built data warehouse solution
that is optimized for efficiently analyzing vast amounts of
business-critical data to enable actionable business
intelligence. We also believe there is a significant market
opportunity for a robust database activity-monitoring solution
that enables enterprises to discover, audit, monitor and protect
the data they store.
Our
Solution
Our TwinFin and Skimmer appliances are designed specifically to
enable high-performance business intelligence solutions at a low
total cost of ownership. They tightly couple database, server,
and storage platforms in compact, efficient units that integrate
easily through open, industry-standard interfaces with leading
business intelligence, data access and analytics, data
integration and data protection tools. As a result, our TwinFin
and Skimmer appliances enable our customers to load, access,
query and run advanced analytics on their data faster, more
easily and cost-effectively than with traditional systems.
This approach, combined with our innovative product
architecture, provides the following significant benefits to our
customers:
Superior Performance. We believe our systems
provide industry-leading performance. With the TwinFin
appliance, many complex and ad hoc queries on terabytes of
information are reduced from days or hours to minutes or
seconds, as disk access speed becomes the primary limiting
factor rather than I/O and network constraints. Our customers
have reported response times for complex and ad hoc queries from
our data warehouse appliances that are often 10 to 100 times
faster, and in some instances 500 times faster than those of
traditional data warehouse systems. This improved performance
enables our customers to analyze their data more
comprehensively, more iteratively and in a more timely way, so
they can make faster and better decisions.
Easy and Cost-Effective Procurement. Our
TwinFin and Skimmer appliances combine database, server, and
storage platforms in a single scalable device using open
standards and commodity components to deliver a significant cost
advantage compared with the products of our competitors. In
addition, since our appliances provide these technologies in a
single product, customers can purchase their data warehouse
appliance from one vendor as opposed to from multiple vendors,
streamlining the procurement process.
Quick and Easy Infrastructure Installation and
Deployment. Netezzas appliances are
factory-configured and tested, enabling our customers to install
our systems typically in less than two days. With all processors
and storage in the same cabinet and all components integrated,
configured and tested as a purpose-built data warehouse
appliance, no custom installation and configuration are
required, unlike traditional solutions. In addition to faster
installation, the TwinFin and Skimmer appliances enable
customers to deploy large, multi-terabyte data warehouse
environments much more rapidly than with traditional systems.
Data is loaded quickly and easily from source systems, and
existing tools and software for business intelligence, data
access and analytics, data integration and data protection all
integrate in a straightforward way through standard interfaces.
This enables our customers to deploy and launch their data
warehousing initiatives faster than is possible with traditional
systems, with minimal need for professional services or
customization.
Rapid Adaptation to Changing Business
Needs. Our TwinFin and Skimmer appliances do not
require the tuning, data indexing or most of the maintenance and
configuration tasks required by traditional systems. As a
result, the Netezza appliances are flexible with regard to the
layout and structure of data models, so as new data is added and
models are updated, the appliance can accommodate changes easily
without requiring additional administrative effort.
Minimal Ongoing Administration and
Maintenance. As a self-regulated and
self-monitored data warehouse appliance, our systems typically
require less than a single administrator to manage. There are no
obscure Netezza-specific commands that need to be learned by
administrators, and the appliance integrates a single interface
for the management and operation of the entire data warehouse.
The management and administration requirements of our systems
remain limited even as the data and system capacity grow
significantly in size.
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Small Footprint, and Low Power and Cooling
Requirements. The TwinFin and Skimmer appliances
are compact, tightly integrated appliances that requires a
significantly smaller data center footprint than
traditional solutions. Because we build our systems specifically
for data warehousing, we are able to more effectively integrate
components in a rack-enabled solution consuming significantly
less power and generating less heat than the solutions of our
competitors.
High Degree of Scalability. Our systems scale
effectively with additional users or more sophisticated queries,
as the limiting factor becomes disk access speed rather than
shared I/O and network constraints. Because storage and
processing are tightly coupled into a modular unit, as data
scales, so does processing power without diminution of
performance. Additionally, with no need for tuning or indexing,
more users can be supported and additional capacity added very
quickly and easily. Both the TwinFin and Skimmer appliances are
priced to provide price-performance and system capacities at a
low cost per terabyte. Customers can scale the TwinFin appliance
by adding additional storage and processing modules in
accordance with their expanding performance or data capacity
needs.
Trust with Built-in Data Compliance & Auditing
Capabilities. Our Mantra appliance is designed
specifically to enable high-performance data auditing of data
warehouse appliances at a low total cost of ownership. The
appliance offers data auditing reports for compliance
regulations without impacting the performance of the warehouse.
Additionally, our Mantra appliance offers real-time analytics to
detect high-risk activities such as non-compliance events or
suspicious activities indicative of data breaches. Our TwinFin
appliance is also offered with the Mantra capability enabling a
high level of confidence around compliance, security and
governance.
Our
Products
The Netezza family of data warehouse and analytic appliances
currently consists of two primary product lines:
The TwinFin Series is our core performance line, with
current data capacity ranging from less than one terabyte of
data up to 1.2 petabytes. This is the primary product line from
which we currently derive the substantial majority of our
revenue. The TwinFin Series currently consists of eleven
product models. The various models have different price points
and support varying amounts of data capacity. The prices range
from several hundred thousand dollars up to several million
dollars.
The Skimmer Series currently consists of one product
model and has available data capacity of up to ten terabytes.
This product is sized and priced for our mid-market and smaller
customers. Many of our customers purchase Skimmer as a
development system to enable them to design and test new
applications and queries prior to deploying them to a TwinFin
Series production system.
Netezza Product Performance Scalability
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Entry
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Smallest
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TwinFin
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Largest
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Configuration
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Configuration
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Configuration
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(Skimmer 1)
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(TwinFin 3)
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(TwinFin 120)
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Snippet Processing Blades (S-Blades)
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1
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3
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120
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Parallel Data Processing Streams
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8
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24
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960
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User Data Capacity (Terabytes)
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10
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32
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1,280
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Data Scan Rate (Terabytes/hour)
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12
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35
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1,400
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Our Mantra appliance is our enterprise data auditing and
protection solution for meeting data compliance and security
needs. The Mantra appliance also offers built-in data
auditing and protection for the TwinFin appliance. The Mantra
Enterprise appliance provides similar data auditing
capabilities across the enterprise datacenter including support
for other transactional databases and fileservers. This product
line is scalable to any size business and can be managed in
either a distributed or central configuration. For large-scale
deployments, multiple Mantra or Mantra Enterprise
appliances can be managed with a Mantra CMC appliance
which provides for centralized reporting and policy management.
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Product Partnerships and Alliances. Through a
network of partnerships and alliances, we provide our customers
with integrated, high-quality solutions to meet their growing
business intelligence requirements. Our appliances provide
high-performance infrastructure technology as part of a larger
bundle of software and hardware used by our
customers to load and integrate data, perform analyses on their
data and protect their data. We have developed partnerships and
alliances with major software partners in the areas of business
intelligence, data access and analytics, data integration and
data protection, which have certified that our appliances
integrate easily with their software solutions. We are working
to create closer integration of our products with certain of
these partners for even simpler customer deployments and
administration.
Technology
and Architecture
The architecture of the TwinFin and Skimmer appliances is based
upon two guiding principles:
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Moving processing intelligence to a record stream adjacent to
storage significantly enhances performance and scalability. Our
approach allows us to perform database operations in a
streaming fashion. This patent-pending Netezza
innovation is called Intelligent Query Streaming technology. The
approach of traditional solutions requires data from storage to
be moved through many stages before database operations can be
performed.
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Performance and scalability goals can be met using elements of
both symmetric multi-processing, or SMP, and massively parallel
processing, or MPP, applying each method where it is best suited
to meet the specific needs of analytic applications operating on
terabytes of data. We believe our architectural approach, AMPP,
provides significant improvements in performance and scalability
as compared to traditional data warehouse systems. We have
several patents pending surrounding our AMPP architecture.
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By applying these two principles in an integrated architecture,
we believe we have achieved significant improvement in the
performance, scalability and manageability of data warehouse
systems.
Our AMPP architecture is a two-tiered system designed to quickly
handle very large queries from multiple users:
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The first tier is a high-performance Linux SMP host that
compiles data query tasks received from business intelligence
applications, and generates query execution plans. It then
divides a query into a sequence of
sub-tasks,
or snippets that can be executed in parallel, and distributes
the snippets to the second tier for execution.
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The second tier consists of one to hundreds of snippet
processing blades, or S-Blades, where all the primary processing
work of the appliance is executed. The S-Blades are intelligent
processing nodes that make up the MPP engine of the appliance.
Each S-Blade is an independent server that contains powerful
multi-core Intel-based CPUs, Netezzas proprietary
multi-engine Field Programmable Gate Array, or FPGA, which have
been programmed by us to accelerate streaming analytic
performance and multiple gigabytes of RAM. The S-Blade is
composed of a standard blade-server combined with a special
Netezza Database Accelerator card which snaps right alongside
the blade. Each S-Blade is, in turn, connected to multiple disk
drives processing multiple data streams in a TwinFin or Skimmer
in parallel.
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With our approach, the pathways used by traditional
architectures to deliver data to the host are streamlined and
shortened. Because the query is initially screened at the disk
drive level in the Netezza appliance, there is far less reliance
on CPUs, data modeling, physical data partitioning or bandwidth
for performance. This results in a significant competitive
advantage over traditional systems, which often require shared
connections over which large amounts of data must travel prior
to any analysis, and which rely primarily on incremental gains
in general-computing processing power that cannot overcome I/O
constraints.
Customers
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. As of January 31, 2010, our total
installed base of customers was 325. Our customers span multiple
vertical industries and include data-intensive companies and
government agencies.
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Our customers use our data warehouse appliances to analyze
terabytes of customer and operational data faster, more
comprehensively and affordably than they had been able to do
with the traditional systems that we replaced. They report
faster query performance, the ability to perform previously
impossible queries, lower costs of ownership, and improvements
in analytical productivity as a result of using our products.
No customer accounted for greater than 10% of our total revenue
in fiscal 2010, the Nielsen Company accounted for 16% of our
total revenue in fiscal 2009 and AOL accounted for 10% of our
total revenue in fiscal 2008.
Service
and Support
We offer our customers service and support for the deployment
and ongoing use of our appliances. We focus primarily on
maintenance, although we offer training and consulting services
on a limited basis as well. We believe the overall simplicity of
our appliances limits the need for extensive training,
customization and deployment services or ongoing consulting.
Unlike vendors offering traditional systems, we do not depend on
service offerings for revenue growth opportunities and, as a
result, our interests in providing easy-to-use products are
clearly aligned with those of our customers.
We provide our customers with support priced as a percentage of
product sales. Our support strategy includes highly-trained
support staff located in our Marlborough, Massachusetts
headquarters, and worldwide installation and technical account
management teams. We have invested in help desk, FAQ,
trouble-ticketing and online forum infrastructure to enable our
customers to log product and support issues, and to share best
practices with each other. Our
on-site
hardware service is performed through hardware service
relationships that we have with Hewlett-Packard and its
affiliates, Unisys and its affiliates and IBM and its affiliates.
We offer training services to our customers in administration
and usage of our appliances through
three-day
sessions as well as shorter sessions
on-site and
in our Marlborough, Massachusetts headquarters. In addition, we
offer limited consulting services, in particular where the
customers do not have the
on-site
staff required for their data warehouse projects and the
projects are too small to justify systems integration partner
services. These bundled services are provided by our technical
account managers assigned to help customers with specific
installation, integration and administration projects.
Our customers report high levels of satisfaction with our
support and we believe our high-touch approach is an
important aspect of our growth and success, driving repeat
business through further product purchases and upgrades. We plan
to continue to invest in the growth and training of our support
staff and infrastructure as we continue to grow.
Where additional professional services are requested by the
customer for application development and customization, these
services are provided through our network of systems integration
and consulting partners worldwide. Our partners provide
expertise in business intelligence, data warehousing and related
areas to our customers. We believe the combined expertise and
technology of us and our partners provide significant value to
our joint customers, without the channel conflict that is
typical of traditional data warehouse vendors and third-party
services firms.
Sales and
Marketing
We have established a worldwide sales and distribution network
to sell data warehouse appliances to large global enterprises,
mid-market companies and government agencies, both directly
through our sales force and indirectly via distribution
partners. Our direct sales force consists of paired teams of
account executives and systems engineers who work closely
together throughout the sales cycle. These teams are organized
vertically and geographically and are focused on strategic
account targets.
In addition to our direct selling efforts, we continue to
develop reseller partnerships, which we believe will enable us
to reach a broader range of customers worldwide. Our reseller
partners sell to global enterprises as well as to mid-market
customers. We are particularly reliant on these relationships in
the Asia-Pacific region. We plan to continue to invest in
building and supporting our reseller distribution channel in
order to increase overall sales as well as the percentage of our
revenues through this channel.
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In addition to our traditional reseller partners, many of our
systems integrator partners have in certain circumstances acted
as distribution partners. We also work closely with a number of
analytic service providers who provide hosted analytic and data
warehousing services as a bundled solution to their customers.
These partners continue to be an important part of our channel
selling and we plan to expand our relationships with existing
and new partners.
We conduct a broad range of marketing activities to promote
market awareness of our products, generate product demand,
accelerate sales and demonstrate our thought leadership. These
include trade shows, field marketing events, public relations,
analyst relations, user conferences, webinars and other
activities. In addition, we are actively engaged with existing
customers in marketing activities to build a community of users
of Netezza appliances worldwide who can promote the benefits of
our products from first-hand experience.
We have been recognized by industry analysts for our development
of data warehouse appliances, and our company, technology and
management team have garnered numerous industry awards and
recognition for our innovation and vision.
Research
and Development
Our research and development organization is responsible for
designing, developing and testing our products and for
integrating our appliances with partner solutions. Our product
development approach utilizes a multi-disciplinary team of
professionals with experience in a broad range of areas,
including databases, networking, microcode, firmware,
performance measurement, application programming interfaces,
optimization techniques and user interface design. In addition
to our internal research and development staff, we have
contracted with Persistent Systems, located in Pune, India, to
employ a dedicated team of engineers focused on quality
assurance and product integration engineering. Research and
development expenses were $41.1 million, $32.6 million
and $23.9 million in fiscal 2010, 2009 and 2008,
respectively. We plan to continue to invest in all areas of
research and development to maintain our price/performance
leadership and to continue to innovate in software, hardware and
firmware design. We are also investing in an advanced
development team that is engaged in prototyping technologies
that enable new market applications for our products, leveraging
our core product advantages.
Manufacturing
Our appliances integrate several commodity hardware components
including blade servers, disk drives, servers, network switches
and memory. Working closely with our primary supplier, IBM, and
Avnet, one of the worlds largest electronic systems
distributors, our manufacturing strategy is to manage the supply
chain, manufacturing process, test process, finished goods
inventory and logistics using third-party expertise and
resources and a highly-leveraged outsourced manufacturing model.
We work closely with IBM and several suppliers to select
components based on price/performance, reliability, and power
and cooling characteristics. Our operations and engineering
personnel work directly with these suppliers on technology
roadmap and supply chain issues. We update our hardware platform
roughly every 18 months, taking advantage of our
suppliers advances and new market offerings. Our advanced
manufacturing team, located in our Marlborough, Massachusetts
headquarters, works closely with hardware engineering to review
the hardware product roadmap and to plan short- and longer-term
materials acquisition strategies, in addition to testing new
components for manufacturability and reliability. 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
manufacturer 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.
We partner with Avnet, a global provider of electronics
manufacturing and distribution services and a leading
distributor of IBM blade-servers, server and storage equipment,
for the manufacture and delivery of our systems. Under the terms
of our agreement with Avnet, we commit to firm purchase orders
based on our manufacturing requirements for a certain rolling
period. In addition, we submit forecasts to Avnet based on our
requirements for an additional rolling future period, for which
we are only responsible for the components purchased by Avnet in
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reliance on our forecast. Our forecasts are rolled into our firm
purchase orders as the manufacturing date approaches. Avnet may
accept or reject any purchase order we submit.
We have implemented a formal product development life cycle
process that is based on Software Engineering Institute, or SEI,
and ISO guidelines and principles. We plan to continue to
improve our manufacturing and quality processes, and to drive
down the manufacturing costs of our appliances through scaling
and improvements in overall design, including the ongoing
evaluation of component costs.
Competition
The data warehouse industry has traditionally been dominated by
a small number of major providers. EMC, Hewlett-Packard, IBM,
Oracle, Sun Microsystems (which was acquired by Oracle in
January 2010), Sybase and Teradata are our principal competitors
in the data warehouse marketplace. Each of these companies
provides several if not all elements of a data warehouse
environment as individual products, including database software,
servers, storage and professional services; however, they do not
provide an integrated solution similar to ours. 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.
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.
In addition to traditional data warehouse offerings, several new
offerings and vendors have entered the market over the past few
years. As the benefits of an appliance solution become evident
in the marketplace, most of our competitors have introduced
appliance-like offerings that combine traditional
database software integrated with lower-cost, commodity hardware
including servers and storage. In addition, several smaller
vendors have entered the market, offering open source or
proprietary database software with commodity hardware.
Furthermore, we 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. The success of any of these sources of competition,
alone or in combination with others, could seriously harm our
business, operating results and financial condition.
Competition in the data warehouse industry is based primarily on
return on investment; performance; ease of deployment and
administration; acquisition and operating costs; scalability;
and power, cooling and footprint requirements. We believe we
compete effectively based on all of these factors. Our TwinFin
and Skimmer data warehouse appliances have demonstrated a
performance advantage of 10 to 100 times greater query speed, a
reduction of overall operations oversight and linear scalability
in users and system capacity, while typically requiring less
floor space, electric power and cooling capacity than the
products provided by our major competitors. However, there can
be no assurance that our products will continue to outperform
those of our competitors or that our product advantages will
always lead to customers choosing our products over those of our
competitors.
Intellectual
Property
Our success depends in part upon our ability to develop and
protect our core technology and intellectual property. We rely
primarily on a combination of trade secret, patent, copyright
and trademark laws, as well as contractual provisions with
employees and third parties, to establish and protect our
intellectual property rights. Our products are provided to
customers pursuant to agreements that impose restrictions on use
and disclosure. Our agreements with employees and contractors
who participate in the development of our core technology and
intellectual property include provisions that assign any
intellectual property rights to us. In addition to the foregoing
protections, we generally control access to our proprietary and
confidential information through the use of internal and
external controls.
As of January 31, 2010, we had 23 issued patents and 19
pending patent applications in the United States. These patents
will expire on dates ranging from 2018 to 2026. We also had 3
granted patents in various European countries and 11 other
European patent applications pending with the European Patent
Office. These applications, if
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allowed, may be converted into issued patents in various
European countries. Pending patent applications may receive
unfavorable examination and are not guaranteed allowance as
issued patents. To the extent that a patent is issued, any such
future patent may be contested, circumvented, found
unenforceable or invalidated, and we may not be able to prevent
third parties from infringing this patent. We may elect to
abandon or otherwise not pursue prosecution of certain pending
patent applications due to patent examination results, strategic
concerns, economic considerations or other factors. We will
continue to assess appropriate occasions to seek patent
protection for aspects of our technology that we believe provide
us a significant competitive advantage in the market. However,
we believe that effective and timely product innovation is more
important to the success of our business than the protection of
our existing technology.
We have registered the following trademarks in the United
States: Netezza, the Netezza logo and design, Netezza
Performance Server, NPS and Mantra. We have also filed for
trademark registration in the United States for the following
trademarks: TwinFin, Skimmer and the Netezza N logo.
We also have numerous trademarks registered and trademark
applications pending in foreign jurisdictions including: the
European Union, India, Australia, China, Japan, Canada,
Argentina, Hong Kong, Korea, Norway, Poland, Singapore,
Switzerland, Taiwan, Thailand, Turkey, Mexico and Brazil. We
believe that our products are identified by our trademarks and,
thus, our trademarks are of significant value. Each registered
trademark has a duration of ten to 20 years, depending on
the date it was registered and the country in which it is
registered, and is subject to an infinite number of renewals for
a like period upon continued use and appropriate application. We
intend to continue the use of our trademarks and to renew our
registered trademarks based upon each trademarks continued
value to us.
Despite our efforts to protect the intellectual property rights
associated with our technology, unauthorized parties may still
attempt to copy or otherwise obtain and use our technology.
Moreover, it is difficult and expensive to monitor whether other
parties are complying with patent and copyright laws and their
confidentiality or other agreements with us, and to pursue legal
remedies against parties suspected of breaching our intellectual
property rights. In addition, we intend to expand our
international operations where the laws do not protect our
proprietary rights as fully as do the laws of the United States.
Third parties could claim that our products or technologies
infringe their proprietary rights. Our industry is characterized
by the existence of a large number of patents, trademarks and
copyrights and by frequent litigation based on allegations of
infringement or other violations of intellectual property
rights. We are currently involved in litigation related to
intellectual property rights of others and we have from time to
time received 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 market share expand and as
the number of products and competitors in our market increase.
Employees
As of January 31, 2010, we had 425 employees
worldwide, including 165 employees in sales and marketing,
165 employees in research and development,
52 employees in service and support, 31 employees in
general administration and 12 employees in manufacturing.
None of our employees are represented by a labor union, and we
consider current employee relations to be good.
INFORMATION
Netezza makes available through its website, free of charge, its
Annual Report on
Form 10-K,
Quarterly Reports on
Form 10-Q,
and Current Reports on
Form 8-K,
and all amendments to such reports, as soon as reasonably
practicable after these reports are electronically filed or
furnished to the U.S. Securities and Exchange Commission,
which we refer to as the SEC, pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended. These
reports and other information are also available, free of
charge, at www.sec.gov. Alternatively, the public may read and
copy any materials we file with the SEC at the SECs Public
Reference Room at 100 F Street, N.E., Washington, DC
20549. Information on the operation of the Public Reference Room
may be obtained by calling the SEC at
1-800-SEC-0330.
Netezza will furnish, without charge to a security holder upon
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written request, the Notice of Meeting and Proxy Statement for
the 2010 Annual Meeting of Stockholders, portions of which are
incorporated herein by reference. Document requests are
available by calling or writing to:
Netezza Shareholder Relations
26 Forest Street
Marlborough, MA 01752
Phone:
508-382-8200
Website: www.netezza.com
Risks
Related to Our Business and Industry
An investment in our common stock involves a high degree of
risk. You should carefully consider the risks and uncertainties
described below together with all of the other information
appearing elsewhere in this Annual Report on
Form 10-K,
including our consolidated financial statements and the related
notes, before deciding whether to purchase shares of our common
stock. Each of these risks could materially adversely affect our
business, operating results and financial condition. As a
result, the trading price of our common stock could decline and
you might lose all or part of your investment in our common
stock.
Adverse
changes in economic conditions and reduced information
technology spending may continue to 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 two fiscal years,
there was a significant deterioration in economic conditions in
many of the countries and regions in which we do business.
Although there has recently been improvement in these economic
conditions, they 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.
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;
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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 develop and introduce new products and to enhance
our existing 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;
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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.
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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 several 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, including internationally;
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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.
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If we fail to successfully address these needs, our business,
operating results and financial condition may 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 three fiscal years,
generating net income of $4.2 million in fiscal 2010,
$31.5 million in fiscal 2009 and $2.0 million in
fiscal 2008, but we had not been profitable in any prior fiscal
period. As of January 31, 2010, our accumulated deficit was
$43.4 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.
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
TwinFintm
appliance, does not achieve widespread market acceptance, our
operating results will suffer.
In August 2009, we announced the general availability of our
next generation TwinFin appliance, which is the first in a
family of new blade server-based appliances. We expect that
sales of our new family of blade server-based data warehouse
appliances, of which the TwinFin appliance is the first member,
will generate the substantial majority of our anticipated
product revenues in fiscal 2011. 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
15
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 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, Hewlett-Packard, IBM, Oracle, Sun Microsystems
(which was acquired by Oracle in January 2010), Sybase and
Teradata. 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
16
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 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. Third parties have asserted, and may assert in
the future, claims that our products infringe patents or patent
applications to which we do not hold licenses or other rights.
Third parties may own or control these patents and patent
applications in the United States and abroad. These third
parties have brought, and could in the future bring, claims
against us that would cause us to incur substantial expenses
and, if successfully asserted against us, could cause us to pay
substantial damages. Further, if a patent infringement suit were
brought against us, we could be forced to stop or delay
manufacturing or sales of the product that is the subject of the
suit. In addition, we could be forced to redesign the product
that uses any allegedly infringing technology.
In November 2009, we filed a lawsuit against Intelligent
Integration Systems, Inc., a former solutions provider to
Netezza that we refer to as IISi, alleging that IISi breached an
agreement with us, as well as breach of implied covenant of good
faith and fair dealing, intentional interference with
contractual relations and beneficial business relations and
violations of the Massachusetts fair business practices act. In
January 2010, IISi filed an answer and counterclaim in
response to our complaint in which IISi alleges that we breached
our contract with IISi, breach of the covenant of good faith and
fair dealing, misappropriation of trade secrets, unjust
enrichment, business defamation, intentional interference with
contractual relations and violations of the Massachusetts fair
business
17
practices act. In its counterclaim, IISi seeks unspecified
monetary damages, an injunction requiring us to return its trade
secrets and proprietary information, costs and attorneys fees.
We intend to vigorously defend ourselves against IISis
counterclaims. However, the prosecution of our lawsuit against
IISi, and the defense against IISis counterclaims may
require significant investment of time and financial resources.
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.
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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 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
18
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.
Our
company has grown rapidly and we may be unable to manage our
growth effectively.
Between January 31, 2005 and January 31, 2010, the
number of our employees increased from 140 to 425 and our
installed base of customers grew from 15 to 325. 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 fiscal years ended January 31, 2010 and 2009, we
derived approximately 11% and 3%, respectively, of our revenue
from sales made by resellers and various integrators to
U.S. federal government agencies, and this amount may
increase substantially in future periods. The demand for data
warehouse products and services by
19
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.
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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 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 fiscal years ended January 31, 2010 and 2009, we
derived approximately 20% and 26%, respectively, of our revenue
from customers based outside the United States, and we currently
have sales personnel in ten different
20
foreign countries. We expect our revenue and operations outside
the United States will 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.
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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 fiscal years ended January 31, 2010 and
2009, we derived approximately 14% and 21%, 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 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.
21
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 in the fiscal year ended
January 31, 2010 and 24% of our revenue in the fiscal year
ended January 31, 2009). 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.
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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
22
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.
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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 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 hold
par value $13.3 million of auction rate securities as of
January 31, 2010, that grants us the right to sell to UBS
$13.3 million of our total $49.7 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 of 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
23
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 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 7 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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24
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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.
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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.
25
We
rely on a single contract manufacturer to assemble our products,
and our failure to manage our relationship with our contract
manufacturer successfully could negatively impact our ability to
sell our products.
We currently rely on a single contract manufacturer to assemble
our appliances, manage our appliance supply chain and
participate in negotiations regarding appliance costs. While we
believe that our use of this contract manufacturer provides
benefits to our business, our reliance on it 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 this contract manufacturer
effectively, or if the contract manufacturer 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 manufacturer 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 can terminate our
agreement for any reason upon 60 days notice. If we
are required to change contract manufacturers or assume internal
manufacturing operations due to any termination of the
agreements with our contract manufacturer, 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 manufacturer 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 Ltd. located in Pune,
India, to employ a dedicated team of 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.
26
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, the AICPA and the Emerging Issues 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 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.
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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.
In October 2009, the FASB issued two accounting standards which
significantly amended previous guidance for the recognition of
certain revenue arrangements that include software elements and
multiple-deliverable revenue arrangements. Although we are still
currently evaluating the impact of adopting these standards, we
plan to early adopt the guidance in the fiscal year beginning
February 1, 2010 and this adoption may have a material affect on
our operating results.
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, 2010, 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.
27
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
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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.
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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
28
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.
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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.
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ITEM 1B.
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UNRESOLVED
STAFF COMMENTS
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Not applicable.
Our principal administrative, sales, marketing, customer support
and research and development facility is located at our
headquarters in Marlborough, Massachusetts. We currently occupy
approximately 68,000 square feet of office space in the
Marlborough facility under the terms of an operating lease
expiring in August 2015. We also have leased sales or support
offices in various locations throughout the United States, as
well as in Canada, Europe, Australia, Japan, Korea and Poland.
We believe that our current facilities will be adequate to meet
our needs. We also believe that suitable additional or
alternative facilities will be available as needed on
commercially reasonable terms. For information concerning our
obligations under all operating leases, see Note 15 in the
Notes to our Consolidated Financial Statements contained in
Item 8 of this Annual Report on
Form 10-K.
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ITEM 3.
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LEGAL
PROCEEDINGS
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On November 20, 2009, we filed a complaint against
Intelligent Integration Systems, Inc., a former solutions
provider to Netezza that we refer to as IISi, in Superior Court
in Suffolk County, Massachusetts. The complaint alleges that
IISi breached an agreement with us, as well as breach of implied
covenant of good faith and fair dealing, intentional
interference with contractual relations and beneficial business
relations and violations of the Massachusetts fair business
practices act. Our complaint against IISi seeks unspecified
monetary damages, a declaration that our termination of our
agreement with IISi was in accordance with the terms of that
agreement and the return of our property and proprietary
information from IISi, costs and attorneys fees. On
January 22, 2010, IISi filed an answer and
counterclaim in response to our complaint. In its
counterclaim, IISi alleges that we breached our
29
contract with IISi, breach of the covenant of good faith and
fair dealing, misappropriation of trade secrets, unjust
enrichment, business defamation, intentional interference with
contractual relations and violations of the Massachusetts fair
business practices act. In its counterclaim, IISi seeks
unspecified monetary damages, an injunction requiring us to
return its trade secrets and proprietary information, costs and
attorneys fees. We believe that the allegations in our compliant
against IISi are meritorious and we intend to vigorously
prosecute our lawsuit against IISi. We also believe we have
meritorious defenses to each of IISis counterclaims in the
lawsuit, and we are prepared to vigorously defend ourselves
against those counterclaims.
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ITEM 4.
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(REMOVED
AND RESERVED)
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PART II
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ITEM 5.
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MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
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Market
Information for Common Stock
Our common stock has been traded on the New York Stock Exchange,
or NYSE, under the symbol NZ since April 9,
2009. Prior to April 9, 2009, our common stock was traded
on NYSE Arca under the symbol NZ since our initial
public offering on July 19, 2007. Prior to our initial
public offering, there was no public market for our common
stock. The following table presents the high and low closing per
share prices of Netezza common stock, as reported by the NYSE
Arca with respect to the period from February 1, 2008
through April 8, 2009 and by the NYSE for the period from
April 9, 2009 through January 31, 2010.
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Fiscal Year 2009
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High
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Low
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First fiscal quarter ended April 30, 2008
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$
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10.60
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$
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7.85
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Second fiscal quarter ended July 31, 2008
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$
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13.40
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$
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10.09
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Third fiscal quarter ended October 31, 2008
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$
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14.03
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$
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8.10
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Fourth fiscal quarter ended January 31, 2009
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$
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9.25
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$
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5.12
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Fiscal Year
2010
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First fiscal quarter ended April 30, 2009
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$
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8.13
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$
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4.82
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Second fiscal quarter ended July 31, 2009
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$
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9.21
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$
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6.63
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Third fiscal quarter ended October 31, 2009
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|
$
|
11.69
|
|
|
$
|
8.84
|
|
Fourth fiscal quarter ended January 31, 2010
|
|
$
|
11.14
|
|
|
$
|
9.09
|
|
The last reported sale price for our common stock on NYSE was
$12.79 per share on March 31, 2010.
Stockholders
As of March 31, 2010, there were 169 holders of record of
our common stock.
Dividend
Policy
We have never declared or paid any cash dividends on our capital
stock and do not expect to pay any cash dividends for the
foreseeable future. We intend to use future earnings, if any, in
the operation and expansion of our business. Payment of future
cash dividends, if any, will be at the discretion of our board
of directors after taking into account various factors,
including our financial condition, recent and expected operating
results, and current and anticipated cash needs.
30
Comparative
Stock Performance Graph
The following graph compares the relative performance of our
common stock, the Standard & Poors 500 Stock
Index and the Standard & Poors Information
Technology Index. This graph covers the period from
July 19, 2007 (date of our initial public offering) through
January 31, 2010.
COMPARISON
OF CUMULATIVE TOTAL RETURN
ANNUAL RETURN PERCENTAGE
Years Ending
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|
|
|
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|
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|
|
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|
Company / Index
|
|
|
1/31/08
|
|
|
1/31/09
|
|
|
1/31/10
|
Netezza Corporation
|
|
|
|
(43.30
|
)
|
|
|
|
(38.44
|
)
|
|
|
|
49.75
|
|
S&P 500 Index
|
|
|
|
(10.34
|
)
|
|
|
|
(38.63
|
)
|
|
|
|
33.14
|
|
S&P Information Technology Index
|
|
|
|
(12.26
|
)
|
|
|
|
(37.00
|
)
|
|
|
|
52.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INDEXED
RETURNS
Years Ending
|
|
|
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|
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|
Base
|
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|
Period
|
|
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|
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|
|
|
|
|
|
Company / Index
|
|
|
7/19/07
|
|
|
|
1/31/08
|
|
|
|
1/31/09
|
|
|
|
1/31/10
|
|
Netezza Corporation
|
|
|
|
100
|
|
|
|
|
56.70
|
|
|
|
|
34.91
|
|
|
|
|
52.27
|
|
S&P 500 Index
|
|
|
|
100
|
|
|
|
|
89.66
|
|
|
|
|
55.02
|
|
|
|
|
73.26
|
|
S&P Information Technology Index
|
|
|
|
100
|
|
|
|
|
87.74
|
|
|
|
|
55.27
|
|
|
|
|
84.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recent
Sales of Unregistered Securities
Not applicable.
Purchases
of Equity Securities by the Issuer and Affiliated
Purchasers
Not applicable.
31
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA
|
The selected financial data set forth below should be read in
conjunction with the audited consolidated financial statements
and related notes thereto included in Part II, Item 8
and Managements Discussion and Analysis of Financial
Condition and Results of Operations in Part II, Item 7
of this Annual Report on
Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
|
|
2010(1)(2)
|
|
|
2009(1)
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Summary of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
190,635
|
|
|
$
|
187,769
|
|
|
$
|
126,686
|
|
|
$
|
79,621
|
|
|
$
|
53,851
|
|
Operating income (loss)
|
|
|
3,650
|
|
|
|
12,589
|
|
|
|
403
|
|
|
|
(8,251
|
)
|
|
|
(14,034
|
)
|
Income (loss) before cummulative effect of change in accounting
principle and accretion to preferred stock
|
|
|
4,190
|
|
|
|
31,519
|
|
|
|
1,994
|
|
|
|
(7,975
|
)
|
|
|
(13,807
|
)
|
Accretion to preferred stock
|
|
|
|
|
|
|
|
|
|
|
(2,853
|
)
|
|
|
(5,931
|
)
|
|
|
(5,797
|
)
|
Net income (loss) attributable to common shareholders
|
|
|
4,190
|
|
|
|
31,519
|
|
|
|
(859
|
)
|
|
|
(13,906
|
)
|
|
|
(19,822
|
)
|
Net income (loss) per share attributable to common
stockholders basic
|
|
$
|
0.07
|
|
|
$
|
0.53
|
|
|
$
|
(0.03
|
)
|
|
$
|
(1.90
|
)
|
|
$
|
(2.99
|
)
|
Net income (loss) per share attributable to common
stockholders diluted
|
|
$
|
0.07
|
|
|
$
|
0.50
|
|
|
$
|
(0.03
|
)
|
|
$
|
(1.90
|
)
|
|
$
|
(2.99
|
)
|
Weighted average common shares outstanding basic
|
|
|
60,447
|
|
|
|
58,967
|
|
|
|
33,989
|
|
|
|
7,319
|
|
|
|
6,635
|
|
Weighted average common shares outstanding diluted
|
|
|
63,062
|
|
|
|
62,791
|
|
|
|
33,989
|
|
|
|
7,319
|
|
|
|
6,635
|
|
|
|
|
(1) |
|
On May 9, 2008, Netezza completed the acquisition of
NuTech, whereby Netezza acquired NuTech for aggregate
consideration of approximately $6.6 million. The financial
data for the fiscal years ended January 31, 2009 and 2010
includes operating results for NuTech for the period following
its acquisition, presented on a consolidated basis. |
|
(2) |
|
On February 18, 2009, Netezza completed the acquisition of
Tizor, whereby Netezza acquired Tizor for aggregate
consideration of approximately $3.1 million. The financial
data for the fiscal year ended January 31, 2010 includes
operating results for Tizor for the period following its
acquisition, presented on a consolidated basis. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of January 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$
|
131,090
|
|
|
$
|
113,330
|
|
|
$
|
92,501
|
|
|
$
|
25,899
|
|
|
$
|
20,329
|
|
Total assets
|
|
|
283,597
|
|
|
|
258,859
|
|
|
|
198,752
|
|
|
|
69,199
|
|
|
|
45,864
|
|
Long-term debt, less current portion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,099
|
|
|
|
2,489
|
|
Convertible redeemable preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
97,131
|
|
|
|
91,200
|
|
Total stockholders equity (deficit)
|
|
|
197,593
|
|
|
|
176,622
|
|
|
|
136,475
|
|
|
|
(81,123
|
)
|
|
|
(67,932
|
)
|
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The following discussion and analysis of our financial condition
and results of operations should be read in conjunction with the
audited consolidated financial statements and the related notes
thereto included in Part II, Item 8 of this Annual
Report on
Form 10-K.
This Annual Report on
Form 10-K
contains forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of
1934, as amended. These
32
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 I, Item 1A of this
Annual Report on
Form 10-K.
The forward-looking statements in this Annual Report on
Form 10-K
represent our views as of the date of this Annual Report on
Form 10-K.
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 Annual Report on
Form 10-K.
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. We also offer database
activity-monitoring appliances that provide a solution for the
monitoring and auditing of access to this critical stored data.
The results of these queries and analyses on this critical data
provide organizations with actionable information to improve
their business operations. The amount of data that is being
generated and stored by organizations is exploding.
Organizations have seen significant growth in the users of
business intelligence, an increasing number and sophistication
of data queries, a need for real-time data availability, the
need for advanced analytical techniques and the need for data
auditing and monitoring capabilities. 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, as well as solutions for security and monitoring
of this stored data. Many traditional data warehouse systems
were initially designed to aggregate and analyze smaller
quantities of data, using general-purpose database, server and
storage platforms manually integrated 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 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.
There was a significant deterioration in economic conditions
over the past two fiscal years in many of the countries and
regions in which we do business. Although there has recently
been improvement in these economic conditions, they 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.
33
We are 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, Italy, Poland, France, Ireland, Singapore, India
and Spain. 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 analytic and monitoring
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 fiscal 2010, 2009
and 2008, U.S. customers accounted for approximately 80%,
74% and 80% of 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
generation 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 fiscal 2010, 2009 and 2008 was 30%, 24% and 19%,
respectively.
Cost
of Revenue and Gross Profit
Cost of product revenue consists primarily of amounts paid to
our contract manufacturer, in connection with the procurement of
hardware components and assembly of those components into our
appliance systems. Neither we nor our contract manufacturer
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
34
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
425 employees at January 31, 2010 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 be
consistent 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 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 may add to the
number of general and administrative employees to ensure we have
appropriate infrastructure to support the growth of our
organization and to support the demands of public company
compliance. Accordingly, we expect general and administrative
expenses to continue to increase in total dollars although we
expect these expenses to be consistent as a percentage of total
revenue.
35
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 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, which
are described in the notes to our Consolidated Financial
Statements contained in Item 8 of this Annual Report on
Form 10-K,
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 results of operations could be
materially affected.
Revenue
Recognition
We derive our revenue from sales of products and related
services and enter into multiple-element arrangements in the
normal course of business with our customers and distribution
partners. In all of our arrangements, we do not recognize any
revenue until we can determine that persuasive evidence of an
arrangement exists, delivery has occurred, the fee is fixed or
determinable, and we deem collection to be probable. In making
these judgments, we evaluate these criteria as follows:
|
|
|
|
|
Evidence of an arrangement. We consider a
non-cancelable agreement signed by the customer and us to be
persuasive evidence of an arrangement.
|
|
|
|
Delivery has occurred. We consider delivery to
have occurred when product has been delivered to the customer
and no post-delivery obligations exist other than ongoing
support obligations. In instances where customer acceptance is
required, delivery is deemed to have occurred when customer
acceptance has been achieved.
|
36
|
|
|
|
|
Fees are fixed or determinable. We consider
the fee to be fixed or determinable unless the fee is subject to
refund or adjustment or is not payable within normal payment
terms. If the fee is subject to refund or adjustment, we
recognize revenue when the right to a refund or adjustment
lapses. If offered payment terms exceed our normal terms, we
recognize revenue as the amounts become due and payable or upon
the receipt of cash.
|
|
|
|
Collection is deemed probable. We conduct a
credit review for all transactions at the inception of an
arrangement to determine the creditworthiness of the customer.
Collection is deemed probable if, based upon our evaluation, we
expect that the customer will be able to pay amounts under the
arrangement as payments become due. If we determine that
collection is not probable, revenue is deferred and recognized
upon the receipt of cash.
|
We enter into multiple element arrangements in the normal course
of business with our customers. Elements in such arrangements
are recognized when delivered and the amount allocated to each
element is based on vendor specific objective evidence of fair
value, or VSOE. VSOE is determined based upon the amount charged
when an element is sold separately. VSOE of the fair value of
maintenance services may also be determined based on a
substantive maintenance renewal clause, if any, within a
customer contract. Our current pricing practices are influenced
primarily by product type, purchase volume and maintenance term.
We review services revenue sold separately and maintenance
renewal rates on a periodic basis and update, when appropriate;
our VSOE of fair value for such services to ensure that it
reflects our recent pricing experience. When VSOE exists for
undelivered elements but not for the delivered elements, we use
the residual method. Under the residual method, the
fair values of the undelivered elements are initially deferred.
The residual contract amount is then allocated to and recognized
for the delivered elements. Thereafter, the amount deferred for
the undelivered element is recognized when those elements are
delivered. For arrangements in which VSOE does not exist for
each undelivered element, revenue for the entire arrangement is
deferred and not recognized until delivery of all the elements
without VSOE has occurred, unless the only undelivered element
is maintenance in which case the entire contract is recognized
ratably over the maintenance period.
The determination of VSOE is highly judgmental and is a key
factor in determining whether revenue may be recognized or must
be deferred and the extent to which it may be recognized once
the various elements of an arrangement are delivered. We assess
VSOE based on previous sales of products and services, the type
and size of customer and renewal rates in contracts. We monitor
VSOE on an ongoing basis. A change in our assessment of or our
inability to establish VSOE for products or services may result
in significant variation in our revenues and operating results.
Our service revenue also consists of software customization and
consulting service contracts. Services revenues are recognized
either as services are performed and billed to customers for
time and material arrangements or on the
percentage-of-completion
method for fixed fee contracts.
Percentage-of-completion
is measured by the percentage of software customization or
consulting hours incurred to date to total estimated hours. This
method is used because management has determined that past
experience has shown expended hours to be the best measure of
progress on these engagements. Revisions in total estimated
hours are reflected in the accounting period in which the
required revisions become known. Anticipated losses on contracts
are charged to income in their entirety when such losses become
evident.
Stock-Based
Compensation
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. We have 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 our financial statements. In
addition, judgment is also required in estimating the amount of
stock-based awards that are expected to be forfeited. Should our
actual forfeiture rates differ significantly from our estimates,
our stock-based compensation expense and results of operations
could be materially impacted. The calculation of compensation
cost for options issued prior to our initial public offering in
July 2007 required our Board of Directors, with input from
management, to estimate the fair market value of our common
stock on the date
37
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.
For stock options and restricted stock granted to employees we
recognize 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 were none outstanding
as of January 31, 2010, we recognize compensation cost
based on the expected attainment of the performance condition of
the award. Compensation cost is recognized on a straight-line
basis over each expected vesting period for each separately
vesting portion of the award as if the award was, in-substance,
multiple awards (i.e. a graded-vesting basis).
We account for stock-based compensation expense for
non-employees using the fair value method which requires the
award to be re-measured at each reporting date until the award
is fully vested. We estimate the fair value using the
Black-Scholes option pricing model, and record the fair value of
non-employee stock options as an expense using the
graded-vesting basis over the term of the option.
Inventory
Valuation
Inventories primarily consist of finished systems and are stated
at the lower of cost or market value. A large portion of our
inventory also relates to evaluation units located at customer
locations, as some of our customers test our equipment prior to
purchasing. The number of evaluation units has increased due to
our overall growth and an increase in our customer base. We
assess the valuation of all inventories, including raw materials
and finished goods, on a periodic basis. We write down inventory
to its estimated market value if less than its cost. Inherent in
our estimates of market value in determining inventory valuation
are estimates related to economic trends, future demand for our
products and technological obsolescence of our products. If
actual market conditions are less favorable than our
projections, additional inventory write-downs may be required.
During the fiscal years ended January 31, 2010, 2009 and
2008, we recorded charges of $6.2 million,
$5.4 million and $1.8, respectively, to write inventory
down to the lower of cost or market.
Accounting
for Income Taxes
We are subject to income taxes in both the United States and
foreign jurisdictions and we use estimates in determining our
provisions for income taxes. We account for income taxes using
the asset and liability method for accounting and reporting for
income taxes. Under this method, deferred tax assets and
liabilities are recognized based on temporary differences
between the financial reporting and income tax bases of assets
and liabilities using statutory rates.
The income tax accounting process involves estimating our actual
current tax liability, together with assessing temporary
differences resulting from differing treatment of items for tax
and accounting purposes. These differences result in deferred
tax assets and liabilities, which are included within our
consolidated balance sheets. We must then assess the likelihood
that our deferred tax assets will be recovered from future
taxable income and, to the extent we believe that it is more
likely than not that all or a portion of the deferred tax assets
will not be realized, we must establish a valuation allowance as
a charge to income tax expense.
As of January 31, 2010, we had a remaining valuation
allowance of $0.9 million against net deferred tax assets
in the United States of which $0.6 million was recorded
against other comprehensive income, and a remaining valuation
allowance of $0.8 million against net deferred tax assets
in certain foreign jurisdictions. The valuation allowance
recorded against net deferred tax assets in the United States
consisted of capital losses that we had determined were not more
likely than not to be realized. The valuation allowance recorded
against net deferred tax assets of certain foreign jurisdictions
consisted primarily of net operating loss carryforwards that
will likely expire without being utilized
Income tax expense related to our international subsidiaries
generally results from taxable income generated by the
subsidiary pursuant to intercompany service agreements. We
believe the compensation associated with these service
agreements is reasonable in light of the level and nature of
services performed by our subsidiaries. However, if a foreign
tax jurisdiction or the Internal Revenue Service were to
challenge these arrangements, we could be subject to additional
income tax expense either in the United States or the foreign
jurisdiction.
38
Our deferred tax assets do not include the excess tax benefit
related to stock-based compensation in the amount of
approximately $4.8 million as of January 31, 2010.
Consistent with prior years, we use the with and
without approach in determining the order in which our tax
attributes are utilized for book purposes. The with and
without approach results in the recognition of the
windfall stock option tax benefit through additional paid-in
capital only after all of our other tax attributes have been
considered in the annual tax accrual computation.
On February 1, 2007, we adopted an accounting standard
which defines the threshold for recognizing the benefits of tax
return positions in the financial statements as
more-likely-than-not to be sustained by the taxing
authorities based solely on the technical merits of the
position. If the recognition threshold is met, the tax benefit
is measured and recognized as the largest amount of tax benefit,
in our judgment, which is greater than 50% likely to be
realized. We did not recognize any change in our reserves for
uncertain tax positions as a result of the adoption of this
standard. At the adoption date of February 1, 2007, we had
$0.3 million of unrecognized tax benefits, the benefit of
which, if recognized, would favorably affect the income tax rate
in future periods. We recognize interest and penalties related
to uncertain tax positions in income tax expense. At
January 31, 2010, we recorded an unrecognized tax benefit
of $4.6 million of which $2.2 million would favorably
affect the income tax rate in future periods. To date we have
not accrued interest and penalties on uncertain tax positions.
During the three months ended January 31, 2010, we recorded
adjustments to correct immaterial errors to the income tax
provision for amounts that should have been recorded in our
financial statements for the three months ended October 31,
2009. The adjustments were identified in connection with our
year-end tax analysis and relate primarily to federal and state
tax credits. Recording these
out-of-period
adjustments had the effect of decreasing the income tax
provision by $0.3 million for the three months ended
January 31, 2010. We have concluded that the error was not
material to our previously issued financial statements for the
three months ended October 31, 2009 and the correction of
the error is not material to our financial statements for the
three months ended January 31, 2010. These adjustments had
no effect on our financial statements for the year ended
January 31, 2010.
Valuation
of Investments
We measure certain financial assets and liabilities at fair
value based on 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. We have certain financial assets and
liabilities recorded at fair value (principally cash equivalents
and short- and long-term marketable securities) that have been
classified as Level 1, 2 or 3 within the fair value
hierarchy. Fair values determined by Level 1 inputs utilize
quoted prices (unadjusted) in active markets for identical
assets or liabilities that we have the ability to access. Fair
values determined by Level 2 inputs utilize data points
that are observable such as quoted prices, interest rates and
yield curves. Fair values determined by Level 3 inputs
utilize unobservable data points for the asset or liability.
Investments and marketable securities are considered to be
impaired when a decline in fair value below cost basis is
determined to be
other-than-temporary.
We periodically evaluate whether a decline in fair value below
cost basis is
other-than-temporary
by considering available evidence regarding these investments
including, among other factors, the duration of the period that,
and extent to which, the fair value is less than cost basis; the
financial health of and business outlook for the issuer,
including industry and sector performance and operational and
financing cash flow factors; overall market conditions and
trends; and our intent and ability to retain our investment in
the security for a period of time sufficient to allow for an
anticipated recovery in market value. Once a decline in fair
value is determined to be
other-than-temporary,
a write-down is recorded and a new cost basis in the security is
established. Assessing the above factors involves inherent
uncertainty. Write-downs, if recorded, could be materially
different from the actual market performance of investments and
marketable securities in our portfolio, if, among other things,
relevant information related to our investments and marketable
securities was not publicly available or other factors not
considered by us would have been relevant to the determination
of impairment.
Included in our long-term marketable securities at
January 31, 2010 and 2009 were auction rate securities, or
ARS, that are primarily AAA-rated bonds, most of which were
collateralized by federally guaranteed student loans. ARS are
long-term variable rate bonds tied to short-term interest rates
that may reset through a Dutch auction process that
is designed to occur every seven to 35 days. Historically,
the carrying value (par value) of ARS
39
approximated fair market value due to the resetting of variable
interest rates. Beginning in mid-February 2008 and continuing
throughout the period ended January 31, 2010, however, the
auctions for ARS then held by us were unsuccessful. As a result,
the interest rates on ARS reset to the maximum rate per the
applicable investment offering statements. We 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 the long-term nature of the
underlying student loan bonds and the failure of the auction
process to provide a current market, we classified these
investments as long-term on our consolidated balance sheet as of
January 31, 2010, except for ARS with respect to which we
have entered into an agreement allowing us to sell such ARS
beginning in June 2010 which have been classified as short-term.
In light of these liquidity issues, we performed a discounted
cash flow analysis to determine the estimated fair value of
these ARS investments. The discounted cash flow analysis we
performed 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 performed as of January 31, 2010 assumes a
weighted average discount rate of between 1.1% and 2.1% and
expected term of one to three years. The discount rate was
determined using a proxy based upon the current market rates for
similar debt offerings within the AAA-rated ARS market. The
expected term was based on managements estimate of future
liquidity. As a result, as of January 31, 2010, we have
estimated an aggregate loss of $1.7 million, of which
$1.6 million was related to the impairment of ARS deemed to
be temporary and included in accumulated other comprehensive
loss within stockholders equity and of which
$0.1 million was related to the impairment of ARS deemed
other-than-temporary
and included in other income (expense), net in the consolidated
statement of operations.
If we had used a term of one year or five years and a discount
rate of 1.1% and 3.2% respectively, the gross unrealized loss
would have been $0.5 million or $5.7 million,
respectively. If we had used a term of one to three years and a
discount rate of 1.1% or 3.2%, the gross unrealized loss would
have been $0.9 million or $3.1 million, respectively.
If we had used a term of one to three years and illiquidity
discounts of 1.0% or 2.0%, the gross unrealized loss would have
been $1.1 million or $2.3 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 to have a material impact on our
financial conditions or results of operations during fiscal 2011.
Despite the failed auctions, we continue to receive cash flows
in the form of specified interest payments from the issuers of
ARS. In addition, except for ARS with respect to which we have
entered into an agreement allowing us to sell such ARS beginning
in June 2010, we have the intent and ability to hold our ARS
until a recovery of the impairment because we believe we have
sufficient cash and other marketable securities on-hand and from
projected cash flows from operations such that we do not
anticipate a need to sell our ARS prior to a recovery to par
value. See Liquidity and Capital Resources below.
Valuation
of Goodwill and Acquired Intangible Assets
Intangible assets are valued based on estimates of future cash
flows and amortized over their estimated useful lives. We
evaluate goodwill and intangible assets for impairment annually
and when events occur or circumstances change that may reduce
the value of the asset below its carrying amount using forecasts
of discounted future cash flows. For purposes of assessing
goodwill for potential impairment, we have determined that we
have one reporting unit based on our organizational structure
and reporting. Our annual goodwill impairment test did not
result in an impairment in fiscal 2010 or 2009. Events or
circumstances that might require an interim evaluation include
unexpected adverse business conditions, economic factors,
unanticipated technological changes or competitive activities,
loss of key personnel and acts by governments and courts.
Goodwill and intangible assets totaled $2.0 million and
$4.1 million, respectively, at January 31, 2010.
Estimates of future cash flows require assumptions related to
revenue and operating income growth, asset-related expenditures,
working capital levels and other factors. Different assumptions
from those made in our analysis could materially affect
projected cash flows and our evaluation of goodwill for
impairment. Should the fair value of our goodwill or
indefinite-lived intangible assets decline because of reduced
operating performance, market declines, or other indicators of
impairment, or as a result of changes in the discount rate,
charges for impairment may be necessary.
40
Results
of Operations for the Years Ended January 31, 2010, 2009
and 2008
The following table sets forth our consolidated results of
operations for the periods shown.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage Change
|
|
|
|
Fiscal Year Ended January 31,
|
|
|
2010 vs
|
|
|
2009 vs
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
134,340
|
|
|
$
|
143,463
|
|
|
$
|
102,994
|
|
|
|
(6.4
|
)%
|
|
|
39.3
|
%
|
Services
|
|
|
56,295
|
|
|
|
44,306
|
|
|
|
23,692
|
|
|
|
27.1
|
%
|
|
|
87.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
190,635
|
|
|
|
187,769
|
|
|
|
126,686
|
|
|
|
1.5
|
%
|
|
|
48.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
|
49,856
|
|
|
|
57,350
|
|
|
|
42,527
|
|
|
|
(13.1
|
)%
|
|
|
34.9
|
%
|
Services
|
|
|
14,692
|
|
|
|
12,211
|
|
|
|
7,716
|
|
|
|
20.3
|
%
|
|
|
58.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
64,548
|
|
|
|
69,561
|
|
|
|
50,243
|
|
|
|
(7.2
|
)%
|
|
|
38.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
126,087
|
|
|
|
118,208
|
|
|
|
76,443
|
|
|
|
6.7
|
%
|
|
|
54.6
|
%
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
65,939
|
|
|
|
58,429
|
|
|
|
43,210
|
|
|
|
12.9
|
%
|
|
|
35.2
|
%
|
Research and development
|
|
|
41,110
|
|
|
|
32,557
|
|
|
|
23,880
|
|
|
|
26.3
|
%
|
|
|
36.3
|
%
|
General and administrative
|
|
|
15,388
|
|
|
|
14,633
|
|
|
|
8,950
|
|
|
|
5.2
|
%
|
|
|
63.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
122,437
|
|
|
|
105,619
|
|
|
|
76,040
|
|
|
|
15.9
|
%
|
|
|
38.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
3,650
|
|
|
|
12,589
|
|
|
|
403
|
|
|
|
(71.0
|
)%
|
|
|
(3023.8
|
)%
|
Interest income
|
|
|
952
|
|
|
|
4,045
|
|
|
|
2,971
|
|
|
|
(76.5
|
)%
|
|
|
36.1
|
%
|
Interest expense
|
|
|
90
|
|
|
|
40
|
|
|
|
717
|
|
|
|
125.0
|
%
|
|
|
(94.4
|
)%
|
Other income (expense), net
|
|
|
366
|
|
|
|
(495
|
)
|
|
|
298
|
|
|
|
(173.9
|
)%
|
|
|
(266.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
4,878
|
|
|
|
16,099
|
|
|
|
2,955
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
|
688
|
|
|
|
(15,420
|
)
|
|
|
961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,190
|
|
|
$
|
31,519
|
|
|
$
|
1,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
Total revenue was $190.6 million, $187.8 million and
$126.7 million in fiscal 2010, 2009 and 2008, respectively,
representing increases of 2% in fiscal 2010 and 48% in fiscal
2009.
Product revenue was $134.3 million, $143.5 million and
$103.0 million in fiscal 2010, 2009 and 2008, respectively,
representing a decrease of 6% in fiscal 2010 and an increase of
39% in fiscal 2009. The decrease in fiscal 2010 was primarily
the result of decreased sales volume to new customers and
reflected the overall macroeconomic conditions during the year.
Product revenue related to existing customer sales increased
$1.3 million in fiscal 2010 and $23.3 million in
fiscal 2009. Product revenue related to new customer sales
decreased $10.4 million in fiscal 2010 and increased
$17.2 million in fiscal 2009. The number of new customers
added was 77 in fiscal 2010, 88 in fiscal 2009 and 55 in fiscal
2008. Our total installed base of Netezza customers was 325 at
January 31, 2010.
Geographically, 83% of our product revenue was in North America
and 17% was international for fiscal 2010, as compared to 78% of
product revenue occurring in North America and 22% international
in fiscal 2009 and 83% occurring in North America and 17%
international in fiscal 2008. The number of sales and marketing
employees increased to 165 at January 31, 2010, from 149 at
January 31, 2009 and 104 at January 31, 2008. Our
enhanced visibility and reputation in our industry, as our base
of referenceable customers has grown, was an important factor in
generating additional sales.
41
Services revenue was $56.3 million, $44.3 million and
$23.7 million in fiscal 2010, 2009 and 2008, respectively,
representing increases of 27% in fiscal 2010 and 87% in fiscal
2009. In fiscal 2009, 17% of the increase in services revenue
was attributable to $3.5 million of service revenue
generated by NuTech. The remainder of these increases was the
result of increased product sales, 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 66% in fiscal 2010, 63% in fiscal 2009
and 60% in fiscal 2008.
Product gross margin was 63% in fiscal 2010, 60% in fiscal 2009
and was 59% in fiscal 2008. This increase in fiscal 2010 and
2009 was due primarily to a reduction in the cost of our
hardware components and increased efficiencies from
relationships with our contract manufacturers.
Services gross margin was 74% in fiscal 2010, 72% in fiscal 2009
and 67% in fiscal 2008. These increased service gross margins
were a result of increased productivity resulting from
attainment of economies of scale, as our base of renewable
maintenance and support contracts with existing customers
continues to grow.
Sales
and Marketing Expenses
As a percentage of revenue, sales and marketing expenses were
35%, 31% and 34% in fiscal 2010, 2009 and 2008, respectively.
The increase in sales and marketing expenses as a percentage of
revenue from fiscal 2009 to fiscal 2010 primarily reflects an
investment in our direct sales force with the number of sales
and marketing employees increasing to 165 at January 31,
2010 from 149 at January 31, 2009. The decrease in sales
and marketing expenses as a percentage of revenue from fiscal
2008 to fiscal 2009 is the result of our significant revenue
growth in fiscal 2009 and attainment of economies of scale.
Sales and marketing expenses increased $7.5 million, or
13%, to $65.9 million in fiscal 2010 from
$58.4 million in fiscal 2009. Sales and marketing expenses
increased $15.2 million, or 35%, to $58.4 million in
fiscal 2009 from $43.2 million in fiscal 2008.
The increase in sales and marketing expenses of
$7.5 million in fiscal 2010 was due primarily to increases
of $3.2 million in salaries and employee benefits,
$1.7 million in marketing programs primarily related to our
new generation TwinFin appliance, $0.7 million in
stock-based compensation expense, $0.6 million in shared
overhead and fringe costs and $0.4 million in sales
commissions.
The increase in sales and marketing expenses of
$15.2 million in fiscal 2009 was due primarily to increases
of $5.5 million in salaries and employee benefits,
$2.1 million in sales commissions, $1.8 million in
sales travel, $1.3 million in stock-based compensation
expense, $1.1 million in partner referral fees and
$1.1 million in sales office rent and office costs to
support the continued geographic expansion of the sales force.
The number of sales and marketing employees increased to 165 at
January 31, 2010 from 149 at January 31, 2009 and 104
at January 31, 2008, in order to expand our sales force to
provide better geographic distribution and market penetration.
Research
and Development Expenses
As a percentage of revenue, research and development expenses
were 22%, 17% and 19% in fiscal 2010, 2009 and 2008,
respectively. The increase in research and development expenses
as a percentage of revenue in fiscal 2010 primarily reflects
significant investments in product development associated with
the development and release of our TwinFin appliance in the
fiscal year. The decrease in research and development expenses
as a percentage of revenue in fiscal 2009 is the result of our
significant revenue growth in fiscal 2009 and attainment of
economies of scale.
42
Research and development expenses increased $8.6 million,
or 26%, to $41.1 million in fiscal 2010 from
$32.6 million in fiscal 2009. Research and development
expenses increased $8.7 million, or 36%, in fiscal 2009
from $23.9 million in fiscal 2008.
The increase in research and development expenses of
$8.6 million in fiscal 2010 was due primarily to increases
of $3.8 million in salaries and employee benefits due to
additional headcount, $1.3 million in prototype expense
primarily related to product development for our TwinFin
appliance, $0.9 million in shared overhead and fringe
costs, $0.7 million in depreciation and amortization
expense and $0.7 million in stock-based compensation
expense.
The increase in research and development expenses of
$8.7 million in fiscal 2009 was due primarily to increases
of $3.9 million in salaries, benefits and offshore
consulting costs, $1.7 million in prototype expense and
inventory expensed and $1.1 million in stock-based
compensation expense.
The number of research and development employees increased to
165 at January 31, 2010 from 113 at January 31, 2009
and 101 at January 31, 2008, to help us broaden and improve
the development of new technology and product enhancements. The
offshore development team from our contract engineering firm
increased to 68 people at January 31, 2010 from
64 people at January 31, 2009 and 62 people at
January 31, 2008, in order to take advantage of the cost
efficiencies associated with offshore research and development
resources.
General
and Administrative Expenses
As a percentage of revenue, general and administrative expenses
were 8%, 8%, and 7% in fiscal 2010, 2009 and 2008, respectively.
General and administrative expenses increased $0.8 million,
or 5%, in fiscal 2010 to $15.4 million from
$14.6 million in fiscal 2009. General and administrative
expenses increased $5.7 million, or 63%, to
$14.6 million in fiscal 2009 from $8.9 million in
fiscal 2008.
The increase in general and administrative expenses of
$0.8 million in fiscal 2010 over fiscal 2009 was due
primarily to increases of $0.6 million in salaries and
benefits, $0.8 million in tax consulting, legal, insurance
and other consulting costs, $0.5 million in stock-based
compensation expense and $0.2 million in depreciation and
amortization expense, partially offset by a decrease of
$1.6 million in shared overhead and fringe costs.
The increase in general and administrative expenses of
$5.7 million in fiscal 2009 over fiscal 2008 was due
primarily to increases of $2.4 million in salaries and
benefits, $1.3 million in audit, tax, legal, insurance and
consulting costs and $0.9 million in stock-based
compensation expense.
The number of general and administrative employees was 31 at
January 31, 2010, 40 at January 31, 2009, and 23 at
January 31, 2008. These changes in headcount primarily
resulted from 10 duplicative general and administrative roles
from the NuTech acquisition in 2009, which were reduced in 2010.
We may add to the number of general and administrative employees
to ensure we have appropriate infrastructure to support the
growth of our organization and to support the additional demands
of public company compliance.
Interest
Income (Expense), Net
We recorded $0.9 million of interest income, net in fiscal
2010 as compared to $4.0 million in fiscal 2009 and
$2.3 million in fiscal 2008. Interest income, net for
fiscal 2010 was comprised of interest income of
$1.0 million and interest expense of $0.1 million.
Interest income, net for fiscal 2009 was comprised of interest
income of $3.7 million and $0.3 million of net
realized gains on the sale of marketable securities. The
components of interest income, net for fiscal 2008 were interest
income of $2.7 million, net realized gains on the sale of
marketable securities of $0.3 million and interest expense
of $0.7 million.
Interest income, net decreased $3.1 million for fiscal 2010
from fiscal 2009, primarily due to lower rates of return as
compared to fiscal 2009 and lower average cash and investment
balances, due primarily to cash used in operating activities.
Interest income increased $1.0 million for fiscal 2009 over
fiscal 2008, primarily due to higher average cash and investment
balances, partially offset by lower rates of return as compared
to fiscal 2008. The increase in our average cash and investment
balances was due primarily to cash generated from operations.
43
Other
Income/(Expense), Net
We incurred other income, net of $0.4 million in fiscal
2010, other expense, net of $0.5 million in fiscal 2009,
and other income, net of $0.3 million in fiscal 2008.
The components of other income, net for fiscal 2010 were
$0.4 million related to a gain on bargain purchase
resulting from an acquisition and $1.4 million of gains on
trading securities. These amounts are partially offset by a
$1.2 million loss on the change in fair value of our
auction rate security put right and $0.3 million of
transaction losses for activities in our foreign subsidiaries.
The components of other expense, net, for fiscal 2009 were
$0.4 million of transaction losses for activities in our
foreign subsidiaries, partially offset by a $0.1 million
gain associated with changes in the fair value of foreign
currency forward contracts and other income. During fiscal 2009,
we recorded a net loss on investments of $0.3 million,
which reflects a loss of $1.6 million due to
other-than-temporary
impairments on marketable securities and a gain of
$1.3 million realized on a put right for the right to sell
its auction rate securities received from one of our investment
advisors in November 2008.
The components of other income, net, for fiscal 2008 were
$0.7 million of gains on the translation of
non-U.S. dollar
transactions into U.S. dollars for activities in our
foreign subsidiaries, partially offset by $0.3 million
expense from the
mark-to-market
adjustments on preferred stock warrants and $0.1 million of
early payoff fees charged to our debt payoff. As warrants for
our preferred stock are no longer outstanding, there will be no
mark-to-market
adjustment expense going forward.
Provision
for Income Taxes
We recorded an income tax provision of $0.7 million for
fiscal 2010, as compared to an income tax benefit of
$15.4 million for fiscal 2009, and an income tax provision
of $1.0 million for fiscal 2008.
For the year ended January 31, 2010, our effective tax rate
was a provision of 14.1% on pre-tax income of $4.9 million
as compared to a benefit of 95.8% in 2009 and a provision of
32.5% in 2008, on pre-tax income of $16.1 million and
$3.0 million respectively. Our effective tax rate in 2010
was lower than the statutory federal income tax rate of 35% due
primarily to use of research and development tax credits to
offset our U.S. taxable income. Our effective tax rates for
the years ended January 31, 2009 and 2008 were lower than
the federal income tax rate of 35%, due primarily to release of
valuation allowances recorded against net deferred tax assets
and use of NOLs and research and development tax credits to
offset our U.S. taxable income offset by the impact of
taxes owed in relation to the income generated by our foreign
subsidiaries.
As of January 31, 2010, we had a remaining valuation
allowance of $0.9 million against net deferred tax assets
in the U.S. of which $0.6 million was recorded against
other comprehensive income, and a remaining valuation allowance
of $0.8 million against net deferred tax assets in certain
foreign jurisdictions. The valuation allowance recorded against
net deferred tax assets in the U.S. consisted of capital
losses that we had determined were not more likely than not to
be realized. The valuation allowance recorded against net
deferred tax assets of certain foreign jurisdictions consisted
primarily of net operating loss carryforwards that will likely
expire without being utilized.
Non-GAAP Net
Income and Non-GAAP Net Income per Share
Non-GAAP net income and non-GAAP net income per share are
alternative views of our performance used by management that we
are providing because management believes this information
enhances investors understanding of our results and is
used by us in public communications. We believe that these
non-GAAP financial measures, when taken together with the
corresponding GAAP financial measures, provide meaningful
supplemental information regarding our performance by excluding
certain non-cash items that may not be indicative of our core
business or future outlook. The presentation of these non-GAAP
measures is not intended to be considered in isolation from, as
a substitute for, or superior to, the financial information
prepared and presented in accordance with GAAP, and may be
different from non-GAAP measures used by other companies. In
addition, these non-GAAP measures have limitations in that they
do not reflect all of the amounts associated with our results of
operations as determined in accordance with GAAP.
44
The non-GAAP financial measures presented by us exclude non-cash
employee stock-based compensation, amortization of acquired
intangible assets, the net
mark-to-market
impact related to an unrealized gain on a put option received
for ARS offset by the unrealized loss on the underlying ARS, an
income tax benefit resulting from the release of a valuation
allowance on deferred tax assets, a gain on bargain purchase,
the related income tax effect of excluding these expenses and,
where applicable, accretion of preferred stock dividends.
Because of the varying valuation methodologies and assumptions
that companies use, we believe that excluding non-cash employee
stock-based compensation allows investors to analyze our
business over multiple periods and provide more meaningful
comparisons with other companies. Because the amount of
amortization of acquired intangible assets varies in amount and
frequency and is significantly affected by the timing and size
of our acquisitions, we believe that excluding amortization of
acquired intangible assets allows investors to analyze our
business over multiple periods and provide more meaningful
comparison with other companies. During the fourth fiscal
quarter of 2009, a net
mark-to-market
charge related to an unrealized gain on a put option received in
the quarter for ARS offset by the unrealized loss on the
underlying ARS was recorded to other income (expense), net. This
amount is excluded to aid in comparing current and future
operating results with those of past periods. During the fourth
fiscal quarter of 2009, an income tax benefit was realized upon
the release of a valuation allowance on specific deferred tax
assets that was no longer required. This income tax benefit is
excluded from non-GAAP operating results to aid in comparing
current and future operating results with those of past periods.
The gain on bargain purchase, which was recorded in the three
months ended July 31, 2009, resulted from the value of
identifiable net assets acquired exceeding the value of the
purchase price for our acquisition of Tizor Systems, Inc. Since
we had no gain on bargain purchase in any prior periods and due
to the non-recurring nature of this charge, we are presenting
our operating results without this gain to allow for a more
meaningful comparison of current periods to prior year periods.
Upon the closing of our initial public offering, accretion of
preferred dividends was no longer applicable due to the
conversion of preferred stock to common stock, and we believe
that excluding accretion of preferred dividends from non-GAAP
results will aid in comparing current and future operating
results with those of past periods.
A reconciliation between GAAP financial measures and non-GAAP
financial measures is as follows (in thousands except per
share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net income (loss) attributable to common stockholders as
reported under GAAP
|
|
$
|
4,190
|
|
|
$
|
31,519
|
|
|
$
|
(859
|
)
|
Adjustments to GAAP net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash employee stock based compensation
|
|
|
9,814
|
|
|
|
7,773
|
|
|
|
4,271
|
|
Amortization of acquired intangible assets
|
|
|
1,038
|
|
|
|
465
|
|
|
|
|
|
Impairment loss on investment(1)
|
|
|
|
|
|
|
228
|
|
|
|
|
|
Tax benefit adjustments(2)
|
|
|
|
|
|
|
(19,950
|
)
|
|
|
|
|
Gain on bargain purchase(3)
|
|
|
(365
|
)
|
|
|
|
|
|
|
|
|
Accretion to preferred stock(4)
|
|
|
|
|
|
|
|
|
|
|
2,853
|
|
Income tax effect(5)
|
|
|
(2,872
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP net income attributable to common stockholders
|
|
$
|
11,805
|
|
|
$
|
20,035
|
|
|
$
|
6,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share as reported under GAAP diluted
|
|
$
|
0.07
|
|
|
$
|
0.50
|
|
|
$
|
(0.03
|
)
|
Earnings per share impact of excluded items
|
|
|
0.12
|
|
|
|
(0.18
|
)
|
|
|
0.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP earnings per share diluted
|
|
$
|
0.19
|
|
|
$
|
0.32
|
|
|
$
|
0.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents net
mark-to-market
impact related to an unrealized gain on a put option received
for ARS offset by the unrealized loss on the underlying ARS. |
|
(2) |
|
Represents income tax benefit resulting from the release of the
tax valuation allowance on deferred tax assets that was no
longer deemed necessary and income tax effect of excluding
stock-based compensation, and amortization of acquired
intangible assets. |
45
|
|
|
(3) |
|
Represents gain on bargain purchase resulting from the value of
identifiable net assets acquired exceeding the value of the
purchase price for our acquisition of Tizor Systems, Inc. |
|
(4) |
|
Represents accretion of preferred stock dividends on our
Series A through D convertible redeemable preferred stock
prior to its conversion to common stock on July 24, 2007. |
|
(5) |
|
Income tax effect of excluding stock-based compensation,
amortization of acquired intangible assets and gain on bargain
purchase. The method used to determine this adjustment was to
calculate the fiscal year tax provision excluding these charges
as compared to the fiscal year tax provision including these
charges. For fiscal 2009, the total income tax effect is
reported with the tax benefit adjustment (see footnote 2 above).
For fiscal 2008, the full valuation allowance on deferred tax
assets resulted in no income tax effect to present. |
Liquidity
and Capital Resources
As of January 31, 2010, our principal sources of liquidity
were cash and cash equivalents of $40.6 million, short-term
investments in U.S. treasury and government agency
securities of $50.9 million and accounts receivable of
$53.5 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 January 31, 2010, we held ARS with a par value totaling
$49.7 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, however, 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. In light of these liquidity issues, we
performed a discounted cash flow analysis to determine the
estimated fair value of these ARS investments. The discounted
cash flow analysis we performed 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 performed as of
January 31, 2010 assumes a weighted average discount rate
of between 1.1% and 2.1% and an expected term of one to three
years. The discount rate was determined using a proxy based upon
the current market rates for similar debt offerings within the
AAA-rated ARS market. The expected term was based on
managements estimate of future liquidity. As a result, as
of January 31, 2010, we have estimated an aggregate loss of
$1.7 million, of which $1.6 million was related to the
impairment of ARS deemed to be temporary and included in
accumulated other comprehensive loss within stockholders
equity and of which $0.1 million was related to the
impairment of ARS deemed
other-than-temporary
and included in other income (expense), net in the consolidated
statement of operations.
If we had used an expected term of one year or five years and a
discount rate of 1.1% and 3.2% respectively, the gross
unrealized loss would have been $0.5 million or
$5.7 million, respectively. If we had used an expected term
of one to three years and a discount rate of 1.1% or 3.2%, the
gross unrealized loss would have been $0.9 million or
$3.1 million, respectively. If we had used an expected term
of one to three years and illiquidity discounts of 1.0% or 2.0%,
the gross unrealized loss would have been $1.1 million or
$2.3 million, respectively. Based on our ability to
46
access our cash and short-term investments and our expected cash
flows, we do not anticipate the current lack of liquidity on
these ARS to have a material impact on our financial conditions
or results of operations during fiscal 2011.
The following table shows our cash flows from operating
activities, investing activities and financing activities for
the stated periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Net cash provided by/(used in), operating activities
|
|
$
|
(8,271
|
)
|
|
$
|
41,450
|
|
|
$
|
26,937
|
|
Net cash provided by/(used in), investing activities
|
|
|
(67,273
|
)
|
|
|
20,084
|
|
|
|
(91,759
|
)
|
Net cash provided by financing activities
|
|
|
4,091
|
|
|
|
4,620
|
|
|
|
106,884
|
|
Cash
Provided by/ (Used In) Operating Activities
Net cash used in operating activities was $8.3 million in
fiscal 2010 and primarily consisted of an increase in accounts
receivable of $18.9 million primarily due to the timing of
billing and collections of customer invoices, an increase in
inventory of $11.0 million primarily due to increased
production of TwinFin inventory and a benefit from deferred
income taxes, net of $2.8 million, partially offset by net
income of $4.2 million and an increase in accounts payable
of $3.9 million. In addition, in fiscal 2010 we had
stock-based compensation expense of $9.9 million and
depreciation and amortization expense of $7.2 million, each
of which is a non-cash expense.
Net cash provided by operating activities was $41.5 million
in fiscal 2009 and primarily consisted of net income of
$31.5 million, an increase in deferred revenue of
$9.2 million, a decrease in inventory of
$10.5 million, an increase in accrued expenses of
$4.7 million and an increase in accounts payable of
$3.0 million. In addition, in fiscal 2009 we had
depreciation and amortization expense of $5.4 million,
stock-based compensation expense of $7.8 million and an
impairment of other long-term assets of $0.8 million. These
sources of cash were partially offset by a benefit from deferred
income taxes, net of $20.8 million as a result of the
reduction of a valuation allowance and an increase in accounts
receivable of $11.6 million primarily due to the timing of
billing and collections of customer invoices.
Net cash provided by operating activities was $26.9 million
in fiscal 2008 and primarily consisted of net income of
$2.0 million, a decrease in accounts receivable of
$12.2 million, due primarily to the receipt of customer
payments during fiscal 2008, an increase in deferred revenue of
$21.4 million, and an increase in accrued expenses of
$2.0 million. In addition, in fiscal 2008 we had
depreciation expense of $3.3 million, stock-based
compensation expense of $4.3 million and a preferred stock
warrant liability adjustment and non-cash interest expense of
$0.4 million, each of which is a non-cash expense. These
sources of cash were partially offset by a use of
$8.8 million to fund our net increase in inventory
primarily used to provide additional evaluation units to our
increasing customer base and prospective customers, a decrease
in accounts payable of $7.2 million, and an increase in
other assets of $2.7 million.
Cash
Provided by/ (Used in) Investing Activities
Net cash used in investing activities was $67.3 million in
fiscal 2010, which primarily consisted of purchases of
short-term and long-term U.S. treasury and government
agency securities of $72.9 million, $3.3 million of
capital expenditures related primarily to new product
development and $2.0 million, net of cash acquired, used to
acquire Tizor Systems, Inc. These uses of cash were partially
offset by $11.5 million of sales and maturities of our
investments.
Net cash provided by investing activities was $20.1 million
in fiscal 2009, which primarily consisted of $43.9 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,
$5.8 million of capital expenditures and $4.4 million
used to purchase other assets.
Net cash used in investing activities was $91.8 million in
fiscal 2008, which primarily consisted of $134.4 million of
net proceeds from our initial public offering used to purchase
our short-term investments,
47
and $1.1 million of capital expenditures. These uses of
cash were partially offset by $43.8 million of sales and
maturities of our short-term investments.
Cash
Provided by Financing Activities
Net cash provided by financing activities was $4.1 million
in fiscal 2010, which primarily consisted of proceeds received
from the issuance of common stock upon the exercise of stock
options of $2.3 million and $1.8 million in excess tax
benefits from stock-based compensation, which lowered our income
taxes payable.
Net cash provided by financing activities was $4.6 million
in fiscal 2009, which primarily consisted of proceeds received
from the issuance of common stock upon the exercise of stock
options of $2.7 million and $1.9 million in excess tax
benefits from stock-based compensation, which lowered our income
taxes payable.
Net cash provided by financing activities was
$106.9 million in fiscal 2008, which primarily consisted of
$113.5 million of proceeds from issuance of common stock,
which included proceeds from our initial public offering of
$113.0 million, net of underwriting discounts and expenses,
and $8.0 million of borrowings under our debt facilities,
partially offset by repayment of $14.6 million under our
debt facilities.
Contractual
Obligations
The following is a summary of our contractual obligations as of
January 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
Contractual Obligations
|
|
Total
|
|
|
1 year
|
|
|
1 - 3 Years
|
|
|
3 - 5 Years
|
|
|
5 Years
|
|
|
|
(In thousands)
|
|
|
Operating lease obligations
|
|
$
|
12,081
|
|
|
$
|
3,069
|
|
|
$
|
4,250
|
|
|
$
|
3,785
|
|
|
$
|
977
|
|
Purchase obligations(1)
|
|
|
21,701
|
|
|
|
21,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Purchase obligations primarily represent the value of purchase
orders issued to our contract manufacturer for the procurement
of assembled appliance systems for the next three months. |
The table above does not reflect unrecognized tax benefits of
$4.6 million, the timing of which is uncertain.
We believe that our cash and cash equivalents of
$40.6 million and our short-term marketable securities of
$64.0 million, both as of January 31, 2010, will be
sufficient to fund our projected operating requirements for at
least 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
In February 2009, we adopted the authoritative guidance for the
fair value measurement of 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.
This adoption did not have a material impact on our consolidated
financial statements.
In February 2009, we adopted an amendment to the accounting and
disclosure requirements for unvested share-based payment awards
that contain nonforfeitable rights to dividends or dividend
equivalents (whether paid or unpaid). Under this amendment,
these awards 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
48
earnings and selected financial data). The adoption did not have
a material impact on our consolidated financial statements.
In February 2009, an amendment to the accounting and disclosure
requirements for business combinations became effective for us.
This amendment 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 (see Note 7) was accounted for under
this amendment. This amendment may have a material impact on our
consolidated financial statements if or when we enter into
future business combinations.
In February 2009, a statement that changes the accounting and
reporting for minority interests, which will be recharacterized
as noncontrolling interests and classified as a component of
equity, became effective for us. This new consolidation method
significantly changes the accounting for transactions with
minority interest holders. As of January 31, 2010, we did
not have any minority interests.
In June 2009, we adopted pronouncements that require disclosures
about fair value of financial instruments in interim as well as
in annual financial statements. The adoption of these
pronouncements did not have a material impact on our
consolidated financial statements.
In June 2009, a pronouncement that provides guidelines for
making fair value measurements became effective for us. The
pronouncement 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. The pronouncement did not have a material
impact on our consolidated financial statements.
In June 2009, amendments to the accounting and disclosure
requirements for
other-than-temporary
impairment for debt and equity securities became effective for
us. These amendments did not have a material impact on our
consolidated financial statements.
In June 2009, the Financial Accounting Standards Board, or FASB,
issued the FASB Accounting Standards Codification, or the
Codification. The Codification is the single source for all
authoritative GAAP recognized by the FASB to be applied for
financial statements issued for periods ending after
September 15, 2009. The Codification does not change GAAP
and did not have an effect on our financial position, results of
operations or liquidity.
In October 2009, the FASB issued an accounting standard for
multiple-deliverable revenue arrangements, which amends
previously issued guidance to require an entity to use an
estimated selling price when VSOE or acceptable third-party
evidence does not exist for any products or services included in
a multiple element arrangement. The arrangement consideration
should be allocated among the products and services based upon
their relative selling prices, thus eliminating the use of the
residual method of allocation. This standard also requires
expanded qualitative and quantitative disclosures regarding
significant judgments made and changes in applying this
guidance. This standard is effective prospectively for revenue
arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010. Early adoption and
retrospective application are also permitted. We plan to early
adopt the guidance in the fiscal year beginning February 1,
2010. We are currently evaluating the impact of adopting the
provisions of this standard on our financial statements and
related disclosures.
In October 2009, the FASB issued an accounting standard for
certain revenue arrangements that include software elements.
This standard amends previously issued guidance to exclude
tangible products containing software components and
non-software components that function together to deliver the
products essential functionality. Entities that sell joint
hardware and software products that meet this scope exception
will be required to follow the guidance for multiple-deliverable
revenue arrangements. This standard is effective prospectively
for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010. Early
adoption and retrospective application are also permitted. We
are currently evaluating the impact of adopting the provisions
of this standard. We plan to early adopt the guidance in the
fiscal year beginning February 1, 2010. We are currently
evaluating the impact of adopting the provisions of this
standard on our financial statements and related disclosures.
49
From time to time, new accounting pronouncements are issued by
the FASB and subsequently adopted by us as of the specified
effective date. Except for the accounting standards issued in
October 2009 for which we are currently evaluating the impact
and unless otherwise discussed above, we believe that the impact
of recently issued standards, which are not yet effective, will
not have a material impact on our consolidated results of
operations and financial condition upon adoption.
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Foreign
Currency Exchange 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 January 31, 2010, we had
$6.1 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 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 January 31, 2010, we had outstanding foreign currency
forward contracts with an aggregate notional value of
$18.1 million, denominated in euros, British pounds,
Australian dollars and Japanese yen. The
mark-to-market
effect associated with these contracts was an immaterial net
unrealized gain at January 31, 2010. 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
$40.6 million at January 31, 2010, 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, and increases in interest rates may increase future
interest expense.
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.
50
At January 31, 2010, we held ARS with a par value of
$49.7 million that had 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 January 31, 2010.
On November 7, 2008, we accepted an offer from UBS AG, one
of our brokers, which provided us with rights to sell UBS our
ARS investments at par, which were purchased through UBS, at any
time during a two-year period beginning June 30, 2010. As a
result of accepting this offer, we have classified our ARS
position with UBS, totaling a par value of $13.3 million at
January 31, 2010, as short-term assets in our consolidated
balance sheet. We have recorded a gross unrealized loss of
$1.7 million related to impairment of our entire ARS
position. See Note 4 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 1.1% and 3.2% respectively,
the gross unrealized loss would have been $0.5 million or
$5.7 million, respectively. If we had used a term of one to
three years and a discount rate of 1.1% or 3.2%, the gross
unrealized loss would have been $0.9 million or
$3.1 million, respectively. If we had used a term of one to
three years and illiquidity discounts of 1.0% or 2.0%, the gross
unrealized loss would have been $1.1 million or
$2.3 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
to have a material impact on our financial conditions or results
of operations during fiscal 2011.
51
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
NETEZZA
CORPORATION
Index To
Consolidated Financial Statements
52
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Netezza Corporation
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of operations,
stockholders equity (deficit) and of cash flows present
fairly, in all material respects, the financial position of
Netezza Corporation and its subsidiaries at January 31,
2010 and January 31, 2009, and the results of their
operations and their cash flows for each of the three years in
the period ended January 31, 2010 in conformity with
accounting principles generally accepted in the United States of
America. Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial
reporting as of January 31, 2010, based on criteria
established in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The
Companys management is responsible for these financial
statements, for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting, included in
Managements Report on Internal Control over Financial
Reporting appearing under Item 9A. Our responsibility is to
express opinions on these financial statements and on the
Companys internal control over financial reporting based
on our audits (which were integrated audits in 2010 and 2009).
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal
control over financial reporting was maintained in all material
respects. Our audits of the financial statements included
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the
assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our
opinions.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
April 1, 2010
53
NETEZZA
CORPORATION
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands, except share and per share data)
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
40,638
|
|
|
$
|
111,635
|
|
Short-term marketable securities
|
|
|
64,020
|
|
|
|
|
|
Accounts receivable
|
|
|
53,450
|
|
|
|
34,457
|
|
Inventory
|
|
|
28,708
|
|
|
|
18,409
|
|
Deferred tax assets, net
|
|
|
14,490
|
|
|
|
12,723
|
|
Restricted cash
|
|
|
60
|
|
|
|
379
|
|
Prepaid expenses and other current assets
|
|
|
4,675
|
|
|
|
3,160
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
206,041
|
|
|
|
180,763
|
|
Property and equipment, net
|
|
|
8,469
|
|
|
|
9,586
|
|
Deferred tax assets, net
|
|
|
12,048
|
|
|
|
9,415
|
|
Goodwill
|
|
|
2,000
|
|
|
|
2,000
|
|
Intangible assets, net
|
|
|
4,056
|
|
|
|
2,935
|
|
Long-term marketable securities
|
|
|
49,769
|
|
|
|
49,222
|
|
Restricted cash
|
|
|
639
|
|
|
|
739
|
|
Other long-term assets
|
|
|
575
|
|
|
|
4,199
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
283,597
|
|
|
$
|
258,859
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
12,604
|
|
|
$
|
8,424
|
|
Accrued expenses
|
|
|
5,906
|
|
|
|
6,301
|
|
Accrued compensation and benefits
|
|
|
6,776
|
|
|
|
6,352
|
|
Current portion of deferred revenue
|
|
|
49,665
|
|
|
|
46,356
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
74,951
|
|
|
|
67,433
|
|
Long-term deferrred revenue
|
|
|
8,727
|
|
|
|
11,979
|
|
Other long-term liabilities
|
|
|
2,326
|
|
|
|
2,825
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
11,053
|
|
|
|
14,804
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
86,004
|
|
|
|
82,237
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 15)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value; 5,000,000 shares
authorized at January 31, 2010 and 2009; none outstanding
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value; 500,000,000 shares
authorized at January 31, 2010 and 2009, 61,021,370 and
59,760,440 shares issued at January 31, 2010 and 2009,
respectively
|
|
|
61
|
|
|
|
60
|
|
Treasury stock, at cost; 139,062 shares at January 31,
2010 and 2009
|
|
|
(14
|
)
|
|
|
(14
|
)
|
Additional
paid-in-capital
|
|
|
242,901
|
|
|
|
228,658
|
|
Accumulated other comprehensive loss
|
|
|
(1,924
|
)
|
|
|
(4,461
|
)
|
Accumulated deficit
|
|
|
(43,431
|
)
|
|
|
(47,621
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
197,593
|
|
|
|
176,622
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
283,597
|
|
|
$
|
258,859
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements
54
NETEZZA
CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
134,340
|
|
|
$
|
143,463
|
|
|
$
|
102,994
|
|
Services
|
|
|
56,295
|
|
|
|
44,306
|
|
|
|
23,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
190,635
|
|
|
|
187,769
|
|
|
|
126,686
|
|
Cost of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
|
49,856
|
|
|
|
57,350
|
|
|
|
42,527
|
|
Services
|
|
|
14,692
|
|
|
|
12,211
|
|
|
|
7,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
64,548
|
|
|
|
69,561
|
|
|
|
50,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
126,087
|
|
|
|
118,208
|
|
|
|
76,443
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
65,939
|
|
|
|
58,429
|
|
|
|
43,210
|
|
Research and development
|
|
|
41,110
|
|
|
|
32,557
|
|
|
|
23,880
|
|
General and administrative
|
|
|
15,388
|
|
|
|
14,633
|
|
|
|
8,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
122,437
|
|
|
|
105,619
|
|
|
|
76,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
3,650
|
|
|
|
12,589
|
|
|
|
403
|
|
Interest income
|
|
|
952
|
|
|
|
4,045
|
|
|
|
2,971
|
|
Interest expense
|
|
|
90
|
|
|
|
40
|
|
|
|
717
|
|
Other income (expense), net
|
|
|
366
|
|
|
|
(495
|
)
|
|
|
298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense (benefit) and accretion to
preferred stock
|
|
$
|
4,878
|
|
|
$
|
16,099
|
|
|
$
|
2,955
|
|
Income tax expense (benefit)
|
|
|
688
|
|
|
|
(15,420
|
)
|
|
|
961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,190
|
|
|
$
|
31,519
|
|
|
$
|
1,994
|
|
Accretion to preferred stock
|
|
|
|
|
|
|
|
|
|
|
(2,853
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders
|
|
$
|
4,190
|
|
|
$
|
31,519
|
|
|
$
|
(859
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share attributable to common stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.07
|
|
|
$
|
0.53
|
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.07
|
|
|
$
|
0.50
|
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic and
diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
60,447
|
|
|
|
58,967
|
|
|
|
33,989
|
|
Diluted
|
|
|
63,062
|
|
|
|
62,791
|
|
|
|
33,989
|
|
See accompanying Notes to Consolidated Financial Statements
55
NETEZZA
CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Treasury Stock
|
|
|
Paid-in
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Par Value
|
|
|
Shares
|
|
|
Cost
|
|
|
Capital
|
|
|
Income
|
|
|
Deficit
|
|
|
Equity (Deficit)
|
|
|
|
(In thousands, except share amounts)
|
|
|
Balance at January 31, 2007
|
|
|
7,542,372
|
|
|
$
|
8
|
|
|
|
139,062
|
|
|
$
|
(14
|
)
|
|
$
|
|
|
|
$
|
(284
|
)
|
|
$
|
(80,833
|
)
|
|
$
|
(81,123
|
)
|
Issuance of common stock upon exercise of stock options
|
|
|
802,697
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
569
|
|
|
|
|
|
|
|
|
|
|
|
570
|
|
Vesting of restricted common stock
|
|
|
23,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
Issuance of common stock upon exercise of warrants
|
|
|
209,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options issued to consultants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
46
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,271
|
|
|
|
|
|
|
|
|
|
|
|
4,271
|
|
Accretion of preferred stock to redemption value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,552
|
)
|
|
|
|
|
|
|
(301
|
)
|
|
|
(2,853
|
)
|
Conversion of preferred stock to common stock
|
|
|
38,802,036
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
100,473
|
|
|
|
|
|
|
|
|
|
|
|
100,512
|
|
Conversion of preferred stock warrants to common stock warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
494
|
|
|
|
|
|
|
|
|
|
|
|
494
|
|
Proceeds of initial public offering, net of offering expenses
|
|
|
10,350,000
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
112,943
|
|
|
|
|
|
|
|
|
|
|
|
112,953
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(398
|
)
|
|
|
|
|
|
|
(398
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,994
|
|
|
|
1,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 31, 2008
|
|
|
57,729,903
|
|
|
|
58
|
|
|
|
139,062
|
|
|
|
(14
|
)
|
|
|
216,253
|
|
|
|
(682
|
)
|
|
|
(79,140
|
)
|
|
|
136,475
|
|
Issuance of common stock upon exercise of stock options
|
|
|
2,002,829
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
2,699
|
|
|
|
|
|
|
|
|
|
|
|
2,701
|
|
Issuance of restricted common stock
|
|
|
27,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,773
|
|
|
|
|
|
|
|
|
|
|
|
7,773
|
|
Stock options issued to consultants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
Excess tax benefit from stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,919
|
|
|
|
|
|
|
|
|
|
|
|
1,919
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,779
|
)
|
|
|
|
|
|
|
(3,779
|
)
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,519
|
|
|
|
31,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 31, 2009
|
|
|
59,760,440
|
|
|
|
60
|
|
|
|
139,062
|
|
|
|
(14
|
)
|
|
|
228,658
|
|
|
|
(4,461
|
)
|
|
|
(47,621
|
)
|
|
|
176,622
|
|
Issuance of common stock upon exercise of stock options
|
|
|
1,173,122
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
2,290
|
|
|
|
|
|
|
|
|
|
|
|
2,291
|
|
Issuance of restricted common stock
|
|
|
87,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,814
|
|
|
|
|
|
|
|
|
|
|
|
9,814
|
|
Stock options issued to consultants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
47
|
|
Excess tax benefit from stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,092
|
|
|
|
|
|
|
|
|
|
|
|
2,092
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,537
|
|
|
|
|
|
|
|
2,537
|
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,190
|
|
|
|
4,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 31, 2010
|
|
|
61,021,370
|
|
|
$
|
61
|
|
|
|
139,062
|
|
|
$
|
(14
|
)
|
|
$
|
242,901
|
|
|
$
|
(1,924
|
)
|
|
$
|
(43,431
|
)
|
|
$
|
197,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements
56
NETEZZA
CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,190
|
|
|
$
|
31,519
|
|
|
$
|
1,994
|
|
Adjustments to reconcile net income to net cash provided by
(used in)
|
|
|
|
|
|
|
|
|
|
|
|
|
operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
7,248
|
|
|
|
5,388
|
|
|
|
3,300
|
|
Stock-based compensation expense
|
|
|
9,861
|
|
|
|
7,787
|
|
|
|
4,317
|
|
Excess tax benefit from stock-based compensation
|
|
|
360
|
|
|
|
|
|
|
|
|
|
Benefit from deferred income taxes, net
|
|
|
(2,832
|
)
|
|
|
(20,786
|
)
|
|
|
|
|
Gain on bargain purchase from acquisition of business
|
|
|
(365
|
)
|
|
|
|
|
|
|
|
|
Change in carrying value of preferred stock warrant liability
|
|
|
|
|
|
|
|
|
|
|
257
|
|
Noncash interest expense related to issuance of warrants
|
|
|
|
|
|
|
|
|
|
|
183
|
|
Loss (gain) on trading securities
|
|
|
(1,387
|
)
|
|
|
1,551
|
|
|
|
|
|
Loss (gain) on auction rate securities written put right
|
|
|
1,172
|
|
|
|
(1,324
|
)
|
|
|
|
|
Impairment of other long-term assets
|
|
|
467
|
|
|
|
800
|
|
|
|
|
|
Changes in assets and liabilities, net of acquisitions
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(18,887
|
)
|
|
|
(11,563
|
)
|
|
|
12,152
|
|
Inventory
|
|
|
(10,989
|
)
|
|
|
10,490
|
|
|
|
(8,763
|
)
|
Other assets
|
|
|
(1,094
|
)
|
|
|
680
|
|
|
|
(2,748
|
)
|
Accounts payable
|
|
|
3,947
|
|
|
|
2,995
|
|
|
|
(7,154
|
)
|
Accrued compensation and benefits
|
|
|
343
|
|
|
|
1,175
|
|
|
|
856
|
|
Accrued expenses
|
|
|
(149
|
)
|
|
|
3,556
|
|
|
|
1,111
|
|
Deferred revenue
|
|
|
(156
|
)
|
|
|
9,182
|
|
|
|
21,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
(8,271
|
)
|
|
|
41,450
|
|
|
|
26,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of investments
|
|
|
(72,898
|
)
|
|
|
(7,377
|
)
|
|
|
(134,449
|
)
|
Sales and maturities of investments
|
|
|
11,525
|
|
|
|
43,854
|
|
|
|
43,832
|
|
Acquisition of business, net of cash acquired
|
|
|
(2,007
|
)
|
|
|
(6,221
|
)
|
|
|
|
|
Purchases of property and equipment
|
|
|
(3,348
|
)
|
|
|
(5,751
|
)
|
|
|
(1,142
|
)
|
Change in other long-term assets
|
|
|
(1,000
|
)
|
|
|
(3,682
|
)
|
|
|
|
|
Decrease (increase) in restricted cash
|
|
|
455
|
|
|
|
(739
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(67,273
|
)
|
|
|
20,084
|
|
|
|
(91,759
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from note payable
|
|
|
|
|
|
|
|
|
|
|
8,000
|
|
Repayment of note payable
|
|
|
|
|
|
|
|
|
|
|
(14,639
|
)
|
Proceeds from issuance of common stock, net
|
|
|
2,291
|
|
|
|
2,701
|
|
|
|
113,523
|
|
Excess tax benefit from stock-based compensation
|
|
|
1,800
|
|
|
|
1,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
4,091
|
|
|
|
4,620
|
|
|
|
106,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(71,453
|
)
|
|
|
66,154
|
|
|
|
42,062
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
456
|
|
|
|
(703
|
)
|
|
|
(896
|
)
|
Cash and cash equivalents, beginning of year
|
|
|
111,635
|
|
|
|
46,184
|
|
|
|
5,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
40,638
|
|
|
$
|
111,635
|
|
|
$
|
46,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
|
|
|
$
|
|
|
|
$
|
588
|
|
Cash paid for taxes
|
|
$
|
576
|
|
|
$
|
1,771
|
|
|
$
|
288
|
|
See accompanying Notes to Consolidated Financial Statements
57
NETEZZA
CORPORATION
|
|
1.
|
Nature of
the Business
|
Netezza Corporation (the Company) is a provider of
data warehouse, analytic and monitoring appliances. The
Companys
TwinFintm
and
Skimmertm
data warehouse products, which replace the Netezza Performance
Server, or NPS family of data warehouses, integrate database,
server and storage platforms in a purpose-built unit to enable
detailed queries and analyses on large volumes of stored data.
The Company also offers its
Mantra®
database activity-monitoring appliance that provides a solution
for the monitoring and auditing of access to this critical
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 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 consolidated financial
statements in conformity with accounting principles generally
accepted in the United States of America (GAAP).
Use of
Estimates
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.
Cash,
Cash Equivalents and Restricted Cash
The Company considers all highly liquid investments with an
original or remaining maturity of three months or less at the
time of purchase to be cash equivalents. Cash equivalents and
restricted cash consist primarily of investments in money market
funds, U.S. treasury and government agency securities and
certificates of deposit of major financial institutions.
Accordingly, investments are subject to minimal credit and
market risk. At January 31, 2010 and January 31, 2009,
cash equivalents were comprised of money market funds totaling
$22.7 million and $97.4 million, respectively.
Restricted cash consists of certificates of deposit required to
be maintained by the Company under letters of credit to comply
with the requirements of office space lease agreements. The
letters of credit totaled $0.7 million and
$1.1 million at January 31, 2010 and January 31,
2009, respectively.
Fair
Value of Financial Measurements
The Company measures certain financial assets and liabilities at
fair value based on 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
58
NETEZZA
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
market for the asset or liability in an orderly transaction
between market participants on the measurement date. The Company
has certain financial assets and liabilities recorded at fair
value which consist primarily of cash equivalents, investments,
and foreign currency forward contracts. See Note 4 for a
further discussion on fair value of financial measurements of
these assets and liabilities.
The carrying amounts reflected in the consolidated balance
sheets for accounts receivable, other current assets, accounts
payable, and accrued expenses and accrued compensation and
benefits approximate fair values due to their short-term
maturities.
Investments
The Company accounts for and classifies its investments as
either
held-to-maturity,
available-for-sale,
or trading. The determination of the appropriate
classification by the Company is based on a variety of factors,
including managements intent at the time of purchase.
Held-to-maturity
securities are those securities which the Company has the
ability and intent to hold until maturity and are recorded at
amortized cost, adjusted for the amortization or accretion of
premiums or discounts. Premiums and discounts are amortized or
accreted over the life of the related
held-to-maturity
security as an adjustment to yield using the effective interest
method. At January 31, 2010, the Company had no investments
which were classified as
held-to-maturity.
Available-for-sale
securities are those securities which the Company views as
available for use in current operations.
Available-for-sale
investments are stated at fair value with their unrealized gains
and losses included as a separate component of
stockholders equity entitled Accumulated other
comprehensive loss, until such gains and losses are
realized. At January 31, 2010, the Company had
$100.6 million of investments which were classified as
available-for-sale.
Trading securities are those securities which are bought and
held principally for the purpose of selling them in the near
term. Accordingly, these securities are classified as short-term
investments, even though the stated maturity date may be one
year or more beyond the current balance sheet date. Trading
securities are stated at fair value with their unrealized gains
and losses included in current earnings. At January 31,
2010, the Company had $13.2 million of investments which
were classified as trading.
On February 1, 2009, the Company adopted an accounting
standard which permits companies to choose to measure certain
financial assets and liabilities at fair value (the fair
value option). If the fair value option is elected, any
upfront costs and fees related to the item must be recognized in
earnings and cannot be deferred. The fair value election is
irrevocable and may generally be made on an
instrument-by-instrument
basis, even if a company has similar instruments that it elects
not to fair value. At the adoption date, unrealized gains and
losses on existing items for which fair value has been elected
are reported as a cumulative adjustment to beginning retained
earnings. The Company chose not to elect the fair value option
for its financial assets and liabilities existing on
February 1, 2008, and did not elect the fair value option
for any financial assets and liabilities transacted during the
fiscal years ended January 31, 2010 and January 31,
2009, except for the put right related to the Companys
auction rate securities (see Note 4).
Gross realized gains and losses are determined on the specific
identification method and are included in interest income in the
statement of operations. During the fiscal years ended
January 31, 2010, 2009 and 2008, realized gains were
$0.0 million, $0.3 million and $0.3 million,
respectively. Interest income is accrued as earned.
Investment
in Pi Solutions
In the second and third quarter of fiscal 2009, the Company
invested $0.8 million in Pi Solutions, a third-party
company that develops and markets analytics applications. This
investment entitles the Company to a series of preferred stock
of Pi Solutions, and is accounted for using the cost method.
59
NETEZZA
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company regularly monitored this investment to determine if
facts and circumstances have changed in a manner that would
require a change in accounting methodology. Additionally, the
Company regularly evaluated whether or not this investment had
been impaired by considering such factors as economic
environment, market conditions, operational performance and
other specific factors relating to the business underlying the
investment. In connection with this evaluation, the Company
determined that its investment was impaired and recorded an
impairment charge of $0.8 million in the fourth quarter of
fiscal 2009 to reduce the carrying value of the investment to $0
as of both January 31, 2010 and January 31, 2009. The
impairment charge is included in sales and marketing and
research and development in the Statement of Operations for the
fiscal year ended January 31, 2009 in the amounts of
$0.4 million and $0.4 million, respectively.
Derivatives
The Company applies accounting and reporting standards for
derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. All
derivatives, whether designated in a hedging relationship or
not, are required to be recorded on the balance sheet at fair
value. Changes in the derivatives fair value must be
recognized currently in earnings unless specific hedge
accounting criteria are met, and the Company must formally
document, designate, and assess the effectiveness of
transactions that receive hedge accounting. The effectiveness of
the derivative as a hedging instrument is based on changes in
its market value being highly correlated with changes in the
market value of the underlying hedged item.
Derivatives are financial instruments whose values are derived
from one or more underlying financial instruments, such as
foreign currency. The Company enters into derivative
transactions, specifically foreign currency forward contracts,
to manage the Companys exposure to fluctuations in foreign
exchange rates that arise, primarily from the Companys
foreign currency-denominated receivables and payables. The
contracts are in euros, British pounds, Australian dollars and
Japanese yen, 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. The Company does not enter into or hold derivatives
for trading or speculative purposes. Generally, the Company does
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 the Company enters 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 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 January 31, 2010, the Company had outstanding foreign
currency forward contracts with an aggregate notional value of
$18.1 million, denominated in euros, British pounds,
Australian dollars and Japanese yen. The
mark-to-market
effect associated with these contracts was an immaterial net
unrealized gain at January 31, 2010. 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.
Inventory
Inventories are stated at the lower of standard cost or market
value. Cost is determined by average costing and market value
represents the lower of replacement cost or estimated net
realizable value. The Company regularly monitors inventory
quantities on-hand and records write-downs for excess and
obsolete inventories based on the Companys estimated
demand for its products, potential obsolescence of technology,
product life cycles and whether pricing trends or forecasts
indicate that the carrying value of inventory exceeds its
estimated selling price. These factors are impacted by market
and economic conditions, technology changes, and new product
introductions and require estimates that may include elements
that are uncertain. If inventory is written down, a new cost
basis will be established that cannot be increased in future
periods.
60
NETEZZA
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Property
and Equipment
Property and equipment are recorded at cost and consist
primarily of engineering test equipment and computer equipment
and software. Depreciation is computed using the straight-line
method over the estimated useful lives as follows:
|
|
|
|
|
|
|
Estimated
|
|
|
|
Useful Life
|
|
|
Engineering test equipment
|
|
|
1 to 5 years
|
|
Computer equipment and software
|
|
|
3 years
|
|
Furniture and fixtures
|
|
|
5 years
|
|
Leasehold improvements
|
|
|
Shorter of useful life or term of lease
|
|
Expenditures for additions, renewals and betterments of property
and equipment are capitalized. Expenditures for repairs and
maintenance are charged to expense as incurred. As assets are
retired or sold, the related cost and accumulated depreciation
are removed from the accounts and any resulting gain or loss is
credited or charged to operations.
Goodwill
and Acquired Intangible Assets
Intangible assets are valued based on estimates of future cash
flows and amortized over their estimated useful lives. The
Company evaluates goodwill and intangible assets for impairment
annually and when events occur or circumstances change that may
reduce the value of the asset below its carrying amount using
forecasts of discounted future cash flows. For purposes of
assessing goodwill for potential impairment, the Company has
determined that it has one reporting unit based on the
Companys organizational structure and reporting. Events or
circumstances that might require an interim evaluation include
unexpected adverse business conditions, economic factors,
unanticipated technological changes or competitive activities,
loss of key personnel and acts by governments and courts.
Estimates of future cash flows require assumptions related to
revenue and operating income growth, asset-related expenditures,
working capital levels and other factors. Different assumptions
from those made in the Companys analysis could materially
affect projected cash flows and our evaluation of goodwill for
impairment. Should the fair value of our goodwill decline
because of reduced operating performance, market declines, or
other indicators of impairment, or as a result of changes in the
discount rate, charges for impairment may be necessary.
Impairment
of Long-Lived Assets
The Company periodically evaluates the recoverability of
long-lived assets whenever events and changes in circumstances
indicate that the carrying amount of an asset may not be fully
recoverable. When indicators of impairment are present, the
carrying values of the assets are evaluated in relation to the
operating performance and future undiscounted cash flows of the
underlying business. The net book value of the underlying asset
is adjusted to fair value if the sum of the expected discounted
cash flows is less than book value. Fair values are based on
estimates of market prices and assumptions concerning the amount
and timing of estimated future cash flows and assumed discount
rates, reflecting varying degrees of perceived risk.
Revenue
Recognition
The Company derives revenue from the sale of its products and
related services. Revenue is recognized when persuasive evidence
of an arrangement exists, delivery has occurred, the sales price
is fixed or determinable and collectability of the related
receivable is probable. This policy is applicable to all revenue
transactions, including sales to resellers and end users. The
following summarizes the major terms of the Companys
contractual relationships with end users and resellers and the
manner in which these transactions are accounted.
The Companys product offerings include the sale of
hardware with its embedded propriety software. Revenue from
these transactions is recognized upon shipment unless shipping
terms or local laws do not allow the title and
61
NETEZZA
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
risk of loss to transfer at shipping point. In those cases, the
Company defers revenue until title and risk of loss transfer to
the customer. The Company does not customarily offer a right of
return on its product sales and any acceptance criteria is
normally based upon published specifications. In cases where a
right of return is granted, the Company defers revenue until
such rights expire. If acceptance criteria are not based on
published specifications with which the Company can ensure
compliance, the Company defers revenue until acceptance has been
confirmed or the right of return expires. Customers may purchase
a standard maintenance agreement which typically commences upon
product delivery. The Company also provides a
90-day
standard product warranty.
The Companys service revenue consists of installation,
maintenance, training and professional services. Installation
and professional services are not considered essential to the
functionality of the Companys products as these services
do not customize or alter the product capabilities and could be
performed by customers or third party vendors. Installation and
professional services revenue is recognized upon completion of
installation or requested services. Maintenance revenue is
recognized ratably over the contract period. Training revenue is
recognized upon the completion of the training or expiration.
The Companys service revenue also consists of software
customization and consulting service contracts. Services
revenues are recognized either as services are performed and
billed to customers for time and material arrangements or on the
percentage-of-completion
method for fixed fee contracts.
Percentage-of-completion
is measured by the percentage of software customization or
consulting hours incurred to date to total estimated hours. This
method is used because management has determined that past
experience has shown expended hours to be the best measure of
progress on these engagements. Revisions in total estimated
hours are reflected in the accounting period in which the
required revisions become known. Anticipated losses on contracts
are charged to income in their entirety when such losses become
evident.
The Company enters into multiple element arrangements in the
normal course of business with its customers. Elements in such
arrangements are recognized when delivered and the amount
allocated to each element is based on vendor specific objective
evidence of fair value (VSOE). VSOE is determined
based upon the amount charged when an element is sold
separately. VSOE of the fair value of maintenance services may
also be determined based on a substantive maintenance renewal
clause, if any, within a customer contract. The Companys
current pricing practices are influenced primarily by product
type, purchase volume and maintenance term. The Company reviews
services revenue sold separately and maintenance renewal rates
on a periodic basis and update, when appropriate; the
Companys VSOE of fair value for such services to ensure
that it reflects the Companys recent pricing experience.
When VSOE exists for undelivered elements but not for the
delivered elements, the Company uses the residual
method. Under the residual method, the fair values of the
undelivered elements are initially deferred. The residual
contract amount is then allocated to and recognized for the
delivered elements. Thereafter, the amount deferred for the
undelivered element is recognized when those elements are
delivered. For arrangements in which VSOE does not exist for
each undelivered element, revenue for the entire arrangement is
deferred and not recognized until delivery of all the elements
without VSOE has occurred, unless the only undelivered element
is maintenance in which case the entire contract is recognized
ratably over the maintenance period.
For sales through resellers and distributors, the Company
delivers the product directly to the end user customer to which
the product has been sold. Revenue recognition on reseller and
distributor arrangements is accounted for as described above.
Shipping
and Handling Costs
Shipping and handling costs are classified in cost of product
revenue.
Research
and Development
Costs incurred in research and development, which consist
primarily of salaries and employee benefits, product prototype
expenses, allocated facilities expenses and depreciation of
equipment used in research and
62
NETEZZA
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
development activities of the Companys products, are
expensed as incurred, except certain software development costs.
Costs associated with the development of computer software are
expensed as incurred prior to the establishment of technological
feasibility. Costs incurred subsequent to the establishment of
technological feasibility and prior to the date when the
software is
available-for-sale
are capitalized. No software development costs have been
capitalized to date since costs incurred between the
establishment of technological feasibility and the
softwares
available-for-sale
date have been insignificant.
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
gains (losses) for the fiscal years ended January 31, 2010,
2009 and 2008 were $(0.3) million, $(0.4) million and
$0.7 million, respectively and were recorded as other
income (expense), net in the 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 January 31,
2010, two customers accounted for 16% and 15% of accounts
receivable, while three customers accounted for 15%, 11% and 10%
of accounts receivable at January 31, 2009. No customers
accounted for 10% or more of the Companys total revenue
for the fiscal year ended January 31, 2010, one customer
accounted for 16% of the Companys total revenue for the
fiscal year ended January 31, 2009, and one customer
accounted for 10% of the Companys total revenue for the
fiscal year ended January 31, 2008.
Stock-Based
Compensation
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 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.
For stock options and restricted stock granted to employees 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 January 31, 2010, the Company recognizes
compensation cost on a graded-vesting basis over the
awards expected vesting periods.
63
NETEZZA
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company accounts for stock-based compensation expense for
non-employees using the fair value method which requires the
award to be re-measured at each reporting date until the award
is fully vested. The Company estimates the fair value using the
Black-Scholes option pricing model, and records the fair value
of non-employee stock options as an expense using the
graded-vesting basis over the term of the option.
The fair value of each option granted during the fiscal years
ended January 31, 2010, 2009 and 2008 was estimated on the
date of grant using the Black-Scholes option-pricing model with
the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
Dividend yield
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
Expected volatility
|
|
|
56.6
|
%
|
|
|
47.5
|
%
|
|
|
68.3
|
%
|
Risk-free interest rate
|
|
|
2.1
|
%
|
|
|
2.6
|
%
|
|
|
4.4
|
%
|
Expected life (in years)
|
|
|
5.0
|
|
|
|
5.0
|
|
|
|
6.2
|
|
Weighted-average fair value at grant date
|
|
$
|
3.59
|
|
|
$
|
4.41
|
|
|
$
|
4.25
|
|
Beginning in the third quarter of fiscal year 2009, the expected
volatility assumption used in the Black-Scholes option-pricing
model was based on the historical trading activity of the
Companys common stock and an analysis of peer group
volatility. Prior to the third quarter of fiscal year 2009, the
Companys expected volatility assumption was based on peer
group volatility. The expected life assumption is based on the
simplified method. The simplified method is based on the vesting
period and contractual term for each vesting tranche of awards.
The mid-point between the vesting date and the expiration date
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. Management has 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 consolidated statements of
operations for the fiscal years ended January 31, 2010,
2009 and 2008 relating to stock-based compensation are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Cost of product
|
|
$
|
49
|
|
|
$
|
176
|
|
|
$
|
94
|
|
Cost of services
|
|
|
393
|
|
|
|
227
|
|
|
|
116
|
|
Sales and marketing
|
|
|
3,268
|
|
|
|
2,535
|
|
|
|
1222
|
|
Research and development
|
|
|
2,793
|
|
|
|
2,067
|
|
|
|
1007
|
|
General and administrative
|
|
|
3,311
|
|
|
|
2,768
|
|
|
|
1832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,814
|
|
|
$
|
7,773
|
|
|
$
|
4,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss) Per Share
The Company computes basic net income (loss) per share
attributable to common stockholders by dividing its net income
(loss) attributable to common stockholders for the period by the
weighted average number of common shares outstanding during the
period. Net income (loss) attributable to common stockholders is
calculated using the two-class method; however, preferred stock
dividends were not included in the Companys diluted net
income (loss) per share for fiscal year 2008 calculation because
to do so would be anti-dilutive.
64
NETEZZA
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The components of the net income (loss) per share attributable
to common stockholders were as follows (in thousands except per
share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net income (loss) attributable to common stockholders
|
|
$
|
4,190
|
|
|
$
|
31,519
|
|
|
$
|
(859
|
)
|
Weighted average shares used to compute net income (loss) per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
60,447
|
|
|
|
58,967
|
|
|
|
33,989
|
|
Dilutive options to purchase common stock
|
|
|
2,615
|
|
|
|
3,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
63,062
|
|
|
|
62,791
|
|
|
|
33,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share attributable to common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.07
|
|
|
$
|
0.53
|
|
|
$
|
(0.03
|
)
|
Diluted
|
|
$
|
0.07
|
|
|
$
|
0.50
|
|
|
$
|
(0.03
|
)
|
The following stock options and warrants to purchase common
stock have been excluded from the computation of diluted net
loss per share for the periods presented because including the
stock options and warrants would be anti-dilutive.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
Warrants to purchase common stock
|
|
|
|
|
|
|
35
|
|
|
|
35
|
|
Options to purchase common stock
|
|
|
7,431
|
|
|
|
5,331
|
|
|
|
9,380
|
|
Advertising
Expense
The Company expenses advertising costs as they are incurred.
During the fiscal years ended January 31, 2010, 2009 and
2008, advertising expense totaled $0.4 million,
$0.2 million and $0.3 million, respectively.
Income
Taxes
The Company records income taxes using the asset and liability
method. Deferred income tax assets and liabilities are
recognized for future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective income tax
bases, and operating loss and tax credit carryforwards. The
Companys consolidated financial statements contain certain
deferred tax assets related to temporary differences between
financial and tax accounting. The Company is required to
establish a valuation allowance if the likelihood of realization
of the deferred tax assets is not more-likely-than-not, based on
an evaluation of objective verifiable evidence. Significant
management judgment is required in determining the
Companys provision for income taxes, the Companys
deferred tax assets and liabilities and any valuation allowance
recorded against those net deferred tax assets. The Company
evaluates the weight of all available evidence to determine
whether it is more likely than not that some portion or all of
the net deferred income tax assets will not be realized.
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. Accumulated other comprehensive
loss consists of foreign exchange gains and losses and net
unrealized gains or losses from investments.
65
NETEZZA
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The components of comprehensive income are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net income
|
|
$
|
4,190
|
|
|
$
|
31,519
|
|
|
$
|
1,994
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency adjustment, net of tax of $0
|
|
|
168
|
|
|
|
(105
|
)
|
|
|
(670
|
)
|
Net unrealized gain (loss) from investments, net of tax of $0
|
|
|
2,369
|
|
|
|
(3,674
|
)
|
|
|
272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$
|
6,727
|
|
|
$
|
27,740
|
|
|
$
|
1,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss consists of the following
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of January 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Foreign currency adjustment
|
|
$
|
(891
|
)
|
|
$
|
(1,059
|
)
|
Net unrealized gain (loss) from investments
|
|
|
(1,033
|
)
|
|
|
(3,402
|
)
|
|
|
|
|
|
|
|
|
|
Total accumulated other comprehensive loss
|
|
$
|
(1,924
|
)
|
|
$
|
(4,461
|
)
|
|
|
|
|
|
|
|
|
|
Recent
Accounting Pronouncements
In February 2009, the Company adopted the authoritative guidance
for the fair value measurement of all non-financial assets and
non-financial liabilities, which are recognized or disclosed at
fair value in the financial statements on a non-recurring basis.
This adoption did not have a material impact on the
Companys consolidated financial statements.
In February 2009, the Company adopted an amendment to the
accounting and disclosure requirements for unvested share-based
payment awards that contain nonforfeitable rights to dividends
or dividend equivalents (whether paid or unpaid). Under this
amendment, these awards 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). The adoption did not have a
material impact on the Companys consolidated financial
statements.
In February 2009, an amendment to the accounting and disclosure
requirements for business combinations became effective for the
Company. This amendment 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 7) was accounted for under this
amendment. This amendment may have a material impact on the
Companys consolidated financial statements if or when the
Company enters into future business combinations.
In February 2009, a statement that changes the accounting and
reporting for minority interests, which are now recharacterized
as noncontrolling interests and classified as a component of
equity, became effective for the Company. This new consolidation
method significantly changes the accounting for transactions
with noncontrolling interest holders. As of January 31,
2010, the Company did not have any noncontrolling interests.
In June 2009, the Company adopted pronouncements that require
disclosures about fair value of financial instruments in interim
as well as in annual financial statements. The adoption of these
pronouncements did not have a material impact on the
Companys consolidated financial statements.
66
NETEZZA
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In June 2009, a pronouncement that provides guidelines for
making fair value measurements became effective for the Company.
The pronouncement 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. The pronouncement did not have a material
impact on the Companys consolidated financial statements.
In June 2009, amendments to the accounting and disclosure
requirements for
other-than-temporary
impairment for debt and equity securities became effective for
the Company. These amendments did not have a material impact on
the Companys consolidated financial statements.
In June 2009, the Financial Accounting Standards Board
(FASB) issued the FASB Accounting Standards
Codification (Codification). The Codification is the
single source for all authoritative GAAP recognized by the FASB
to be applied for financial statements issued for periods ending
after September 15, 2009. The Codification does not change
GAAP and did not have an effect on the Companys financial
position, results of operations or liquidity.
In October 2009, the FASB issued an accounting standard for
multiple-deliverable revenue arrangements, which amends
previously issued guidance to require an entity to use an
estimated selling price when VSOE or acceptable third-party
evidence does not exist for any products or services included in
a multiple element arrangement. The arrangement consideration
should be allocated among the products and services based upon
their relative selling prices, thus eliminating the use of the
residual method of allocation. This standard also requires
expanded qualitative and quantitative disclosures regarding
significant judgments made and changes in applying this
guidance. This standard is effective prospectively for revenue
arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010. Early adoption and
retrospective application are also permitted. The Company plans
to early adopt the guidance in the fiscal year beginning
February 1, 2010. The Company is currently evaluating the
impact of adopting the provisions of this standard on the
financial statements and related disclosures.
In October 2009, the FASB issued an accounting standard for
certain revenue arrangements that include software elements.
This standard amends previously issued guidance to exclude
tangible products containing software components and
non-software components that function together to deliver the
products essential functionality. Entities that sell joint
hardware and software products that meet this scope exception
will be required to follow the guidance for multiple-deliverable
revenue arrangements. This standard is effective prospectively
for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010. Early
adoption and retrospective application are also permitted. The
Company plans to early adopt the guidance in the fiscal year
beginning February 1, 2010. The Company is currently
evaluating the impact of adopting the provisions of this
standard on the financial statements and related disclosures.
From time to time, new accounting pronouncements are issued by
the FASB and subsequently adopted by the Company as of the
specified effective date. Except for the accounting standards
issued in October 2009 for which the Company is currently
evaluating the impact and unless otherwise discussed above, 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.
|
Initial
Public Offering
|
On July 24, 2007, the Company closed its initial public
offering of 10,350,000 shares of common stock at an
offering price of $12.00 per share, raising proceeds of
approximately $113.0 million, net of underwriting discounts
and expenses.
At the close of the initial public offering, the Companys
outstanding shares of convertible redeemable preferred stock
were automatically converted into 38,802,036 shares of
common stock and warrants to purchase convertible, redeemable
preferred stock were converted into warrants to purchase
58,000 shares of common stock.
67
NETEZZA
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
4.
|
Fair
Value Measurements
|
On February 1, 2008, the Company adopted a newly issued
accounting standard for its financial assets and liabilities
measured at fair value on a recurring basis. On February 1,
2009, the Company adopted the remaining provisions of the
standard 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.
The accounting standard for fair value measurements provides a
framework for measuring fair value under GAAP and requires
expanded disclosures regarding fair value measurements. Fair
value is defined 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. The accounting standard 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 January 31, 2010 and
January 31, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classification on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Aggregate
|
|
|
Short Term
|
|
|
Long Term
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Marketable
|
|
|
Marketable
|
|
January 31, 2010
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Securities
|
|
|
Securities
|
|
|
Available-for-sale
U.S. treasury and government agency securities
|
|
$
|
65,879
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
65,879
|
|
|
$
|
50,860
|
|
|
$
|
15,019
|
|
Available-for-sale
auction rate securities
|
|
$
|
36,325
|
|
|
$
|
|
|
|
$
|
(1,575
|
)
|
|
$
|
34,750
|
|
|
$
|
|
|
|
$
|
34,750
|
|
Trading auction rate securities
|
|
$
|
13,325
|
|
|
$
|
|
|
|
$
|
(165
|
)
|
|
$
|
13,160
|
|
|
$
|
13,160
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
115,529
|
|
|
$
|
|
|
|
$
|
(1,740
|
)
|
|
$
|
113,789
|
|
|
$
|
64,020
|
|
|
$
|
49,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classification on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Aggregate
|
|
|
Short Term
|
|
|
Long Term
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Marketable
|
|
|
Marketable
|
|
January 31, 2009
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Securities
|
|
|
Securities
|
|
|
Auction Rate Securities
|
|
$
|
54,175
|
|
|
$
|
|
|
|
$
|
(4,953
|
)
|
|
$
|
49,222
|
|
|
$
|
|
|
|
$
|
49,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
54,175
|
|
|
$
|
|
|
|
$
|
(4,953
|
)
|
|
$
|
49,222
|
|
|
$
|
|
|
|
$
|
49,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All gross unrealized losses in the table above are unrealized
losses for greater than twelve months.
68
NETEZZA
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table details the fair value measurements within
the fair value hierarchy of the Companys financial assets
at January 31, 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
|
|
|
|
Total Fair Value at
|
|
|
Reporting Date Using
|
|
|
|
January 31, 2010
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
22,650
|
|
|
$
|
22,650
|
|
|
$
|
|
|
|
$
|
|
|
U.S. treasury and government agency securities
|
|
|
73,879
|
|
|
|
73,879
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
|
699
|
|
|
|
699
|
|
|
|
|
|
|
|
|
|
Auction rate securities
|
|
|
47,910
|
|
|
|
|
|
|
|
|
|
|
|
47,910
|
|
Put right related to auction rate securities
|
|
|
151
|
|
|
|
|
|
|
|
|
|
|
|
151
|
|
Foreign currency forward contracts
|
|
|
11
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
145,300
|
|
|
$
|
97,228
|
|
|
$
|
11
|
|
|
$
|
48,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Transfers in from Level 1
|
|
|
|
|
Unrealized gains included in accumulated other comprehensive loss
|
|
|
1,826
|
|
Unrealized gains included in other income (expense), net
|
|
|
1,387
|
|
Sales of securities
|
|
|
(4,525
|
)
|
|
|
|
|
|
Balance as of January 31, 2009
|
|
$
|
47,910
|
|
|
|
|
|
|
At January 31, 2010 ARS represented 33% of total financial
assets measured at fair value.
At January 31, 2010, the Company grouped money market funds
and certificates of deposit using a Level 1 valuation
because market prices were readily available. At
January 31, 2010, 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 January 31,
2010, the fair value of the Companys assets grouped using
a Level 3 valuation consisted of auction rate securities
(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, however, 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 the Companys
inability to quickly liquidate these investments, the Company
has reclassified those investments with failed auctions and
which have not been subsequently liquidated as long-term assets
in its consolidated balance sheet based on managements
estimate of its inability to liquidate these investments within
the next twelve months. Due to these liquidity issues, the
Company performed a discounted cash flow analysis to determine
the estimated 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
69
NETEZZA
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
interest rates, collateralization of underlying security
investments and the creditworthiness of the issuer. The
discounted cash flow analysis at January 31, 2010 included
the following assumptions:
|
|
|
Expected Term
|
|
1-3 Years
|
Illiquidity Discount
|
|
1.5-1.8%
|
Discount Rate
|
|
1.1-2.1%
|
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
(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. The Company has
classified its ARS positions with UBS, totaling
$13.2 million at January 31, 2010, as short-term
marketable securities in the Companys consolidated balance
sheet. 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 for accounting for financial assets and
liabilities 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 fair
value of the Put Right, $1.3 million, as an unrealized gain
in other income (expense), net in the fiscal year
ended January 31, 2009. The Company recorded the changes in
the fair value of the Put Right during the fiscal year ended
January 31, 2010 of approximately $(1.1) million as
unrealized 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 an other current 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.
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, cash equivalents
and marketable securities balance of approximately
$106.5 million in investments other than ARS, and that the
Company expects 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 does 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 January 31, 2010, the Company recorded an unrealized
loss of $1.6 million related to the temporary impairment of
the
available-for-sale
securities, which was included in accumulated other
comprehensive loss within stockholders equity.
70
NETEZZA
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Inventory consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of January 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Raw materials
|
|
$
|
2,102
|
|
|
$
|
770
|
|
Finished goods
|
|
|
26,606
|
|
|
|
17,639
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
28,708
|
|
|
$
|
18,409
|
|
|
|
|
|
|
|
|
|
|
|
|
6.
|
Property
and Equipment
|
Property and equipment consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of January 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Engineering test equipment
|
|
$
|
19,494
|
|
|
$
|
17,015
|
|
Computer equipment and software
|
|
|
6,499
|
|
|
|
5,508
|
|
Furniture and fixtures
|
|
|
973
|
|
|
|
860
|
|
Leasehold improvements
|
|
|
753
|
|
|
|
754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,719
|
|
|
|
24,137
|
|
Less: accumulated depreciation
|
|
|
19,250
|
|
|
|
14,551
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,469
|
|
|
$
|
9,586
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for the fiscal years ended January 31,
2010, 2009 and 2008, was $5.3 million, $4.5 million,
and $3.3 million, respectively. During the fiscal year
ended January 31, 2010, 2009 and 2008, the Company disposed
of property and equipment with an original cost of
$0.7 million, $0.4 million, and $0.0 million,
respectively, resulting in a net gain on disposal of
$0.0 million in each of the fiscal years. During the fiscal
years ended January 31, 2010, 2009 and 2008,
$0.7 million, $2.7 million and $3.4 million of
inventory was reclassified to fixed assets representing a non
cash increase in property and equipment respectively.
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
71
NETEZZA
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
operations for the fiscal year ended January 31, 2010. The
acquisition was accounted for using the acquisition method of
accounting. 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 in
the fiscal year ended January 31, 2010, 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 fiscal
years ended January 31, 2010 and
72
NETEZZA
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2009, giving effect to the merger as if it occurred on
February 1, 2009 and 2008, respectively (in thousands,
except per share data):
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
January 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Pro forma revenue
|
|
$
|
190,690
|
|
|
$
|
189,721
|
|
Pro forma operating income
|
|
$
|
2,904
|
|
|
$
|
(6,461
|
)
|
Pro forma net income
|
|
$
|
3,443
|
|
|
$
|
26,600
|
|
Pro forma basic net income per share
|
|
$
|
0.06
|
|
|
$
|
0.45
|
|
Pro forma diluted net income per share
|
|
$
|
0.05
|
|
|
$
|
0.42
|
|
The pro forma net income and net income per share for each
period presented primarily includes adjustments for amortization
of intangibles, interest income and interest expense. 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.
|
|
8.
|
Goodwill
and Acquired Intangible Assets
|
Goodwill
The carrying amount of goodwill of the Company was
$2.0 million as of both January 31, 2010 and
January 31, 2009. The Companys goodwill resulted from
the acquisition of NuTech Solutions, Inc. in May 2008. 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 Company considers its business to
be one reporting unit for purposes of performing its goodwill
impairment analysis. The Companys annual goodwill
impairment test did not result in an impairment in fiscal 2009
or 2010.
There was no change in the carrying amount of goodwill for the
fiscal year ended January 31, 2010.
Acquired
Intangible Assets
The carrying amount of acquired intangible assets was
$4.1 million as of January 31, 2010 and
$2.9 million as of January 31, 2009. Intangible assets
acquired in a business combination are recorded under the
purchase 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
January 31, 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Cost
|
|
|
Amortization
|
|
|
Net
|
|
|
Developed technology
|
|
$
|
3,210
|
|
|
$
|
(677
|
)
|
|
$
|
2,533
|
|
Order backlog
|
|
|
300
|
|
|
|
(260
|
)
|
|
|
40
|
|
Customer relationships
|
|
|
1,460
|
|
|
|
(405
|
)
|
|
|
1,055
|
|
Trademark and tradename
|
|
|
590
|
|
|
|
(162
|
)
|
|
|
428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,560
|
|
|
$
|
(1,504
|
)
|
|
$
|
4,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of acquired intangible assets was approximately
$1.0 million and $0.5 million for the fiscal years
ended January 31, 2010 and 2009, respectively.
73
NETEZZA
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following is the expected future amortization expense of the
Companys acquired intangible assets as of January 31,
2010 for the respective fiscal years ending January 31 (in
thousands):
|
|
|
|
|
2011
|
|
$
|
958
|
|
2012
|
|
|
918
|
|
2013
|
|
|
920
|
|
2014
|
|
|
918
|
|
2015
|
|
|
294
|
|
Thereafter
|
|
|
48
|
|
|
|
|
|
|
Total
|
|
$
|
4,056
|
|
|
|
|
|
|
The weighted average useful life of acquired intangible assets
is six years.
On August 6, 2008, the Company entered into a purchase and
distribution agreement with Intelligent Integration Systems,
Inc. to acquire technology, including spatial analytic
capabilities and an extended SQL toolkit. Under the terms of the
agreement, the Company will pay up to $6.0 million in cash
through August 6, 2011, with a required minimum payment of
$3.0 million, in exchange for an exclusive license to
distribute the technology with transfer of ownership to the
Company upon completion of the cash payments. As of
January 31, 2009, license costs of $2.3 million, net
of amortization, were recorded as other long-term assets on the
balance sheet. Amortization of the license costs was
approximately $0.8 million and $0.5 million for the
fiscal year ended January 31, 2010 and 2009, respectively.
As discussed in Note 15, this agreement was terminated in
the fiscal year ended January 31, 2010. As a result of the
termination, the Company recorded an impairment charge of
$0.5 million in the fourth quarter to reduce the carrying
value of the license to $0 as of January 31, 2010. The
impairment charge is included in cost of product revenue in the
Statement of Operations.
Accrued expenses consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of January 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Corporate taxes
|
|
$
|
792
|
|
|
$
|
117
|
|
Accrued warranty
|
|
|
36
|
|
|
|
747
|
|
Accrued license payable
|
|
|
|
|
|
|
973
|
|
Sales meetings and events
|
|
|
1,015
|
|
|
|
950
|
|
Legal/audit/compliance
|
|
|
893
|
|
|
|
682
|
|
Rent/phone/utilities
|
|
|
1,080
|
|
|
|
869
|
|
Partner fees
|
|
|
268
|
|
|
|
192
|
|
Travel and entertainment
|
|
|
298
|
|
|
|
447
|
|
Inventory items
|
|
|
|
|
|
|
238
|
|
Other
|
|
|
1,524
|
|
|
|
1,086
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,906
|
|
|
$
|
6,301
|
|
|
|
|
|
|
|
|
|
|
74
NETEZZA
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In June 2005, the Company entered into a credit line agreement
with an outside party. Under this agreement, the Company was
able to borrow up to $8.0 million. The Company was required
to make interest only payments on any amounts borrowed through
June 2006 and was then required to make 36 equal consecutive
monthly installments of principal and interest through June
2009. The Company had borrowed the full $8.0 million as of
June 30, 2006. Interest rates were fixed for the term of
the loan at the time of each advance and were 10%, 10.75%,
11.75% and 12%. The loan was secured by all assets of the
Company, excluding intellectual property. All borrowings under
this credit line were repaid in full in July 2007. In addition,
in conjunction with the line of credit, the Company issued
warrants to purchase 125,490 shares of Series D
preferred stock at a price of $2.55 per share. These warrants
were exercised in July 2007. As the credit line was no longer
outstanding, the remaining debt discount and premium were
recorded as interest expense during the three months ended
July 31, 2007.
In January 2007, the Company entered into a revolving credit
line agreement with an outside party. Under this agreement, the
Company could borrow up to $15.0 million. Borrowings under
the line were due and payable on the maturity date of
January 31, 2008. The interest on this revolving credit
line was a floating rate of 1% below the prime rate, payable
monthly. The Company borrowed $4.0 million in April 2007
and $4.0 million in May 2007 under the revolving line of
credit. The Company repaid the outstanding balance under the
revolving line of credit of $8.0 million in July 2007. This
agreement expired on January 31, 2008.
|
|
12.
|
Warrants
for Preferred Stock
|
In conjunction with obtaining and drawing down on lines of
credit, the Company issued warrants to purchase
80,000 shares of Series A convertible preferred stock
and 36,000 shares of Series B convertible redeemable
preferred stock. Upon the closing of the initial public
offering, these warrants converted into warrants to purchase
58,000 shares of common stock. In August 2005, in
accordance with a new accounting pronouncement, the Company
reclassified all of its freestanding preferred stock warrants as
a liability and began adjusting the warrants to their respective
fair values at each reporting period. In the fiscal year ended
January 31, 2007, the Company recorded $0.1 million of
expense to reflect the increase in fair value between
February 1, 2006 and January 31, 2007. In the fiscal
year ended January 31, 2008, the Company recorded
$0.3 million of additional expense to reflect the increase
in fair value between February 1, 2007 and the closing of
the Companys initial public offering. Upon the closing of
the initial public offering in July 2007, the preferred stock
warrant liability was reclassified to additional paid-in capital
and is no longer required to be adjusted at each reporting
period.
In conjunction with obtaining and drawing down on a line of
credit, the Company issued warrants to purchase
125,490 shares of Series D convertible preferred
stock. These warrants were exercised in July 2007 prior to the
closing date of the initial public offering.
As discussed above, the Company reclassified all of its
freestanding preferred stock warrants as a liability and began
adjusting the warrants to their respective fair values at each
reporting period. Upon exercise of the warrants, the liability
was adjusted to the intrinsic value plus cash consideration and
reclassified as preferred stock in the mezzanine section of the
balance sheet. The line of credit was closed, therefore, the
remaining debt premium and debt discounts which were recorded at
the issuance of the warrants were recorded as interest expense
during the second quarter of fiscal 2008.
|
|
13.
|
Stock
Incentive Plans
|
The Company has two stock plans. The Companys 2007 Stock
Incentive Plan (2007 Plan), was adopted by the board
of directors on March 21, 2007 and approved by stockholders
on April 27, 2007. The 2007 Plan permits the Company to
make grants of incentive and nonqualified stock options, stock
appreciation rights, restricted stock, restricted stock units
and other stock-based awards. These awards may be granted to the
Companys employees, officers, directors, consultants, and
advisors. Stock option vesting typically occurs over five years
and is at the
75
NETEZZA
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
discretion of the Board of Directors. Options granted typically
have a maximum term of seven years. Upon approval of the plan,
the Company reserved 2,000,000 shares of its common stock
for issuance under the 2007 Plan. On February 1, 2008,
2,015,679 shares were added to the shares issuable under
the 2007 Plan. On February 1, 2009, an additional
2,086,748 shares were added to the shares issuable under
the 2007 Plan. In June 2009, the stockholders approved an
amendment to the 2007 Plan to increase the number of shares
available for issuance by 4,000,000 shares, to
10,102,427 shares in the aggregate.
The Companys 2000 Stock Incentive Plan, as amended
(2000 Plan) provided for the grant of incentive
stock options and nonqualified stock options, restricted stock,
warrants and stock grants for the purchase of up to
15,721,458 shares of common stock, to employees, officers,
directors and consultants of the Company. The 2000 Plan is
administered by the Companys board of directors. In
connection with the adoption of the 2007 Plan, the board of
directors determined not to grant any further awards under the
2000 Plan subsequent to the closing of the Companys
initial public offering.
Non-employee
Awards
The Company issues equity instruments to non-employees,
including warrants and options to purchase common stock. The
Company is required to re-measure the awards at each reporting
period until the vesting date. The Company records the value of
the shares using the graded-vesting basis over the period of
time services are provided. Stock based compensation expense for
non-employees for the fiscal years ended January 31, 2010,
2009 and 2008 was approximately $47,000, $14,000 and $46,000,
respectively.
At January 31, 2010, non-employees held nonstatutory
options to purchase 22,500 shares of common stock, of which
15,625 were fully vested and exercisable.
Restricted
Common Stock
The Company awards 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 fiscal year ended January 31,
2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
Grant Date Fair
|
|
|
|
Shares
|
|
|
Par value
|
|
|
Value
|
|
|
Non-vested as of January 31, 2009
|
|
|
27,708
|
|
|
$
|
0.001
|
|
|
$
|
12.99
|
|
Granted
|
|
|
87,808
|
|
|
$
|
0.001
|
|
|
$
|
7.15
|
|
Vested
|
|
|
(57,708
|
)
|
|
$
|
0.001
|
|
|
$
|
9.35
|
|
Cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested as of January 31, 2010
|
|
|
57,808
|
|
|
$
|
0.001
|
|
|
$
|
7.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76
NETEZZA
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stock
Options
The following table summarizes stock option activity for the
fiscal year ended January 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
Shares
|
|
|
Number of
|
|
|
Average
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
Available
|
|
|
Options
|
|
|
Exercise
|
|
|
Remaining Life
|
|
|
Intrinsic
|
|
|
|
for Grant
|
|
|
Outstanding
|
|
|
Price
|
|
|
in Years
|
|
|
Value
|
|
|
Outstanding at January 31, 2009
|
|
|
116,471
|
|
|
|
10,474,631
|
|
|
$
|
6.44
|
|
|
|
|
|
|
|
|
|
Additional shares authorized
|
|
|
6,086,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(2,989,950
|
)
|
|
|
2,989,950
|
|
|
$
|
7.16
|
|
|
|
|
|
|
|
|
|
Restricted shares granted
|
|
|
(87,808
|
)
|
|
|
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
(1,173,122
|
)
|
|
$
|
1.95
|
|
|
|
|
|
|
|
|
|
Forfeited, cancelled or expired(1)
|
|
|
296,775
|
|
|
|
(475,937
|
)
|
|
$
|
8.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 31, 2010
|
|
|
3,422,236
|
|
|
|
11,815,522
|
|
|
$
|
7.00
|
|
|
|
5.90 years
|
|
|
$
|
32.7 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at January 31, 2010
|
|
|
|
|
|
|
4,822,328
|
|
|
$
|
5.78
|
|
|
|
5.72 years
|
|
|
$
|
19.1 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at January 31, 2010
|
|
|
|
|
|
|
11,495,046
|
|
|
$
|
6.96
|
|
|
|
5.90 years
|
|
|
$
|
32.2 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Options cancelled under the 2000 Plan after July 24, 2007
are not considered available for grant, as the Company is no
longer granting options under this plan. For the fiscal year
ended January 31, 2010, options for 179,162 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
January 31, 2010, which was $9.09 per share. The aggregate
intrinsic value of options exercised for the years ended
January 31, 2010, 2009 and 2008 was $8.0 million,
$19.2 million and $6.9 million, respectively.
The Company recognized excess tax benefits of $2.1 million
for the fiscal year ended January 31, 2009 related to the
exercise of stock options, which was recorded as an increase to
additional
paid-in-capital.
At January 31 2010, unrecognized compensation expense related to
unvested stock options and unvested restricted shares was
$28.9 million and $0.2 million, respectively, which is
expected to be recognized over a weighted-average period of 3.05
and 0.4 years, respectively.
Income before income tax expense consisted of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended January 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Domestic
|
|
$
|
3,891
|
|
|
$
|
15,747
|
|
|
$
|
2,136
|
|
Foreign
|
|
|
987
|
|
|
|
352
|
|
|
|
819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,878
|
|
|
$
|
16,099
|
|
|
$
|
2,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77
NETEZZA
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The components of income taxes consist of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of January 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Federal
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
2,829
|
|
|
$
|
3,505
|
|
|
$
|
16
|
|
Deferred
|
|
|
(1,796
|
)
|
|
|
(16,177
|
)
|
|
|
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
220
|
|
|
|
1,008
|
|
|
|
39
|
|
Deferred
|
|
|
(900
|
)
|
|
|
(4,406
|
)
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
471
|
|
|
|
853
|
|
|
|
906
|
|
Deferred
|
|
|
(136
|
)
|
|
|
(203
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
688
|
|
|
$
|
(15,420
|
)
|
|
$
|
961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of net deferred tax assets were as follows at
January 31, 2010 and 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of January 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Net operating loss carryforwards
|
|
$
|
6,380
|
|
|
$
|
5,244
|
|
Deferred revenue
|
|
|
4,744
|
|
|
|
6,066
|
|
Research and development credit carryforwards
|
|
|
3,880
|
|
|
|
3,414
|
|
Inventory
|
|
|
3,992
|
|
|
|
2,362
|
|
Unrealized loss on marketable securities
|
|
|
898
|
|
|
|
1,311
|
|
Capitalized research and development expenses
|
|
|
1,956
|
|
|
|
2,392
|
|
Depreciation
|
|
|
1,205
|
|
|
|
523
|
|
Stock-based compensation
|
|
|
4,436
|
|
|
|
2,503
|
|
Accrued expenses and other
|
|
|
1,427
|
|
|
|
1,567
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
28,918
|
|
|
|
25,382
|
|
Deferred tax valuation allowance
|
|
|
(1,700
|
)
|
|
|
(2,538
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
|
27,218
|
|
|
|
22,844
|
|
Financial basis in excess of tax basis of intangibles
|
|
|
(680
|
)
|
|
|
(706
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
26,538
|
|
|
$
|
22,138
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets and liabilities are recognized based on the
expected future tax consequences, using current tax rates, of
temporary differences between the financial statement carrying
amounts and the income tax basis of assets and liabilities. A
valuation allowance is applied against any net deferred tax
asset if, based on the weighted available evidence, it is more
likely than not that some or all of the deferred tax assets will
not be realized.
As of January 31, 2010, the Company had a remaining
valuation allowance of $0.9 million against net deferred
tax assets in the United States of which $0.6 million was
recorded against other comprehensive income, and a remaining
valuation allowance of $0.8 million against net deferred
tax assets in certain foreign jurisdictions. The valuation
allowance recorded against net deferred tax assets in the United
States consisted of capital losses that the Company had
determined were not more likely than not to be realized. The
valuation allowance recorded against net deferred tax assets of
certain foreign jurisdictions consisted primarily of net
operating loss carryforwards that will likely expire without
being utilized.
78
NETEZZA
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
At January 31, 2010, the Company had available net
operating loss carryforwards for federal tax purposes of
approximately $11.5 million, of which approximately
$3.0 million was related to excess tax benefits from
stock-based payments which are not reflected as deferred tax
assets, the benefits of which will be credited to additional
paid-in capital when the deductions reduce current taxes
payable. These federal net operating loss carryforwards may be
utilized to offset future taxable income and expire at various
dates through fiscal year 2028. The Company also had available
research and development credit carryforwards to offset future
federal and state taxes of approximately $4.5 million and
$4.2 million, respectively, which may be used to offset
future taxable income and expire at various dates through fiscal
year 2025 for federal and state purposes. Included in the
research and development credit carryforwards were approximately
$2.8 million and $1.2 million of federal and state tax
credits, respectively, generated from excess tax deductions
related to stock-based payment awards which are not reflected as
deferred tax assets, the tax benefits of which will be credited
to additional paid-in capital when the credits reduce current
taxes payable. Under the Internal Revenue Code of 1986, as
amended, certain substantial changes in the Companys
ownership may result in an annual limitation on the amount of
net operating loss and tax credit carryforwards that may be
utilized in future years.
A reconciliation of the Companys effective tax rate to the
statutory federal rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended January 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
U.S. Federal income tax statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State taxes, net of federal taxes
|
|
|
2.3
|
|
|
|
3.3
|
|
|
|
(5.0
|
)
|
Tax rate differential for international jurisdictions
|
|
|
(0.6
|
)
|
|
|
0.3
|
|
|
|
0.2
|
|
Federal and State tax credits
|
|
|
(45.1
|
)
|
|
|
(6.6
|
)
|
|
|
(10.7
|
)
|
Permanent items
|
|
|
(1.8
|
)
|
|
|
14.3
|
|
|
|
3.6
|
|
Stock-based Compensation
|
|
|
26.1
|
|
|
|
1.7
|
|
|
|
50.6
|
|
Change in valuation allowances
|
|
|
(1.8
|
)
|
|
|
(143.8
|
)
|
|
|
(41.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14.1
|
%
|
|
|
(95.8
|
%)
|
|
|
32.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On February 1, 2007, the Company adopted the a new
accounting standard that defines the threshold for recognizing
the benefits of tax return positions in the financial statements
as more-likely-than-not to be sustained by the
taxing authorities based solely on the technical merits of the
position. If the recognition threshold is met, the tax benefit
is measured and recognized as the largest amount of tax benefit,
in the Companys judgment, which is greater than 50% likely
to be realized. The Company did not recognize any change in its
reserve for uncertain tax positions as a result of the adoption
of this standard. At the adoption date of February 1, 2007,
the Company had approximately $0.3 million of unrecognized
tax benefits.
The following is a roll forward of the Companys gross
liability for unrecognized income tax benefits for the fiscal
years ended January 31, 2010, 2009 and 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of January 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Balance as of the beginning of the year
|
|
$
|
3,869
|
|
|
$
|
324
|
|
|
$
|
250
|
|
Increases related to prior year tax positions
|
|
|
76
|
|
|
|
1,300
|
|
|
|
|
|
Increases related to current year tax positions
|
|
|
630
|
|
|
|
2,245
|
|
|
|
74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of the end of the year
|
|
$
|
4,575
|
|
|
$
|
3,869
|
|
|
$
|
324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in the unrecognized tax benefit of $4.6 million is
$2.2 million of tax benefits that, if recognized, would
reduce the Companys annual effective tax rate. The Company
estimates that its total unrecognized tax benefit will not
change significantly within the next twelve months.
79
NETEZZA
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Companys accounting policy is to recognize interest
and/or
penalties related to income tax matters in income tax expense.
The Company recognized interest and penalties of
$0.1 million related to foreign income tax filings in the
statement of operations for the fiscal year ended
January 31, 2010, compared with $0.0 million in the
fiscal years ended January 31, 2009 and 2008. The Company
is not currently under federal, state or foreign income tax
examination.
The major domestic tax jurisdictions that remain subject to
examination are: U.S. Federal fiscal years
2005-2009
and U.S. states fiscal years
2005-2009.
Within limited exceptions, the Company is no longer subject to
state or local examinations for years prior to 2005, however,
carryforward attributes that were generated prior to
2004 may still be adjusted upon examination by state or
local tax authorities if they either have been or will be used
in a future period. The major international tax jurisdictions
that remain subject to examination are: UK fiscal
years
2005-2009,
Japan fiscal years
2006-2009
and Australia fiscal years
2005-2009.
Through January 31, 2010, the Company has not provided
deferred income taxes on the distributed earnings of its foreign
subsidiaries because such earnings were intended to be
permanently reinvested outside of the United States.
Determination of the potential deferred income tax liability on
these undistributed earnings is not practicable because such
liability, if any, is dependent on circumstances existing if and
when remittance occurs. At January 31, 2010, the Company
had $2.6 million of undistributed earnings in its foreign
subsidiaries.
|
|
15.
|
Commitments
and Contingencies
|
Legal
On November 20, 2009, the Company filed a complaint against
Intelligent Integration Systems, Inc., (IISi), a
former solutions provider to Netezza, in Superior Court in
Suffolk County, Massachusetts. The complaint alleges that IISi
breached an agreement with the Company, as well as breach of
implied covenant of good faith and fair dealing, intentional
interference with contractual relations and beneficial business
relations and violations of the Massachusetts fair business
practices act. The Companys complaint against IISi seeks
unspecified monetary damages, a declaration that the
Companys termination of the agreement with IISi was in
accordance with the terms of that agreement and the return of
the Companys property and proprietary information from
IISi, costs and attorneys fees. On January 22,
2010, IISi filed an answer and counterclaim in response to
the Companys complaint. In its counterclaim, IISi
alleges that the Company breached its contract with IISi, breach
of the covenant of good faith and fair dealing, misappropriation
of trade secrets, unjust enrichment, business defamation,
intentional interference with contractual relations and
violations of the Massachusetts fair business practices act. In
its counterclaim, IISi seeks unspecified monetary damages,
an injunction requiring the Company to return its trade secrets
and proprietary information, costs and attorneys fees. The
Company believes that the allegations in its complaint against
IISi are meritorious and intends to vigorously prosecute its
lawsuit against IISi. The Company also believes it has
meritorious defenses to each of IISis counterclaims in the
lawsuit, and is prepared to vigorously defend itself against
those counterclaims.
Lease
Obligations
The Company leases its office space and certain equipment under
noncancelable operating lease agreements. Total rent expense
under the operating leases for the fiscal years ended
January 31, 2010, 2009 and 2008 was $3.7 million,
$3.3 million and $2.5 million, respectively.
On January 2, 2008, the Company entered into a lease as
amended on July 8, 2008, to rent approximately
68,000 square feet of office space in Marlborough,
Massachusetts to be used as the Companys primary business
location. The lease term expires in August, 2015.
80
NETEZZA
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Total lease commitments for office space and equipment under
noncancelable operating leases are as follows (in thousands):
|
|
|
|
|
|
|
Operating
|
|
Fiscal Year Ended January 31,
|
|
Leases
|
|
|
2011
|
|
$
|
3,069
|
|
2012
|
|
|
2,223
|
|
2013
|
|
|
2,027
|
|
2014
|
|
|
1,924
|
|
2015
|
|
|
1,861
|
|
Thereafter
|
|
|
977
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
12,081
|
|
|
|
|
|
|
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 any time after execution of the agreement.
Based on historical information and information known as of
January 31, 2010, the Company does not expect it will incur
any significant liabilities under these indemnification
agreements.
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
appliances shipped in the period and changes in estimated costs
of warranties on appliances 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 10) in the accompanying balance sheets.
Activity related to the warranty accrual was as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Balance at beginning of period
|
|
$
|
747
|
|
|
$
|
1,141
|
|
|
$
|
1,093
|
|
Provision
|
|
|
612
|
|
|
|
2,035
|
|
|
|
2,071
|
|
Warranty usage*
|
|
|
(1,323
|
)
|
|
|
(2,429
|
)
|
|
|
(2,023
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
36
|
|
|
$
|
747
|
|
|
$
|
1,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Warranty usage includes expiration of product warranty. |
|
|
16.
|
Industry
Segment, Geographic Information and Significant
Customers
|
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
81
NETEZZA
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
United States
|
|
$
|
153,345
|
|
|
$
|
139,761
|
|
|
$
|
101,138
|
|
International
|
|
|
37,290
|
|
|
|
48,008
|
|
|
|
25,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
190,635
|
|
|
$
|
187,769
|
|
|
$
|
126,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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):
|
|
|
|
|
|
|
|
|
|
|
As of January 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
United States
|
|
$
|
8,234
|
|
|
$
|
9,369
|
|
International
|
|
|
235
|
|
|
|
217
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,469
|
|
|
$
|
9,586
|
|
|
|
|
|
|
|
|
|
|
|
|
17.
|
Quarterly
Information (unaudited and in thousands, except per share
data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended
|
|
|
|
April 30,
|
|
|
July 31,
|
|
|
October 31,
|
|
|
January 31,
|
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
Revenue
|
|
$
|
39,576
|
|
|
$
|
47,035
|
|
|
$
|
50,579
|
|
|
$
|
50,579
|
|
Gross margin
|
|
|
24,878
|
|
|
|
30,142
|
|
|
|
31,247
|
|
|
|
31,941
|
|
Net income
|
|
|
2,132
|
|
|
|
3,141
|
|
|
|
3,464
|
|
|
|
22,782
|
|
Net income per share attributable to common stockholders-basic
|
|
$
|
0.04
|
|
|
$
|
0.05
|
|
|
$
|
0.06
|
|
|
$
|
0.38
|
|
Net income per share attributable to common stockholders-diluted
|
|
$
|
0.03
|
|
|
$
|
0.05
|
|
|
$
|
0.05
|
|
|
$
|
0.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended
|
|
|
|
April 30,
|
|
|
July 31,
|
|
|
October 31,
|
|
|
January 31,
|
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
Revenue
|
|
$
|
45,367
|
|
|
$
|
43,934
|
|
|
$
|
47,735
|
|
|
$
|
53,599
|
|
Gross margin
|
|
|
29,548
|
|
|
|
29,391
|
|
|
|
31,861
|
|
|
|
35,287
|
|
Net income (loss)
|
|
|
(237
|
)
|
|
|
730
|
|
|
|
850
|
|
|
|
2,847
|
|
Net income (loss) per share attributable to common
stockholders-basic
|
|
$
|
(0.00
|
)
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
|
$
|
0.05
|
|
Net income (loss) per share attributable to common
stockholders-diluted
|
|
$
|
(0.00
|
)
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
|
$
|
0.04
|
|
During the three months ended January 31, 2010, the Company
recorded adjustments to correct immaterial errors to the income
tax provision for amounts that should have been recorded in the
financial statements for the
82
NETEZZA
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
three months ended October 31, 2009. The adjustments were
identified in connection with the Companys year-end tax
analysis and relate primarily to federal and state tax credits.
Recording these
out-of-period
adjustments had the effect of decreasing the income tax
provision by $0.3 million for the three months ended
January 31, 2010. The Company has concluded that the error
was not material to its previously issued financial statements
for the three months ended October 31, 2009 and the
correction of the error is not material to the financial
statements for the three months ended January 31, 2010.
These adjustments had no effect on the financial statements for
the year ended January 31, 2010.
In March 2007, the Companys Board of Directors approved a
one-for-two
reverse stock split of the Companys common stock (the
Stock Split) which became effective upon the filing
of the restated certificate of incorporation on June 25,
2007. All references to shares in the consolidated financial
statements and the accompanying notes, including but not limited
to the number of shares and per share amounts, unless otherwise
noted, have been adjusted to reflect the Stock Split
retroactively. Previously awarded options and warrants to
purchase shares of the Companys common stock and the
shares of common stock issuable upon the conversion of the
convertible redeemable preferred stock have also been
retroactively adjusted to reflect the Stock Split.
83
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
None.
|
|
ITEM 9A.
|
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 January 31,
2010. 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, 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 January 31, 2010, 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.
MANAGEMENTS
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting. Internal
control over financial reporting is defined in
Rules 13a-15(f)
and
15d-15(f)
under the Securities Exchange Act as a process designed by, or
under the supervision of, a companys principal executive
and principal financial officers, or persons performing similar
functions, and effected by a companys board of directors,
management and other personnel to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles.
Internal control over financial reporting includes those
policies and procedures that:
|
|
|
|
|
pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and
dispositions of a companys assets;
|
|
|
|
provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and
that a companys receipts and expenditures are being made
only in accordance with authorizations of the companys
management and directors; and
|
|
|
|
provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of a
companys assets that could have a material effect on the
financial statements.
|
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate. Our
management assessed the effectiveness of our internal control
over financial reporting as of January 31, 2010. In making
this assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control Integrated
Framework.
Based on our assessment, our management has concluded that, as
of January 31, 2010, our internal control over financial
reporting was effective based on those criteria.
84
The effectiveness of the Companys internal control over
financial reporting as of January 31, 2010, has been
audited by PricewaterhouseCoopers LLP, an independent registered
public accounting firm, as stated in their report which appears
herein.
CHANGES
IN INTERNAL CONTROL OVER FINANCIAL REPORTING
No change in our internal control over financial reporting
occurred during the fiscal quarter ended January 31, 2010
that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
|
|
ITEM 9B.
|
OTHER
INFORMATION
|
Not applicable.
PART III
Pursuant to Paragraph G(3) of the General Instructions to
Form 10-K,
information required by Part III (Items 10, 11, 12, 13
and 14) is being incorporated by reference herein from our
proxy statement to be filed with the Securities and Exchange
Commission within 120 days of the end of the fiscal year
ended January 31, 2010 in connection with our 2010 Annual
Meeting of Stockholders.
|
|
ITEM 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
Information required by this item relating to our directors and
nominees is contained in our 2010 proxy statement under the
caption Board of Directors and Corporate Governance
Information Members of the Board of Directors
and is incorporated herein by reference. Information required by
this item relating to our executive officers is contained in our
2010 proxy statement under the caption Management
and is incorporated herein by reference. Information required by
this item relating to compliance with Section 16(a) of the
Securities Exchange Act of 1934 is contained in our 2010 proxy
statement under the caption Other Matters
Section 16(a) Beneficial Ownership Reporting
Compliance and is incorporated herein by reference.
We have adopted a written code of business conduct and ethics
that applies to all employees, including our principal executive
officer, principal financial officer, principal accounting
officer, or persons performing similar functions and have posted
it in the Investor Relations Corporate Governance
section of our website which is located at www.netezza.com. We
intend to satisfy any disclosure requirement under
Item 5.05 of
Form 8-K
regarding any amendments to, or waivers from, our code of
business conduct and ethics by posting such information on our
website which is located at www.netezza.com within four business
days of such waiver or amendment.
Information required by this item relating to the audit
committee of our Board of Directors is contained in our 2010
proxy statement under the captions Board of Directors and
Corporate Governance Information Board
Committees Audit Committee and Board of
Directors and Corporate Governance Information Board
Determination of Director Independence and is incorporated
herein by reference.
|
|
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
Information required by this item is contained in our 2010 proxy
statement in the section Executive and Director
Compensation and Related Matters and is incorporated
herein by reference.
|
|
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
Information required by this item is contained in our 2010 proxy
statement in the section General Information about the
Annual Meeting Beneficial Ownership of Voting
Stock and is incorporated herein by reference.
85
|
|
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
Information required by this item is contained in our 2010 proxy
statement in the section Board of Directors and Corporate
Governance Information under the captions
Determination of Independence,
Board Committees and
Related Person Transactions and is
incorporated herein by reference.
|
|
ITEM 14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
Information required by this item is contained in our 2010 proxy
statement in the section Ratification of Selection of
Independent Registered Public Accounting Firm
Independent Registered Public Accounting Firms Fees and
Other Matters and is incorporated herein by reference.
|
|
ITEM 15.
|
EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
|
(a) Index
1. Financial Statements: Our consolidated financial
statements and the Report of Independent Registered Public
Accounting Firm are set forth in Part II, Item 8 of
this Annual Report on
Form 10-K.
2. Financial Statement Schedules: Schedules have been
omitted since they are either not required, not applicable, or
the information is otherwise included.
3. Exhibits: See Index to Exhibits below for a listing of
all exhibits to this Annual Report on
Form 10-K.
(b) Exhibits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference to
|
|
|
Exhibit
|
|
|
|
Form and
|
|
SEC
|
|
Exhibit
|
|
Filed with
|
No.
|
|
Description
|
|
SEC File No.
|
|
Filing Date
|
|
No.
|
|
this 10-K
|
|
|
2
|
.1
|
|
Agreement and Plan of Merger, dated as of February 18,
2009, by and among the Registrant, Netezza Holding Corp., Tizor
Systems, Inc. and Longworth Venture Partners II-A, L.P., as
Indemnification Representative
|
|
8-K (001-33445)
|
|
|
2-24-2009
|
|
|
|
2.1
|
|
|
|
|
|
|
3
|
.1
|
|
Second Amended and Restated Certificate of Incorporation
|
|
10-Q (001-33445)
|
|
|
9-14-2007
|
|
|
|
3.1
|
|
|
|
|
|
|
3
|
.2
|
|
Amended and Restated By-laws of the Registrant
|
|
S-1 (333-141522)
|
|
|
3-22-2007
|
|
|
|
3.3
|
|
|
|
|
|
|
4
|
.1
|
|
Specimen Stock Certificate Evidencing the Shares of Common Stock
|
|
S-1/A (333-141522)
|
|
|
6-28-2007
|
|
|
|
4.1
|
|
|
|
|
|
|
10
|
.1#
|
|
2000 Stock Incentive Plan, as amended
|
|
S-1 (333-141522)
|
|
|
3-22-2007
|
|
|
|
10.1
|
|
|
|
|
|
|
10
|
.2#
|
|
Form of Incentive Stock Option Agreement under 2000 Stock
Incentive Plan
|
|
S-1 (333-141522)
|
|
|
3-22-2007
|
|
|
|
10.2
|
|
|
|
|
|
|
10
|
.3#
|
|
Form of Nonstatutory Stock Option Agreement under 2000 Stock
Incentive Plan
|
|
S-1 (333-141522)
|
|
|
3-22-2007
|
|
|
|
10.3
|
|
|
|
|
|
|
10
|
.4#
|
|
Form of Restricted Stock Agreement under 2000 Stock Incentive
Plan
|
|
S-1 (333-141522)
|
|
|
3-22-2007
|
|
|
|
10.4
|
|
|
|
|
|
|
10
|
.5#
|
|
2007 Stock Incentive Plan, as amended
|
|
DEF 14A,
Appendix (001-33445)
|
|
|
4-23-2009
|
|
|
|
|
|
|
|
|
|
|
10
|
.6#
|
|
Form of Incentive Stock Option Agreement under 2007 Stock
Incentive Plan
|
|
S-1/A (333-141522)
|
|
|
5-4-2007
|
|
|
|
10.6
|
|
|
|
|
|
|
10
|
.7#
|
|
Form of Nonstatutory Stock Option Agreement under 2007 Stock
Incentive Plan
|
|
S-1/A (333-141522)
|
|
|
5-4-2007
|
|
|
|
10.7
|
|
|
|
|
|
86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference to
|
|
|
Exhibit
|
|
|
|
Form and
|
|
SEC
|
|
Exhibit
|
|
Filed with
|
No.
|
|
Description
|
|
SEC File No.
|
|
Filing Date
|
|
No.
|
|
this 10-K
|
|
|
10
|
.8#
|
|
Form of Nonstatutory Stock Option Agreement for Non-Employee
Directors under 2007 Stock Incentive Plan
|
|
S-1/A (333-141522)
|
|
|
5-4-2007
|
|
|
|
10.8
|
|
|
|
|
|
|
10
|
.9#
|
|
Form of Restricted Stock Agreement under 2007 Stock Incentive
Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
|
10
|
.10#
|
|
Form of Restricted Stock Unit Agreement with Performance-Based
Vesting under 2007 Stock Incentive Plan
|
|
8-K (001-33445)
|
|
|
3-8-2010
|
|
|
|
10.2
|
|
|
|
|
|
|
10
|
.11#
|
|
Form of Restricted Stock Unit Agreement with Time-Based Vesting
under 2007 Stock Incentive Plan
|
|
8-K (001-3345)
|
|
|
3-8-2010
|
|
|
|
10.3
|
|
|
|
|
|
|
10
|
.12#
|
|
Fiscal 2010 Executive Officer Incentive Bonus Plan
|
|
8-K (001-33445)
|
|
|
3-13-2009
|
|
|
|
10.1
|
|
|
|
|
|
|
10
|
.13#
|
|
Fiscal 2011 Executive Officer Incentive Bonus Plan
|
|
8-K (001-33445)
|
|
|
3-8-2010
|
|
|
|
10.1
|
|
|
|
|
|
|
10
|
.14
|
|
Lease Agreement, dated January 2, 2008, by and between the
Registrant and NE Williams II, LLC
|
|
10-K (001-33445)
|
|
|
4-18-2008
|
|
|
|
10.12
|
|
|
|
|
|
|
10
|
.15
|
|
First Amendment dated as of July 8, 2008, to the Lease,
dated January 2, 2008, by and between the Company and NE
Williams II, LLC
|
|
10-Q (001-33445)
|
|
|
9-9-2008
|
|
|
|
10.2
|
|
|
|
|
|
|
10
|
.16
|
|
Third Amended and Restated Investor Rights Agreement among the
Registrant, the Founders and the Purchasers, dated as of
December 22, 2004
|
|
S-1 (333-141522)
|
|
|
3-22-2007
|
|
|
|
10.11
|
|
|
|
|
|
|
10
|
.17
|
|
Amendment No. 1 to the Third Amended and Restated Investor
Rights Agreement among the Registrant, the Founders and the
Purchasers, dated as of June 14, 2005
|
|
S-1 (333-141522)
|
|
|
3-22-2007
|
|
|
|
10.12
|
|
|
|
|
|
|
10
|
.18
|
|
Amendment No. 2 to the Third Amended and Restated Investor
Rights Agreement among the Registrant, the Founders and the
Purchasers, dated as of April 30, 2007
|
|
10-K (001-33445)
|
|
|
3-26-2009
|
|
|
|
10.15
|
|
|
|
|
|
|
10
|
.19#
|
|
Letter Agreement between the Registrant and James Baum, dated
June 1, 2006
|
|
S-1 (333-141522)
|
|
|
3-22-2007
|
|
|
|
10.13
|
|
|
|
|
|
|
10
|
.20#
|
|
Form of Amended and Restated Executive Retention Agreement for
each of James Baum, Patrick J. Scannell, Jr., Raymond Tacoma and
Patricia Cotter
|
|
10-K (001-33445)
|
|
|
3-26-2009
|
|
|
|
10.17
|
|
|
|
|
|
|
10
|
.21#
|
|
Amended and Restated Executive Retention Agreement between the
Registrant and David Flaxman, dated as of November 24, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
|
10
|
.22#
|
|
Second Amended and Restated Executive Retention Agreement by and
between the Registrant and Jitendra S. Saxena, dated as of
March 12, 2009
|
|
8-K (001-33445)
|
|
|
3-13-2009
|
|
|
|
10.2
|
|
|
|
|
|
87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference to
|
|
|
Exhibit
|
|
|
|
Form and
|
|
SEC
|
|
Exhibit
|
|
Filed with
|
No.
|
|
Description
|
|
SEC File No.
|
|
Filing Date
|
|
No.
|
|
this 10-K
|
|
|
10
|
.23#
|
|
Form of Indemnification Agreement for each of Jitendra S.
Saxena, James Baum, Patrick J. Scannell, Jr., Raymond Tacoma,
Patricia Cotter, David Flaxman, Francis A. Dramis Jr., Robert J.
Dunst, Jr., Paul J. Ferri, Peter Gyenes, Charles F. Kane, J.
Chris Scalet and Edward J. Zander
|
|
S-1/A (333-141522)
|
|
|
6-28-2007
|
|
|
|
10.15
|
|
|
|
|
|
|
10
|
.24
|
|
Contractor Agreement between Persistent Systems Pct. Ltd and the
Registrant, dated as of February 1, 2001
|
|
S-1/A (333-141522)
|
|
|
7-3-2007
|
|
|
|
10.18
|
|
|
|
|
|
|
10
|
.25
|
|
Manufacturing Services Agreement by and between the Registrant
and Sanmina-SCI Corporation, dated as of June 17, 2004, as
amended by Amendment No. 1 to the Manufacturing Services
Agreement, dated as of May 11, 2005
|
|
S-1/A (333-141522)
|
|
|
5-15-2007
|
|
|
|
10.19
|
|
|
|
|
|
|
21
|
.1
|
|
Subsidiaries of the Registrant
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
|
23
|
.1
|
|
Consent of PricewaterhouseCoopers LLP, Independent Registered
Public Accounting Firm
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
|
31
|
.1
|
|
Certification of Principal 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
|
31
|
.2
|
|
Certification of Principal 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
|
32
|
.1
|
|
Certification of Principal Executive Officer and Principal
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.
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*
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Confidential treatment requested as to certain portions, which
portions have been separately filed with the Securities and
Exchange Commission. |
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Management contracts or compensatory plans or arrangements
required to be filed as an exhibit hereto pursuant to
Item 15(a) of
Form 10-K. |
88
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
NETEZZA CORPORATION
James Baum
President and Chief Executive Officer
Date: April 1, 2010
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
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Signature
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Title
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Date
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By:
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/s/ James
Baum
James
Baum
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President, Chief Executive Officer and Director (principal
executive officer)
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April 1, 2010
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By:
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/s/ Patrick
J. Scannell, Jr.
Patrick
J. Scannell, Jr.
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Senior Vice President and Chief Financial Officer (principal
financial and accounting officer)
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April 1, 2010
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By:
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/s/ Francis
A. Dramis, Jr.
Francis
A. Dramis, Jr.
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Director
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April 1, 2010
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By:
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/s/ Robert
J. Dunst, Jr.
Robert
J. Dunst, Jr.
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Director
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April 1, 2010
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By:
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/s/ Paul
J. Ferri
Paul
J. Ferri
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Director
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April 1, 2010
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By:
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/s/ Peter
Gyenes
Peter
Gyenes
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Director
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April 1, 2010
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By:
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/s/ Charles
F. Kane
Charles
F. Kane
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Director
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April 1, 2010
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By:
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/s/ Jitendra
S. Saxena
Jitendra
S. Saxena
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Director
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April 1, 2010
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By:
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/s/ J.
Chris Scalet
J.
Chris Scalet
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Director
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April 1, 2010
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By:
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/s/ Edward
J. Zander
Edward
J. Zander
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Director
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April 1, 2010
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89