e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended April 30, 2010
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001-33445
NETEZZA CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
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Delaware
(State or Other Jurisdiction of Incorporation or
Organization)
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04-3527320
(I.R.S. Employer Identification No.) |
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26 Forest Street
Marlborough, MA
(Address of Principal Executive Offices)
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01752
(Zip Code) |
(508) 382-8200
(Registrants Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
o Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
(Do not check if a smaller reporting company)
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). o Yes þ No
As of May 31, 2010, there were 61,834,578 shares of the registrants common stock outstanding.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NETEZZA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share and per share data)
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April 30, |
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January 31, |
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2010 |
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2010 |
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ASSETS |
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Current assets |
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Cash and cash equivalents |
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$ |
32,188 |
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$ |
40,638 |
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Short-term marketable securities |
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75,756 |
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64,020 |
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Accounts receivable |
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36,870 |
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53,450 |
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Inventory |
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36,258 |
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28,708 |
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Deferred tax assets, net |
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15,076 |
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14,490 |
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Restricted cash |
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60 |
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60 |
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Prepaid expenses and other current assets |
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6,986 |
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4,675 |
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Total current assets |
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203,194 |
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206,041 |
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Property and equipment, net |
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9,031 |
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8,469 |
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Deferred tax assets, net |
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11,724 |
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12,048 |
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Goodwill |
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2,000 |
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2,000 |
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Intangible assets, net |
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3,796 |
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4,056 |
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Long-term marketable securities |
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49,532 |
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49,769 |
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Restricted cash |
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639 |
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639 |
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Other long-term assets |
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576 |
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575 |
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Total assets |
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$ |
280,492 |
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$ |
283,597 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities |
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Accounts payable |
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$ |
4,966 |
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$ |
12,604 |
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Accrued expenses |
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7,243 |
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5,906 |
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Accrued compensation and benefits |
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5,916 |
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6,776 |
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Current portion of deferred revenue |
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44,584 |
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49,665 |
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Total current liabilities |
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62,709 |
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74,951 |
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Long-term deferrred revenue |
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10,023 |
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8,727 |
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Other long-term liabilities |
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2,332 |
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2,326 |
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Total long-term liabilities |
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12,355 |
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11,053 |
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Total liabilities |
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75,064 |
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86,004 |
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Commitments and contingencies (Note 10) |
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Stockholders equity: |
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Preferred stock, $0.001 par value; 5,000,000 shares authorized at April 30,
2010 and January 31, 2010; none outstanding |
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Common stock, $0.001 par value; 500,000,000 shares authorized at
April 30, 2010 and January 31, 2010, 61,743,152 and 61,021,370 shares
issued at April 30, 2010 and January 31, 2010, respectively |
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62 |
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61 |
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Treasury stock, at cost; 226,415 and 139,062 shares at April 30, 2010
and January 31, 2010, respectively |
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(1,202 |
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(14 |
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Additional paid-in-capital |
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249,226 |
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242,901 |
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Accumulated other comprehensive loss |
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(1,899 |
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(1,924 |
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Accumulated deficit |
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(40,759 |
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(43,431 |
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Total stockholders equity |
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205,428 |
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197,593 |
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Total liabilities and stockholders equity |
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$ |
280,492 |
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$ |
283,597 |
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See accompanying Notes to Condensed Consolidated Financial Statements
1
NETEZZA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
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Three Months Ended April 30, |
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2010 |
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2009 |
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Revenue |
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Product |
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$ |
42,837 |
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$ |
32,702 |
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Services |
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15,337 |
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12,665 |
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Total revenue |
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58,174 |
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45,367 |
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Cost of revenue |
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Product |
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15,445 |
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12,344 |
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Services |
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4,330 |
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3,475 |
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Total cost of revenue |
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19,775 |
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15,819 |
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Gross margin |
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38,399 |
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29,548 |
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Operating expenses |
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Sales and marketing |
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19,150 |
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14,676 |
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Research and development |
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10,829 |
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11,620 |
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General and administrative |
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4,550 |
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3,976 |
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Total operating expenses |
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34,529 |
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30,272 |
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Operating income (loss) |
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3,870 |
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(724 |
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Interest income |
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286 |
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310 |
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Interest expense |
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25 |
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Other income (expense), net |
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(46 |
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131 |
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Income (loss) before income tax expense (benefit) |
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$ |
4,110 |
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$ |
(308 |
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Income tax expense (benefit) |
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1,438 |
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(71 |
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Net income (loss) |
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$ |
2,672 |
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$ |
(237 |
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Net income (loss) per share |
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Basic |
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$ |
0.04 |
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$ |
(0.00 |
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Diluted |
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$ |
0.04 |
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$ |
(0.00 |
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Weighted average common shares outstanding |
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Basic |
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61,273 |
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59,917 |
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Diluted |
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64,688 |
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59,917 |
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See accompanying Notes to Condensed Consolidated Financial Statements
2
NETEZZA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
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Three Months Ended April 30, |
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2010 |
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2009 |
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Cash flows from operating activities |
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Net income (loss) |
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$ |
2,672 |
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$ |
(237 |
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Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activites |
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Depreciation and amortization |
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1,443 |
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1,829 |
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Stock-based compensation expense |
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2,989 |
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2,241 |
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Benefit from deferred income taxes, net |
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(262 |
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(171 |
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Gain on trading securities |
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(9 |
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(361 |
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Loss on auction rate securities written put right |
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7 |
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296 |
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Amortization and accretion of discount and premium on
marketable securities |
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62 |
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Changes in assets and liabilities, net of acquisitions |
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Accounts receivable |
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15,744 |
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7,653 |
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Inventory |
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(7,550 |
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192 |
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Other assets |
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(2,340 |
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698 |
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Accounts payable |
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(7,791 |
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(1,772 |
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Accrued compensation and benefits |
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(950 |
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(1,784 |
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Accrued expenses |
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2,484 |
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(1,786 |
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Deferred revenue |
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(3,785 |
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(10,193 |
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Net cash provided by (used in) operating activities |
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2,714 |
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(3,395 |
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Cash flows from investing activities |
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Purchase of investments |
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(49,898 |
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Sales and maturities of investments |
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38,396 |
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1,700 |
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Acquisition of business, net of cash acquired |
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(2,007 |
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Purchases of property and equipment |
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(1,772 |
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(977 |
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Change in other long-term assets |
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(328 |
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Decrease (increase) in restricted cash |
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419 |
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Net cash used in investing activities |
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(13,274 |
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(1,193 |
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Cash flows from financing activities |
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Proceeds from issuance of common stock, net |
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2,149 |
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242 |
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Net cash provided by financing activities |
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2,149 |
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242 |
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Net increase (decrease) in cash and cash equivalents |
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(8,411 |
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(4,346 |
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Effect of exchange rate changes on cash and cash equivalents |
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(39 |
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106 |
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Cash and cash equivalents, beginning of period |
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40,638 |
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111,635 |
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Cash and cash equivalents, end of period |
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$ |
32,188 |
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$ |
107,395 |
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Non-cash
financing transaction |
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Common stock
swap for exercise of stock options |
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$ |
1,188 |
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Supplemental disclosure of cash flow information |
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Cash paid for taxes |
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$ |
106 |
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$ |
128 |
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See accompanying Notes to Condensed Consolidated Financial Statements
3
NETEZZA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of the Business
Netezza Corporation (the Company) is a provider of data warehouse, analytic and
monitoring appliances. The Companys TwinFin and Skimmer 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 condensed consolidated financial statements include those of the Company
and its wholly owned subsidiaries, after elimination of all intercompany accounts and transactions.
The Company has prepared the accompanying condensed consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America (GAAP).
The condensed consolidated balance sheet at January 31, 2010 was derived from audited
financial statements, but does not include all disclosures required by GAAP. The accompanying
unaudited financial statements as of April 30, 2010 and for the three months ended April 30, 2010
and 2009 have been prepared by the Company, pursuant to the rules and regulations of the Securities
and Exchange Commission (SEC). Certain information and footnote disclosures normally included in
financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to
such rules and regulations. However, the Company believes that the disclosures are adequate to make
the information presented not misleading. These condensed consolidated financial statements should
be read in conjunction with the Companys audited consolidated financial statements and the notes
thereto included in its Annual Report on Form 10-K for the fiscal year ended January 31, 2010,
filed with the SEC on April 1, 2010.
In the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to present a fair statement of the Companys financial position as of April
30, 2010, results of operations for the three months ended April 30, 2010 and 2009 and cash flows
for the three months ended April 30, 2010 and 2009 have been made. The results of operations for
the three months ended April 30, 2010 and the cash flows for the three months ended April 30, 2010
are not necessarily indicative of the results of operations and cash flows that may be expected for
the year ending January 31, 2011 or any future periods.
The Companys fiscal year ends on January 31. When the Company refers to a particular fiscal
year, the Company is referring to the fiscal year ended January 31 of that year. For example,
fiscal 2011 refers to the fiscal year ending January 31, 2011.
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
4
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.
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
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.
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.
In October 2009, the Financial Accounting Standards Board (FASB) issued an accounting
standard for multiple-deliverable revenue arrangements which changes the requirements for
establishing separate units of accounting in a multiple element arrangement and requires the
allocation of arrangement consideration to each deliverable to be based on the relative selling
price. Concurrently with issuing this standard, the FASB also issued an accounting standard which
excludes software that is contained on a tangible product from the scope of software revenue
guidance if the software component and the non-software component function together to deliver the
tangible products essential functionality.
The 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 adopted these standards on a prospective basis as of the beginning of fiscal 2011
for new and materially modified arrangements originating on or after February 1, 2010. As a result,
net revenues for the three months ended April 30, 2010 were approximately $17.0 million higher than
the net revenues that would have been recorded under the previous accounting rules. The increase in
revenues was due to recognition of revenue for products for which a
new or materially modified contract was entered into during the three months ended April
30, 2010 where the product contained undelivered elements for which the Company was unable to demonstrate fair
value under the previous standards.
Had the Company adopted these standards
on a prospective basis as of the beginning of fiscal 2010 for new and
materially modified arrangements originating on or after February 1, 2009, net revenues for the three months ended
April 30, 2009 would have been approximately $0.5 million higher.
Under the new standards the Company allocates the total
consideration for an arrangement among the separable elements of the arrangement based upon the
relative selling price of each element. Arrangement consideration allocated to undelivered elements
is deferred until delivery.
Beginning in fiscal 2011, when a sales arrangement contains multiple elements and software and
non-software components function together to deliver the tangible products essential
functionality, the Company allocates revenue to each element based on a selling price hierarchy.
The selling price for a deliverable is based on its vendor-specific objective evidence (VSOE) if
available, third party evidence (TPE) if VSOE is not available, or best estimated selling price
(BESP) if neither VSOE nor TPE is available. The Company then recognizes revenue on each
deliverable in accordance with its policies for product and service revenue recognition.
VSOE of fair value is 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 updates,
when appropriate, the Companys VSOE of fair value for such services to ensure that it reflects the
Companys recent pricing experience. TPE of selling price is established by evaluating largely
interchangeable competitor products or services in stand-alone sales to similarly situated
customers. However, as the Companys products contain a significant element of proprietary
technology and its solutions offer substantially different features and functionality than other
available products, the comparable pricing of products with similar functionality typically cannot
be obtained. As the Company is unable to reliably determine what competitors
products selling prices are on a stand-alone basis, the Company is not typically able to determine TPE.
When the Company is unable to establish selling price using VSOE or TPE, the Company uses BESP
in its allocation of arrangement consideration. The objective of BESP is to determine the price at
which the Company would transact a sale if the product or service was sold on a stand-alone basis.
The Company determines BESP for a product or service by considering multiple factors including, but
not limited to, overall market conditions, including geographic or regional specific market
factors; pricing practices, including pricing in different geographies and for different purchase
volumes; internal costs; and competitor pricing strategies. The determination of BESP is a formal
process within the Company that includes review and approval by the Companys management. The
Company
5
reviews its determination of BESP on a periodic basis and updates it, when appropriate, to
ensure that it reflects the Companys recent pricing experience.
The Company evaluates all deliverables in an arrangement to determine whether they represent
separate units of accounting. A deliverable constitutes a separate unit of accounting when it has
stand-alone value and there are no customer-negotiated refunds or return rights for the delivered
elements. The new standards do not change the units of accounting for the Companys
revenue transactions.
In
multiple element arrangements where software deliverables that are not more-than-incidental are
included, revenue is allocated to each separate unit of accounting for each of the non-software
deliverables and to the software deliverables as a group using the relative selling prices within the selling price hierarchy of each
of the deliverables in the arrangement based on the selling price hierarchy described above. If the
arrangement contains more than one software deliverable, the arrangement consideration allocated to
the software deliverables as a group is then allocated among the individual software deliverables
using the guidance for recognizing software revenue, as amended.
The Company limits the amount of revenue recognition for delivered elements to the amount that
is not contingent on the future delivery of products or services, future performance obligation, or
subject to customer-specific return or refund privileges.
For transactions entered into prior to February 1,
2010, the Company allocates revenue for multiple element arrangements for which VSOE exists for undelivered elements but not for the
delivered elements, using 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.
Foreign Currency Translation
The functional currency for the Companys foreign subsidiaries is the applicable local
currency. For financial reporting purposes, assets and liabilities of subsidiaries outside the
United States of America are translated into U.S. dollars using period-end exchange rates. Revenue
and expense accounts are translated at the average rates in effect during the period. The effects
of foreign currency translation adjustments are included in accumulated other comprehensive income
as a component of stockholders equity. Transaction (losses) gains for the three months ended April
30, 2010 and 2009 were approximately $(67,000) and $35,000, respectively, and are recorded as
other income (expense), net in the condensed consolidated statements of operations.
Concentration of Credit Risk and Significant Customers
The Company maintains its cash in bank deposit accounts at high quality financial
institutions. The individual balances, at times, may exceed federally insured limits. However, the
Company does not believe that it is subject to unusual credit risk beyond the normal credit risk
associated with commercial banking relationships.
Financial instruments which potentially expose the Company to concentrations of credit
risk consist of accounts receivable. Management believes its credit policies are prudent and
reflect normal industry terms and business risk. At April 30, 2010, one customer accounted for 38%
of accounts receivable, or $14.0 million. Approximately $12.2 million
of this $14.0 million balance was subsequently collected in May 2010.
At January 31, 2010, two customers accounted for 16% and 15% of accounts
receivable, respectively. One customer accounted for 10% or greater of the Companys total
revenue in the three months ended April 30, 2010 and one
customer accounted for 10% or greater in the three months ended in April 30, 2009.
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
6
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,
the Company recognizes compensation cost on a graded-vesting basis over the awards expected
vesting periods.
The Company accounts for stock-based compensation expense for non-employees using the
fair value method which requires the award to be re-measured at each reporting date until the award
is 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 three months ended April 30, 2010 and
2009 was estimated on the date of grant using the Black-Scholes option-pricing model with the
following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended April 30, |
|
|
2010 |
|
2009 |
Dividend yield |
|
None |
|
None |
Expected volatility |
|
|
57.2 |
% |
|
|
56.7 |
% |
Risk-free interest rate |
|
|
2.4 |
% |
|
|
1.9 |
% |
Expected life (in years) |
|
|
5.0 |
|
|
|
5.0 |
|
Weighted-average fair value
at grant date |
|
$ |
5.84 |
|
|
$ |
2.98 |
|
For the three months ended April 30, 2010 and the three months ended April 30, 2009, the
expected volatility assumption used in the Black-Scholes option-pricing model was a blended rate
based on the historical trading activity of the Companys common stock since the initial public
offering and an analysis of peer group volatility. 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 average mid-point between the vesting date and the expiration
date for each vesting period is used as the expected term under this method. The risk-free interest
rate used in the Black-Scholes model is based on the implied yield curve available on U.S. Treasury
zero-coupon issues at the date of grant with a remaining term equal to the Companys expected term
assumption. The Company has never declared or paid a cash dividend and has no current plans to pay
cash dividends. 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 condensed consolidated statements of operations for the three
months ended April 30, 2010 and 2009 relating to stock-based compensation expense are as follows
(in thousands):
7
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended April 30, |
|
|
|
2010 |
|
|
2009 |
|
Cost of product |
|
$ |
23 |
|
|
$ |
11 |
|
Cost of services |
|
|
146 |
|
|
|
97 |
|
Sales and marketing |
|
|
1,022 |
|
|
|
750 |
|
Research and development |
|
|
828 |
|
|
|
634 |
|
General and administrative |
|
|
960 |
|
|
|
743 |
|
|
|
|
|
|
|
|
|
|
$ |
2,979 |
|
|
$ |
2,235 |
|
|
|
|
|
|
|
|
Net Income (Loss) Per Share
The Company computes basic net income (loss) per share by dividing its net income (loss)
for the period by the weighted average number of common shares outstanding during the period,
excluding the dilutive effects of common stock equivalents. Diluted net income (loss) per share
includes the dilutive effect of stock options and restricted stock under the treasury stock method.
The components of the net income (loss) per share were as follows (in thousands except
per share amounts):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended April 30, |
|
|
|
2010 |
|
|
2009 |
|
Net income (loss) |
|
$ |
2,672 |
|
|
$ |
(237 |
) |
Weighted average shares used to
compute net income (loss) per
share: |
|
|
|
|
|
|
|
|
Basic |
|
|
61,273 |
|
|
|
59,917 |
|
Dilutive effect of stock options
and restricted stock |
|
|
3,415 |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
64,688 |
|
|
|
59,917 |
|
|
|
|
|
|
|
|
Net income (loss) per share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.04 |
|
|
$ |
(0.00 |
) |
Diluted |
|
$ |
0.04 |
|
|
$ |
(0.00 |
) |
The following stock options to purchase common stock have been excluded from the
computation of diluted net income per share for the periods presented because including the stock
options would be anti-dilutive.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended April 30, |
|
|
2010 |
|
2009 |
Options to purchase common stock |
|
|
4,386 |
|
|
|
12,103 |
|
Comprehensive Income (Loss)
Comprehensive income (loss) 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 (loss) 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.
The components of comprehensive income (loss) are as follows (in thousands):
8
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended April 30, |
|
|
|
2010 |
|
|
2009 |
|
Net income (loss) |
|
$ |
2,672 |
|
|
$ |
(237 |
) |
Other comprehensive income: |
|
|
|
|
|
|
|
|
Foreign currency adjustment, net
of tax of $0 |
|
|
(25 |
) |
|
|
(34 |
) |
Net unrealized gain from
investments, net of tax of $0 |
|
|
50 |
|
|
|
1,107 |
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
2,697 |
|
|
$ |
836 |
|
|
|
|
|
|
|
|
Recent Accounting Pronouncements
In January 2010, the FASB issued an update requiring
reporting entities to provide new
disclosures and clarifications of currently required disclosures related to fair value measurements. The new
disclosures require reporting entities to disclose separately the amounts of significant
transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for
the transfers. Additionally, in the Level 3 reconciliations, a reporting entity should present
separately information about purchases, sales, issuances and settlements. The update also clarifies
that a reporting entity needs to use judgment in determining the appropriate classes of assets and
liabilities, and should provide disclosures about the valuation techniques and inputs used to
measure fair value for both recurring and nonrecurring fair value measurements in Level 2 and Level
3. The new disclosures and clarifications of existing disclosures are effective for interim and
annual reporting periods beginning after December 15, 2009, except for the disclosures about
purchases, sales, issuances, and settlements in the rollforward of activity in Level 3 fair value
measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010,
and for interim periods within those fiscal years. This new guidance
only requires additional disclosures and will not have a material impact on the Companys consolidated financial
statements.
In October 2009, the FASB issued an accounting standard for multiple-deliverable revenue
arrangements, which amends previously issued guidance to require that an entity 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 made to revenue recognition policies 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 adopted the guidance beginning
February 1, 2010 as described in Revenue Recognition above.
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 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 adopted the guidance beginning February 1, 2010
as described in Revenue Recognition above.
From time to time, new accounting pronouncements are issued by the FASB and subsequently
adopted by the Company as of the specified effective date. Unless otherwise discussed in these
notes, 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.
9
3. Fair Value Measurements
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 April 30,
2010 and January 31, 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classification on Balance Sheet |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Short Term |
|
|
Long Term |
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
Aggregate |
|
|
Marketable |
|
|
Marketable |
|
April 30, 2010 |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
|
Securities |
|
|
Securities |
|
Available-for-sale U.S. treasury and
government agency securities |
|
$ |
79,192 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
79,192 |
|
|
$ |
64,387 |
|
|
$ |
14,805 |
|
Available-for-sale auction rate securities |
|
$ |
36,225 |
|
|
$ |
|
|
|
$ |
(1,498 |
) |
|
$ |
34,727 |
|
|
$ |
|
|
|
$ |
34,727 |
|
Trading auction rate securities |
|
$ |
11,525 |
|
|
$ |
|
|
|
$ |
(156 |
) |
|
$ |
11,369 |
|
|
$ |
11,369 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
126,942 |
|
|
$ |
|
|
|
$ |
(1,654 |
) |
|
$ |
125,288 |
|
|
$ |
75,756 |
|
|
$ |
49,532 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classification on Balance Sheet |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Short Term |
|
|
Long Term |
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
Aggregate |
|
|
Marketable |
|
|
Marketable |
|
January 31, 2010 |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
The following table details the fair value measurements within the fair value hierarchy of the
Companys financial assets and liabilities at April 30, 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at |
|
|
|
|
|
|
|
Reporting Date Using |
|
|
|
Total Fair Value at |
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2010 |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
Financial Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
$ |
19,428 |
|
|
$ |
19,428 |
|
|
$ |
|
|
|
$ |
|
|
U.S. treasury and government agency securities |
|
|
83,168 |
|
|
|
83,168 |
|
|
|
|
|
|
|
|
|
Certificates of deposit |
|
|
699 |
|
|
|
699 |
|
|
|
|
|
|
|
|
|
Auction rate securities |
|
|
46,096 |
|
|
|
|
|
|
|
|
|
|
|
46,096 |
|
Put right related to auction rate securities |
|
|
144 |
|
|
|
|
|
|
|
|
|
|
|
144 |
|
|
|
$ |
149,535 |
|
|
$ |
103,295 |
|
|
$ |
|
|
|
$ |
46,240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts |
|
$ |
22 |
|
|
|
|
|
|
$ |
22 |
|
|
|
|
|
|
|
$ |
22 |
|
|
$ |
|
|
|
$ |
22 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2010 |
|
$ |
47,910 |
|
Unrealized gain included in accumulated other comprehensive loss |
|
|
77 |
|
Unrealized gain included in other income (expense), net |
|
|
9 |
|
Sales or redemptions of securities |
|
|
(1,900 |
) |
Balance as of April 30, 2010 |
|
$ |
46,096 |
|
|
|
|
|
At April 30, 2010, auction rate securities (ARS) represented 31% of total financial
assets measured at fair value.
At April 30, 2010, the Company grouped money market funds and certificates of deposit
using a Level 1 valuation because market prices were readily available. At April 30, 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 April 30, 2010, the fair value of the
Companys assets grouped using a Level 3 valuation consisted of ARS, most of which were AAA-rated
bonds collateralized by federally guaranteed student loans. ARS are long-term variable rate bonds
tied to short-term interest rates that are reset through a Dutch auction process that typically
occurs every 7 to 35 days. Historically, the carrying value (par value) of the ARS approximated
fair market value due to the resetting of variable interest rates.
Beginning in late February 2008, 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 that 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
11
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 interest rates, collateralization of underlying
security investments and the creditworthiness of the issuer. The discounted cash flow analysis at
April 30, 2010 included the following assumptions:
|
|
|
|
|
Expected Term |
|
1-3 Years |
Illiquidity Discount |
|
|
1.5-1.8 |
% |
Discount Rate |
|
|
1.2-2.1 |
% |
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
$11.5 million at April 30, 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 three months ended April 30, 2010 and 2009 of approximately $7,000 and
$0.3 million, respectively, 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 $111.4 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 April 30, 2010, the Company recorded an unrealized loss of $1.5 million related to
the temporary impairment of the available-for-sale securities, which was included in accumulated
other comprehensive loss within stockholders equity.
4. Inventory
Inventory consists of the following (in thousands):
12
|
|
|
|
|
|
|
|
|
|
|
April 30, |
|
|
January 31, |
|
|
|
2010 |
|
|
2010 |
|
Raw materials |
|
$ |
1,996 |
|
|
$ |
2,102 |
|
Finished goods |
|
|
34,262 |
|
|
|
26,606 |
|
|
|
|
|
|
|
|
|
|
$ |
36,258 |
|
|
$ |
28,708 |
|
|
|
|
|
|
|
|
5. Goodwill and Acquired Intangible Assets
Goodwill
The carrying amount of goodwill of the Company was $2.0 million as of both April 30, 2010
and January 31, 2010. 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 three months ended April 30,
2010.
Acquired Intangible Assets
The carrying amount of acquired identifiable intangible assets was $3.8 million as of
April 30, 2010 and $4.1 million as of January 31, 2010. 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 April 30, 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Cost |
|
|
Amortization |
|
|
Net |
|
Developed technology |
|
$ |
3,210 |
|
|
$ |
(815 |
) |
|
$ |
2,395 |
|
Order backlog |
|
|
300 |
|
|
|
(296 |
) |
|
|
4 |
|
Customer relationships |
|
|
1,460 |
|
|
|
(466 |
) |
|
|
994 |
|
Trademark and tradename |
|
|
590 |
|
|
|
(187 |
) |
|
|
403 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,560 |
|
|
$ |
(1,764 |
) |
|
$ |
3,796 |
|
|
|
|
|
|
|
|
|
|
|
Amortization of acquired intangible assets was approximately $0.3 million and $0.2 million for
the three months ended April 30, 2010 and 2009, respectively.
The following is the expected future amortization expense of the Companys acquired intangible
assets as of April 30, 2010 for the respective fiscal years ending January 31 (in thousands):
|
|
|
|
|
2011 (remaining nine months) |
|
$ |
698 |
|
2012 |
|
|
918 |
|
2013 |
|
|
920 |
|
2014 |
|
|
918 |
|
2015 |
|
|
294 |
|
Thereafter |
|
|
48 |
|
|
|
|
|
Total |
|
$ |
3,796 |
|
|
|
|
|
13
The weighted average useful life of acquired intangible assets is six years.
7. Accrued Expenses
Accrued expenses consist of the following (in thousands) as of:
|
|
|
|
|
|
|
|
|
|
|
April 30, |
|
|
January 31, |
|
|
|
2010 |
|
|
2010 |
|
Corporate taxes |
|
$ |
2,270 |
|
|
$ |
792 |
|
Sales meetings and events |
|
|
588 |
|
|
|
1,015 |
|
Legal/audit/compliance |
|
|
1,034 |
|
|
|
893 |
|
Rent/phone/utilities |
|
|
1,047 |
|
|
|
1,080 |
|
Partner fees |
|
|
230 |
|
|
|
268 |
|
Travel and entertainment |
|
|
705 |
|
|
|
298 |
|
Inventory items |
|
|
168 |
|
|
|
36 |
|
Other |
|
|
1,201 |
|
|
|
1,524 |
|
|
|
|
|
|
|
|
|
|
$ |
7,243 |
|
|
$ |
5,906 |
|
|
|
|
|
|
|
|
8. Stock Incentive Plans
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 three months ended April 30, 2010 and 2009 was approximately $10,000 and $6,000,
respectively.
At April 30, 2010, non-employees held nonstatutory options to purchase 22,500 shares of
common stock, of which 16,875 were fully vested and exercisable.
Restricted Common Stock Awards
From
time to time, the Company awards its non-employee directors restricted
common stock awards 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 awards 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.
14
The following table summarizes the Companys restricted stock activity during the three months
ended April 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
|
|
|
|
|
Grant Date Fair |
|
|
|
Shares |
|
|
Par value |
|
|
Value |
|
Non-vested as of January 31, 2010 |
|
|
57,808 |
|
|
$ |
0.001 |
|
|
$ |
7.76 |
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
Vested |
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested as of April 30, 2010 |
|
|
57,808 |
|
|
$ |
0.001 |
|
|
$ |
7.76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Common Stock Units
The Company awards its employees and officers restricted common stock units under the
Companys 2007 Stock Incentive Plan. Restricted stock units represent the right to receive shares
of common stock in the future, with the right to future delivery of the shares contingent upon
satisfaction of specified conditions. The restricted stock units are valued based on the Companys
stock price on the grant date. For restricted stock units that contain only a service-based vesting
feature, the Company recognizes compensation cost on a straight-line
basis over the awards vesting periods. For restricted stock
units with a performance-based vesting feature, the Company recognizes compensation cost on
a graded-vesting basis over the awards expected vesting periods, commencing when achievement of the performance condition is deemed probable. Each period
management evaluates the criteria established in each grant to determine the probability that the
performance condition will be achieved. As of April 30, 2010, the
number of performance-based vesting restricted stock units
outstanding was 202,500.
The following table summarizes the Companys restricted stock unit activity during the three
months ended April 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant Date Fair |
|
|
Aggregate Intrinsic |
|
|
|
Units |
|
|
Par value |
|
|
Value |
|
|
Value |
|
Oustanding units as of January 31, 2010 |
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
763,000 |
|
|
$ |
0.001 |
|
|
$ |
11.20 |
|
|
|
|
|
Vested |
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled |
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oustanding units as of April 30, 2010 |
|
|
763,000 |
|
|
$ |
0.001 |
|
|
$ |
11.20 |
|
|
$10.4 million |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
The following table summarizes stock option activity for the three months ended April 30,
2010:
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
Aggregate |
|
|
|
Shares |
|
|
Number of Options |
|
|
Weighted Average |
|
|
Remaining Life in |
|
|
Intrinsic |
|
|
|
Available for Grant |
|
|
Outstanding |
|
|
Exercise Price |
|
|
Years |
|
|
Value |
|
Outstanding at January 31, 2010 |
|
|
3,422,236 |
|
|
|
11,815,522 |
|
|
$ |
7.00 |
|
|
|
|
|
|
|
|
|
Options granted |
|
|
(158,250 |
) |
|
|
158,250 |
|
|
$ |
11.57 |
|
|
|
|
|
|
|
|
|
Restricted stock units granted |
|
|
(763,000 |
) |
|
|
|
|
|
$ |
0.00 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
(721,782 |
) |
|
$ |
4.62 |
|
|
|
|
|
|
|
|
|
Forfeited, cancelled or expired (1) |
|
|
239,450 |
|
|
|
(242,750 |
) |
|
$ |
10.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at April 30, 2010 |
|
|
2,740,436 |
|
|
|
11,009,240 |
|
|
$ |
7.15 |
|
|
5.70 years |
|
$72.1 million |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at April 30, 2010 |
|
|
|
|
|
|
4,869,681 |
|
|
$ |
6.09 |
|
|
5.70 years |
|
$37.0 million |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at April 30, 2010 |
|
|
|
|
|
|
10,734,174 |
|
|
$ |
7.11 |
|
|
5.57 years |
|
$70.6 million |
|
|
|
(1) |
|
Options cancelled under the Companys 2000 Stock Incentive Plan
(the 2000 Plan) after July 24, 2007 are not considered available
for grant, as the Company is no longer granting options under this
plan. During the three months ended April 30, 2010, options for
3,300 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 April
30, 2010, which was $13.69 per share. The aggregate intrinsic value of options exercised for the
three months ended April 30, 2010 and 2009 was $6.0 million and $1.4 million, respectively.
At April 30, 2010, unrecognized compensation expense related to unvested stock options,
unvested restricted stock awards and unvested restricted stock units was $26.9 million, $0.1
million and $8.2 million, respectively, which is expected to be recognized over a weighted-average
period of 2.9, 0.17 and 3.57 years, respectively.
9. Income Taxes
The Company recorded income tax expense of approximately $1.4 million and income tax
benefit of approximately $71,000 for the three months ended April 30, 2010 and 2009, respectively.
The Companys effective income tax rate was 35% and 23% for the three months ended April 30, 2010
and 2009, respectively. The effective income tax rate is based upon the estimated income for the
year, the estimated composition of the income in different jurisdictions and adjustments, if any,
in the applicable quarterly periods for potential tax consequences, benefits, resolution of tax
audits or other tax contingencies.
For the three months ended April 30,
2010, the effective income tax rate approximated the U.S. federal statutory tax rate of 35%, primarily due to the offsetting effects of accounting
for stock-based compensation, the federal manufacturers deduction, as well as the utilization of
state tax credits. For the three months ended April 30, 2009, the effective income tax rate varied
from the U.S. federal statutory tax rate of 35%, primarily due to the effects of accounting for
stock-based compensation, as well as the utilization of federal and state tax credits.
The Companys income tax provision for the three months ended April 30, 2010 consisted of
federal, state and foreign taxes owed in relation to income generated. The Companys income tax
provision for the three months ended April 30, 2009 consisted primarily of taxes owed in relation
to income generated by its foreign subsidiaries. The federal and state provision for the three
months ended April 30, 2009 included amounts in relation to the Companys income generated in the
United States, reduced by the utilization of available net operating loss
(NOL) carryforwards and tax credits that were recorded on the balance sheet with a full
valuation allowance prior to their utilization.
The Company continued to provide a full valuation allowance for foreign net operating losses
for NuTech Solutions, Inc., acquired by Netezza in May 2008, with operations in Germany and Poland,
as the Company believes it is more likely than not that the future tax benefits from accumulated
net operating losses will not be realized. The
16
Company continues to assess the need for the
valuation allowance at each balance sheet date based on all available evidence. However, it is
possible that the more likely than not criterion could be met in a future period, which could
result in the reversal of a significant portion or all of the valuation allowance. Any reversal of
the valuation allowance associated with the NuTech acquisition would be recorded as a tax benefit.
10. Commitments and Contingencies
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.
Guarantees and Indemnification Obligations
The Company enters into standard indemnification agreements in the ordinary course of
business. Pursuant to these agreements, the Company indemnifies and agrees to reimburse the
indemnified party for losses incurred by the indemnified party, generally the Companys customers,
in connection with any patent, copyright, trade secret or other proprietary right infringement
claim by any third party with respect to the Companys products. The term of these indemnification
agreements is generally perpetual. Based on historical information and information known as of
April 30, 2010, the Company does not expect it will incur any significant liabilities under these
indemnification agreements.
11. Industry Segment and Geographic Information
The
Company is organized as, and operates in, one reportable segment: the development and
sale of data warehouse appliances. The Companys chief operating decision-maker is its Chief
Executive Officer. The Companys Chief Executive Officer reviews financial information presented on
a consolidated basis, accompanied by information about revenue by geographic region, for purposes
of evaluating financial performance and allocating resources. The Company and its Chief Executive
Officer evaluate performance based primarily on revenue in the geographic locations in which the
Company operates. Revenue is attributed by geographic location based on the location of the end
customer.
Revenue, classified by the major geographic areas in which the Companys customers are
located, was as follows (in thousands):
17
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended April 30, |
|
|
|
2010 |
|
|
2009 |
|
United States |
|
$ |
46,770 |
|
|
$ |
33,692 |
|
International |
|
|
11,404 |
|
|
|
11,675 |
|
|
|
|
|
|
|
|
Total |
|
$ |
58,174 |
|
|
$ |
45,367 |
|
|
|
|
|
|
|
|
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):
|
|
|
|
|
|
|
|
|
|
|
April 30, |
|
|
January 31, |
|
|
|
2010 |
|
|
2010 |
|
United States |
|
$ |
8,769 |
|
|
$ |
8,234 |
|
International |
|
|
262 |
|
|
|
235 |
|
|
|
|
|
|
|
|
Total |
|
$ |
9,031 |
|
|
$ |
8,469 |
|
|
|
|
|
|
|
|
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement
The following discussion and analysis of our financial condition and results of operations
should be read in conjunction with the unaudited condensed consolidated financial statements and
the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited
consolidated financial statements and notes thereto and managements discussion and analysis of
financial condition and results of operations included in the Companys Annual Report on Form 10-K
for the year ended January 31, 2010, which was filed with the Securities and Exchange Commission
(SEC) on April 1, 2010. This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These
statements are often identified by the use of words such as may, will, expect, believe,
anticipate, intend, could, estimate, or continue, and similar expressions or variations.
Such forward-looking statements are subject to risks, uncertainties and other factors that could
cause actual results and the timing of certain events to differ materially from future results
expressed or implied by such forward-looking statements. Factors that could cause or contribute to
such differences include, but are not limited to, those identified below, and those discussed in
the section titled Risk Factors, set forth in Part II, Item 1A of this Quarterly Report on Form
10-Q. The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as
of the date of this Quarterly Report on Form 10-Q. We anticipate that subsequent events and
developments will cause our views to change. However, while we may elect to update these
forward-looking statements at some point in the future, we have no current intention of doing so
except to the extent required by applicable law. You should, therefore, not rely on these
forward-looking statements as representing our views as of any date subsequent to the date of this
Report on Form 10-Q.
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
18
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 one of our 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 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.
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 appliances worldwide to large global enterprises, mid-market companies and government
agencies through our direct sales force as well as indirectly via distribution partners. To date,
we have derived the substantial majority of our revenue from customers located in the United
States. For the three months ended April 30, 2010 and 2009, U.S. customers accounted for
approximately 80% and 74% of our overall revenue, respectively. For fiscal 2010, 2009 and 2008,
U.S. customers accounted for approximately 80%, 74% and 80% 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
19
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 the three
months ended April 30, 2010 and 2009 was 26% and 28%, respectively, and was 30%, 24% and 19% in
fiscal 2010, 2009 and 2008, 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
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 447 employees at April 30, 2010 from 425
employees at January 31, 2010 and 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
20
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.
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 and losses or gains on disposal of fixed assets.
Critical Accounting Policies and Use of Estimates
Our consolidated financial statements are prepared in accordance with generally accepted
accounting principles in the United States, which we refer to as GAAP. These accounting principles
require us to make certain estimates, judgments and assumptions that can affect the reported
amounts of assets and liabilities as of the dates of the consolidated financial statements, the
disclosure of contingencies as of the dates of the consolidated financial statements, and the
reported amounts of revenue and expenses during the periods presented. We evaluate these estimates,
judgments and assumptions on an ongoing basis. Although we believe that our estimates, judgments
and assumptions are reasonable under the circumstances, actual results may differ from those
estimates.
We believe that of our significant accounting policies, the following accounting policies
involve the most judgment and complexity:
21
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revenue recognition; |
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stock-based compensation; |
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inventory valuation; |
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accounting for income taxes; |
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valuation of investments; and |
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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. Additional information about these critical accounting policies may be found in the
Managements Discussion and Analysis of Financial Condition and Results of Operations section
included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2010. The critical
accounting policies described in our Annual Report on Form 10-K for the fiscal year ended January
31, 2010 have not materially changed, other than the critical accounting policy titled
Revenue Recognition which has been modified as a result of
changes to our revenue recognition policy required by new accounting guidance adopted during the three months ended April 30, 2010.
Revenue Recognition
We derive revenue from the sale of our
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 our contractual relationships with end users and
resellers and the manner in which these transactions are accounted.
Our 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 risk of loss to
transfer at shipping point. In those cases, we defer revenue until title and risk of loss transfer to the customer. We do
not customarily offer a right of return on our product sales and any acceptance criteria is normally based upon
published specifications. In cases where a right of return is granted, we defer revenue until such rights expire. If
acceptance criteria are not based on published specifications with which we can ensure compliance, we defer
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. We also provide a 90-day standard
product warranty.
Our service revenue consists of installation, maintenance,
training and professional services. Installation and
professional services are not considered essential to the functionality of our 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.
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
we have 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.
For sales through resellers and distributors,
we deliver 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.
In October 2009, the Financial Accounting Standards Board, or FASB, issued an accounting
standard for multiple-deliverable revenue arrangements which changes the requirements for
establishing separate units of accounting in a multiple element arrangement and requires the
allocation of arrangement consideration to each deliverable to be based on the relative selling
price. Concurrently with issuing this standard, the FASB also issued an accounting standard which
excludes software that is contained on a tangible product from the scope of software revenue
guidance if the software component and the non-software component function together to deliver the
tangible products essential functionality.
The 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 adopted these standards on a prospective basis as of the beginning of fiscal 2011 for new
and materially modified arrangements originating on or after February 1, 2010. As a result, net
revenues for the three months ended April 30, 2010 were approximately $17.0 million higher than the
net revenues that would have been recorded under the previous accounting rules. The increase in
revenues was due to recognition of revenue for products for which a
new or materially modified contract was entered into during the three months ended April
30, 2010 where the product contained undelivered elements for which we were unable to demonstrate fair value
under the previous standards.
Had we adopted these standards on a
prospective basis as of the beginning of fiscal 2010 for new and materially
modified arrangements originating on or after February 1, 2009, net revenues for the three months ended April 30,
2009 would have been approximately $0.5 million higher.
Under the new standards we allocate the total consideration for an
arrangement among the separable elements of the arrangement based upon the relative selling price of
each element. Arrangement consideration allocated to undelivered elements is deferred until
delivery.
We do not believe the effect of adopting these standards will have
a material impact on total revenue recognized in our full fiscal year
2011, however, the impact in any given period will vary depending on
the nature and volume of multiple element arrangements entered into during the period.
Beginning in fiscal 2011, when a sales arrangement contains multiple elements and software and
non-software components function together to deliver the tangible products essential
functionality, we allocate revenue to each element based on a selling price hierarchy. The selling
price for a deliverable is based on its vendor-specific objective evidence, or VSOE, if available,
third party evidence, or TPE, if VSOE is not available, or best estimated selling price, or BESP,
if neither VSOE nor TPE is available. We then recognize revenue on each deliverable in accordance
with its policies for product and service revenue recognition.
VSOE of fair value is 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. TPE of
selling price is established by evaluating largely interchangeable competitor products or services
in stand-alone sales to similarly situated customers. However, as our products contain a
significant element
of proprietary technology and our solutions offer substantially different features and
functionality than other
22
available products, the comparable pricing of products with similar
functionality typically cannot be obtained. As we are unable to reliably determine
what competitors products selling prices are on a stand-alone basis, we are not typically able to
determine TPE.
When we are unable to establish selling price using VSOE or TPE, we use BESP in our allocation
of arrangement consideration. The objective of BESP is to determine the price at which the company
would transact a sale if the product or service were sold on a stand-alone basis. We determine BESP
for a product or service by considering multiple factors including, but not limited to, overall
market conditions, including geographic or regional specific market factors; pricing practices;
including pricing in different geographies and for different purchase volumes; internal costs; and
competitor pricing strategies. The determination of BESP is a formal process within our company
that includes review and approval by our management. We review our determination of BESP on a
periodic basis and updates it, when appropriate, to ensure that it reflects our recent pricing
experience.
We evaluate all deliverables in an arrangement to determine whether they represent separate
units of accounting. A deliverable constitutes a separate unit of accounting when it has
stand-alone value and there are no customer-negotiated refunds or return rights for the delivered
elements. The new standards do not change the units of accounting for our revenue
transactions.
In
multiple element arrangements where software deliverables that are not more-than-incidental are
included, revenue is allocated to each separate unit of accounting for each of the non-software
deliverables and to the software deliverables as a group using the relative selling prices within the selling price hierarchy of each
of the deliverables in the arrangement based on the selling price hierarchy described above. If the
arrangement contains more than one software deliverable, the arrangement consideration allocated to
the software deliverables as a group is then allocated among the individual software deliverables
using the guidance for recognizing software revenue, as amended.
We limit the amount of revenue recognition for delivered elements to the amount that is not
contingent on the future delivery of products or services, future performance obligation, or
subject to customer-specific return or refund privileges.
For transactions entered into prior to February 1, 2010,
we allocate revenue for multiple element arrangements for which VSOE exists for undelivered elements but not for the delivered
elements, using 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.
23
Results of Operations
The following table sets forth our consolidated results of operations for the periods shown.
|
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|
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Three Months Ended April 30, |
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Percentage |
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2010 |
|
|
2009 |
|
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Change |
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(in thousands) |
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|
Revenue |
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|
Product |
|
$ |
42,837 |
|
|
$ |
32,702 |
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|
|
31 |
% |
Services |
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|
15,337 |
|
|
|
12,665 |
|
|
|
21 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
58,174 |
|
|
|
45,367 |
|
|
|
28 |
% |
|
|
|
|
|
|
|
|
|
|
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Cost of revenue |
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|
|
|
|
|
|
|
|
|
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|
Product |
|
|
15,445 |
|
|
|
12,344 |
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|
|
25 |
% |
Services |
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|
4,330 |
|
|
|
3,475 |
|
|
|
25 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue |
|
|
19,775 |
|
|
|
15,819 |
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|
|
25 |
% |
|
|
|
|
|
|
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|
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|
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|
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|
|
|
|
|
|
Gross margin |
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|
38,399 |
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|
|
29,548 |
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|
|
30 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
19,150 |
|
|
|
14,676 |
|
|
|
30 |
% |
Research and development |
|
|
10,829 |
|
|
|
11,620 |
|
|
|
-7 |
% |
General and administrative |
|
|
4,550 |
|
|
|
3,976 |
|
|
|
14 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
34,529 |
|
|
|
30,272 |
|
|
|
14 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
3,870 |
|
|
|
(724 |
) |
|
|
N/A |
|
Interest income |
|
|
286 |
|
|
|
310 |
|
|
|
-8 |
% |
Interest expense |
|
|
|
|
|
|
25 |
|
|
|
-100 |
% |
Other income (expense), net |
|
|
(46 |
) |
|
|
131 |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
4,110 |
|
|
|
(308 |
) |
|
|
|
|
Income tax expense (benefit) |
|
|
1,438 |
|
|
|
(71 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,672 |
|
|
$ |
(237 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
Total revenue was $58.2 million and $45.4 million in the three months ended April 30, 2010 and
2009, respectively, representing an increase of 28%.
Product revenue was $42.8 million and $32.7 million for the three months ended April 30, 2010 and
2009, respectively, representing an increase of 31%. This increase was primarily based on increased
sales volume and continued deployment of our TwinFin appliance, particularly from our existing
customers, rather than price increases. As a result of the adoption of new revenue recognition
accounting standards for arrangements with multiple deliverables, described above, product revenues
were approximately $17.0 million higher than revenues that would have been recorded under previous
accounting rules. Product revenue related to existing customer sales increased by $12.3 million in
the three months ended April 30, 2010, representing 77% of total product revenue, from 63% in the
three months ended April 30, 2009. Product revenue related to new customers represented 23% of
total product revenue, from 37% of total product revenue in the three months ended April 30, 2009.
Our total installed base of customers was 345 at April 30, 2010.
Geographically, 81% of our product revenue was from customers in the United States and 19% was
from international customers for the three months ended April 30, 2010, as compared to 75% of our
product revenue from customers in the United States and 25% from international customers for the
three months ended April 30, 2009.
24
Services revenue was $15.3 million and $12.7 million for the three months ended April 30, 2010
and 2009, respectively, representing an increase of 21%. This increase was the result of
maintenance and support services for an expanding installed customer base as a result of the
renewal of maintenance and support contracts by existing customers, combined with new product sales
during the period, and accompanying sales of new maintenance and support contracts. 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% and 65% for the three months ended April 30, 2010 and 2009,
respectively. The increase in gross margin was the result of an increase in the product gross
margin, but is not necessarily sustainable or indicative of any future trends.
Product gross margin was 64% and 62% for the three months ended April 30, 2010 and 2009,
respectively. This increase was due primarily to a reduction in the cost of our hardware components
and increased efficiencies from improved relationships with our contract manufacturers.
Services gross margin was 72% and 73% for the three months ended April 30, 2010 and 2009,
respectively. The decrease in the services gross margin for the three months ended April 30, 2010
was primarily due to a services headcount increase of 17% to 56 at April 30, 2010 from 48 at April
30, 2009.
Sales and Marketing Expenses
Sales and marketing expenses increased $4.5 million, or 30%, to $19.2 million for the three
months ended April 30, 2010 from $14.7 million for the three months ended April 30, 2009. The
increase in sales and marketing expenses for the three months ended April 30, 2010 was primarily
due to increases of $2.5 million in salaries and employee benefits due to additional headcount,
$0.6 million in marketing programs primarily related to our TwinFin appliance, $0.5 million in
sales travel and expense, $0.5 million in shared overhead, fringe and office costs and $0.2 million
in stock-based compensation expense.
As a percentage of revenue, sales and marketing expenses were 33% and 32% for the three months
ended April 30, 2010 and 2009, respectively.
The number of sales and marketing employees increased to 181 at April 30, 2010, from 156 at
April 30, 2009, as we continue to expand our sales force to provide better geographic distribution
and market penetration.
Research and Development Expenses
Research and development expenses decreased $0.8 million, or 7%, to $10.8 million for the
three months ended April 30, 2010 from $11.6 million for the three months ended April 30, 2009. The
decrease in research and development expenses for the three months ended April 30, 2010 was due
primarily to a decrease of $2.6 million in prototype expense primarily due to expenditures in the
three months ended April 30, 2009 related to product development for our TwinFin appliance. This
decrease was partially offset by an increase of $0.8 million due to additional headcount, $0.5
million in shared overhead and fringe costs, $0.3 million in consulting costs and $0.2 million in
stock-based compensation expense.
As a percentage of revenue, research and development expenses were 19% and 26% for the three
months ended April 30, 2010 and 2009, respectively.
The number of research and development employees increased to 166 at April 30, 2010 from 164
at April 30, 2009. The development team from our contract engineering firm in India also increased
to 68 at April 30, 2010 from 65 at April 30, 2009, in order to take advantage of the cost
efficiencies associated with offshore research and development resources.
25
General and Administrative Expenses
General and administrative expenses increased $0.6 million, or 14%, to $4.6 million for the
three months ended April 30, 2010 from $4.0 million for the three months ended April 30, 2009. The
increase in general and administrative expenses for the three months ended April 30, 2010 was due
primarily to increases of $0.6 million in office rent and office costs, $0.5 million in salaries
and employee benefits, and $0.2 million in stock-based compensation expense, partially offset by
decreases of $0.8 million in shared overhead and fringe costs.
As a percentage of revenue, general and administrative expenses were 8% and 9% for the three
months ended April 30, 2010 and 2009, respectively.
The number of general and administrative employees was 33 at April 30, 2010 and 31 at April
30, 2009, and may change from time to time to ensure that we have appropriate infrastructure to
support the growth of our organization and to support the demands of public company compliance.
Interest Income (Expense), Net
We recorded approximately $286,000 of interest income, net, for the three months ended April
30, 2010 as compared to $285,000 for the three months ended April 30, 2009. Interest income, net,
for the three months ended April 30, 2010 was comprised of interest income of $286,000. Interest
income, net, for the three months ended April 30, 2009 was comprised of interest income of $310,000
and interest expense of approximately $25,000.
Other Income (Expense), Net
We incurred other expense, net, of approximately $46,000 for the three months ended April 30,
2010 as compared to other income, net, of approximately $0.1 million for the three months ended
April 30, 2009. The components of other expense, net, for the three months ended April 30, 2010
were a loss on the change in fair value of our auction rate security put right, gains on trading
securities, transaction losses for activities in our foreign subsidiaries and losses associated
with changes in the fair value of foreign currency forward contracts. The components of other
income, net in the three months ended April 30, 2009 were gains on trading securities, transaction
gains for activities in our foreign subsidiaries, gains associated with changes in the fair value
of foreign currency forward contracts, and a loss on the change in fair value of our auction rate
security put right.
Provision for Income Taxes
We recorded an income tax expense of approximately $1.4 million for the three months ended
April 30, 2010, as compared to an income tax benefit of approximately $0.1 million for the three
months ended April 30, 2009.
Our effective income tax rate was 35% and 23% for the three months ended April 30, 2010 and
2009, respectively. Our effective income tax rate is based upon the estimated income for the year,
the estimated composition of the income in different jurisdictions and adjustments, if any, in the
applicable quarterly periods for potential tax consequences, benefits, resolution of tax audits or
other tax contingencies. For the three months ended April 30, 2010, the
effective income tax rate approximated the U.S. federal statutory tax
rate of 35%, primarily due to the offsetting effects of accounting for stock-based compensation, the federal manufacturers deduction, as
well as the utilization of state tax credits. For the three months ended April 30, 2009, the
effective income tax rate varied from the U.S. federal statutory tax rate of 35%, primarily due to
the effects of accounting for stock-based compensation, as well as the utilization of federal and
state tax credits.
Our income tax provision for the three months ended April 30, 2010 consisted of federal, state
and foreign taxes owed in relation to income generated. Our income tax provision for the three
months ended April 30, 2009 consisted primarily of taxes owed in relation to income generated by
its foreign subsidiaries. The federal and state provision for the three months ended April 30, 2009
included amounts in relation to our income generated in the U.S., reduced by the utilization of
available net operating loss, or NOL, carryforwards and tax credits that were recorded on the
balance sheet with a full valuation allowance prior to their utilization.
26
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.
The non-GAAP financial measures presented by us exclude non-cash employee stock-based
compensation, amortization of acquired intangible assets, and the related income tax effect of
excluding these expenses. 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 comparisons with other companies.
A reconciliation between GAAP financial measures and non-GAAP financial measures is as follows
(in thousands except per share data):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended April 30, |
|
|
|
2010 |
|
|
2009 |
|
Net income
(loss) as reported under GAAP |
|
$ |
2,672 |
|
|
$ |
(237 |
) |
Adjustments to GAAP net income (loss): |
|
|
|
|
|
|
|
|
Non-cash employee stock based compensation |
|
|
2,979 |
|
|
|
2,235 |
|
Amortization of acquired intangible assets |
|
|
260 |
|
|
|
231 |
|
Income tax effect (1) |
|
|
(1,052 |
) |
|
|
(662 |
) |
|
|
|
Non-GAAP net income |
|
$ |
4,859 |
|
|
$ |
1,567 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share as reported under GAAP diluted |
|
$ |
0.04 |
|
|
$ |
(0.00 |
) |
Net income per share impact of excluded items |
|
|
0.04 |
|
|
|
0.03 |
|
|
|
|
Non-GAAP net income per share diluted |
|
$ |
0.08 |
|
|
$ |
0.03 |
|
|
|
|
|
|
|
(1) |
|
Income tax effect of excluding stock-based compensation and amortization of
acquired intangible assets. The method used to determine this adjustment was to
calculate the tax provision excluding these charges as compared to the tax provision
including these charges. |
Liquidity and Capital Resources
As of April 30, 2010, our principal sources of liquidity were cash and cash equivalents of
$32.2 million, short-term investments in U.S. treasury and government agency securities of $64.4
million and accounts receivable of $36.9 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
27
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 April 30, 2010, we held auction rate securities, or ARS, with a par value totalling $47.8
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 April 30, 2010
assumes a weighted average discount rate of between 1.2% 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 April 30, 2010, we have estimated an aggregate
loss of $1.7 million, of which $1.5 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 $0.2 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.
The following table shows our cash flows from operating activities, investing activities and
financing activities for the stated periods:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended April 30, |
|
|
2010 |
|
2009 |
|
|
(In thousands) |
Net cash provided by (used in) operating activities |
|
$ |
2,714 |
|
|
$ |
(3,395 |
) |
Net cash used in investing activities |
|
|
(13,274 |
) |
|
|
(1,193 |
) |
Net cash provided by financing activities |
|
|
2,149 |
|
|
|
242 |
|
Cash Provided by (Used in) Operating Activities
Net cash provided by operating activities was $2.7 million for the three months ended April
30, 2010 and primarily consisted of net income of $2.7 million, a decrease in accounts receivable
of $15.7 million, primarily due to the timing and billing and collections of customer invoices, and
an increase in accrued expenses of $2.5 million. These increases were partially offset by an
increase in inventory of $7.6 million, due to increased production of TwinFin inventory, a decrease
in accounts payable of $7.8 million, a decrease in deferred revenues of $3.8 million, and an
increase in other assets of $2.3 million. In addition, for the three months ended April 30, 2010,
we had stock-based compensation expense of $3.0 million and depreciation and amortization expense
of $1.4 million, each of which is a non-cash expense.
28
Net cash used in operating activities was $3.4 million for the three months ended April 30,
2009 and primarily consisted of a net loss of $0.2 million, a decrease in deferred revenues of
$10.2 million, a decrease in accounts payable of $1.8 million, a decrease in accrued compensation
and benefits of $1.8 million, and a decrease in accrued expenses of $1.8 million. These uses of
cash were partially offset by a decrease in accounts receivable of $7.7 million, primarily due to
the timing of billing and collections of customer invoices, and a decrease in other assets of $0.7
million. In addition, for the three months ended April 30, 2009, we had stock-based compensation
expense of $2.2 million and depreciation and amortization expense of $1.8 million, each of which is
a non-cash expense.
Cash Used in Investing Activities
Net cash used in investing activities was $13.3 million for the three months ended April 30,
2010, comprised primarily of purchases of short-term and long-term U.S. treasury and government
agency securities of $49.9 million and $1.8 million of capital expenditures related primarily to
new product development. These uses of cash were partially offset by $38.4 million of sales and
maturities of our investments.
Net cash used in investing activities was $1.2 million for the three months ended April 30,
2009, comprised primarily of $2.0 million, net of cash acquired, used to acquire Tizor, and $1.0
million of capital expenditures. These uses of cash were partially offset by $1.7 million of sales
and maturities of our investments.
Cash Provided by Financing Activities
Net cash provided by financing activities was $2.1 million and $0.2 million for the three
months ended April 30, 2010 and 2009, respectively, each of which consisted of proceeds received
from the issuance of common stock upon the exercise of stock options.
Contractual Obligations
The following is a summary of our contractual obligations as of April 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual obligations |
|
Total |
|
Less than 1 year |
|
1 - 3 Years |
|
3 - 5 Years |
|
More Than 5 Years |
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
Operating lease obligations |
|
$ |
12,574 |
|
|
$ |
3,143 |
|
|
$ |
4,512 |
|
|
$ |
3,942 |
|
|
$ |
977 |
|
Purchase obligations (1) |
|
|
9,916 |
|
|
|
9,916 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Purchase obligations primarily represent the value of purchase orders issued to our contract
manufacturers for the procurement of assembled appliance systems for the next three months. |
|
|
|
The table above does not reflect unrecognized tax benefits of $4.6 million, the timing of
which is uncertain. |
We believe that our cash and cash equivalents of $32.2 million and our short-term marketable
securities of $75.8 million, both as of April 30, 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. Examples of off-balance sheet arrangements include
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.
29
Recent Accounting Pronouncements
In January 2010, the FASB issued an update requiring reporting
entities to provide new disclosures, and clarifications of currently required disclosures related to fair value measurements. The new disclosures require
reporting entities to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the
reasons for the transfers. Additionally, in the Level 3 reconciliations, a reporting entity should present separately information about purchases, sales,
issuances and settlements. The update also clarifies that a reporting entity needs to use judgment in determining the appropriate classes of assets and
liabilities, and should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value
measurements in Level 2 and Level 3. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods
beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the rollforward of activity in Level 3
fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal
years. This new guidance only requires additional disclosures and will not have a material impact on our consolidated financial statements.
In October 2009, the FASB issued an accounting standard for multiple-deliverable revenue
arrangements, which amends previously issued guidance to require that an entity 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 made to revenue recognition policies 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 adopted the guidance beginning February 1, 2010, as described in Revenue Recognition above.
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 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 adopted the guidance beginning
February 1, 2010, as described in Revenue Recognition above.
|
|
|
Item 3. |
|
Quantitative and Qualitative Disclosures About Market Risk |
Foreign Currency Risk
Our international sales and marketing operations incur expenses that are denominated in
foreign currencies. These expenses could be materially affected by currency fluctuations. Our
exposures are to fluctuations in exchange rates for the U.S. dollar versus the British pound,
Australian dollar, the euro, the Canadian dollar, the Polish zloty, the Korean won and the Japanese
yen. Changes in currency exchange rates could adversely affect our consolidated results of
operations or financial position. Additionally, our international sales and marketing operations
maintain cash balances denominated in foreign currencies. In order to decrease the inherent risk
associated with translation of foreign cash balances into our reporting currency, we have not
maintained excess cash balances in foreign currencies. As of April 30, 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
30
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 April 30, 2010, we had outstanding foreign currency forward contracts with an aggregate
notional value of $11.6 million, denominated in British pounds, Australian dollars, euros and
Japanese yen. The mark-to-market effect associated with these contracts was a net unrealized loss
of approximately $22,000 at April 30, 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 $32.2 million at April 30, 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 an increase in rates will increase investment
income.
Our exposure to market risk for changes in interest rates relates primarily to our investment
portfolio. We place our investments with high quality issuers and, by policy, limit the amount of
risk by investing primarily in money market funds, high-quality corporate obligations and
certificates of deposit.
At April 30, 2010, we held ARS with a par value of $47.8 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 April 30,
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 $11.5 million at April 30, 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 3 to the accompanying
financial statements for a description of how we value these ARS. Our valuation of the ARS is
sensitive to market conditions and managements judgment and could change significantly based on
the assumptions used. If we had used an expected term of one year or five years and a discount
rate of 1.2% and 3.1% respectively, the gross unrealized loss would have been $0.5 million or $5.2
million, respectively. If we had used an expected term of one to three years and a discount rate of
1.2% or 3.1%, the gross unrealized loss would have been $0.8 million or $2.8 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 $2.2 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 ability to
operate our business
|
|
|
Item 4. |
|
Controls and Procedures |
Our management, with the participation of our chief executive officer and chief financial
officer, evaluated the effectiveness of our disclosure controls and procedures as of April 30,
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, or the Exchange Act, means controls and
other procedures of a company that are designed to ensure that information required to be disclosed
by a company in the reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the SECs rules and forms. Disclosure
controls and procedures include, without limitation, controls and procedures designed to ensure
that information required to be disclosed by a company in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the companys management, including its
principal executive and principal financial officers, or persons performing similar functions, as
appropriate to allow timely decisions regarding required disclosure. Management recognizes that any
controls and procedures, no matter how well designed and operated, can provide only reasonable
assurance of achieving their objectives and management necessarily applies its judgment in
evaluating the cost-benefit relationship of possible controls and procedures. Based on the
evaluation of our
31
disclosure controls and procedures as of April 30, 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.
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) occurred during the three months ended April 30, 2010 that has
materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
PART II. OTHER INFORMATION
There are risks and uncertainties that could cause our actual results to differ materially from the
results contemplated by the forward-looking statements contained in this Quarterly Report on Form
10-Q. Because of the these factors, as well as other variables affecting our operating results,
past financial performance should not be considered as a reliable indicator of future performance
and investors should not use historical trends to anticipate results or trends in future periods.
These risks are not the only ones facing us. Please also see Cautionary Statement in Part I,
Item 2 of this Quarterly Report on Form 10-Q. The following discussion highlights certain risks
which may affect future operating results. These are the risks and uncertainties we believe are
most important for our existing and potential stockholders to consider. These risk factors have
been updated from those in our Annual Report on Form 10-K, to, among other things, update the risk
factor related to our future interpretations of existing accounting standards. Additional risks
and uncertainties not presently known to us, which we currently deem immaterial or which are
similar to those faced by other companies in our industry or business in general, may also impair
our business operations. If any of the following risks or uncertainties actually occurs, our
business, financial condition and operating results would likely suffer.
Risks Related to Our Business and Industry
Adverse changes in economic conditions and reduced information technology spending may 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:
|
|
|
the impact of the recent economic downturn on customer purchases; |
|
|
|
|
the impact of new competitors or new competitive offerings; |
32
|
|
|
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; |
|
|
|
|
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; |
|
|
|
|
the possibility of seasonality in demand for our products; |
|
|
|
|
the addition of new customers or the loss of existing customers; |
|
|
|
|
the rates at which customers purchase additional products or additional capacity for
existing products from us; |
|
|
|
|
changes in the mix of products and services sold; |
|
|
|
|
the rates at which customers renew their maintenance and support contracts with us; |
|
|
|
|
our ability to develop and introduce new products and to enhance our existing products
with new and better functionality that meet customer requirements; |
|
|
|
|
the timing of recognizing revenue as a result of revenue recognition rules, including
due to the timing of delivery and receipt of our products; |
|
|
|
|
the length of our product sales cycle; |
|
|
|
|
the productivity and growth of our sales force; |
|
|
|
|
service interruptions with any of our single source suppliers or manufacturing partners; |
|
|
|
|
changes in pricing by us or our competitors, or the need to provide discounts to win
business; |
|
|
|
|
the timing of our product releases or upgrades or similar announcements by us or our
competitors; |
|
|
|
|
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. |
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 April 30, 2010, our accumulated deficit was $40.8
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 TwinFin 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 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.
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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 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 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.
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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 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
36
presence and market share expand and as the number of competitors in our market increases.
Any such claims or litigation could:
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be time-consuming and expensive to defend, whether meritorious or not; |
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cause shipment delays; |
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divert the attention of our technical and managerial resources; |
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require us to enter into royalty or licensing agreements with third parties, which may
not be available on terms that we deem acceptable, if at all; |
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prevent us from operating all or a portion of our business or force us to redesign our
products, which could be difficult and expensive and may degrade the performance of our
products; |
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subject us to significant liability for damages or result in significant settlement
payments; and/or |
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require us to indemnify our customers, distribution partners or suppliers. |
Any of the foregoing could disrupt our business and have a material adverse effect on our
operating results and financial condition.
Our products must interoperate with our customers information technology infrastructure, including
customers software applications, networks, servers and data-access protocols, and if our products
do not do so successfully, we may experience a weakening demand for our products.
To be competitive in the market, our products must interoperate with our customers
information technology infrastructure, including software applications, network infrastructure and
servers supplied by a variety of other vendors, many of whom are competitors of ours. Our products
currently interoperate with a number of business intelligence and data-integration applications
provided by vendors including IBM and Oracle, among others. When new or updated versions of these
software applications are introduced, we must sometimes develop updated versions of our software
that may require assistance from these vendors to ensure that our products effectively interoperate
with these applications. If these vendors do not provide us with assistance on a timely basis, or
decide not to work with us for competitive or other reasons, including due to consolidation with
our competitors, we may be unable to ensure such interoperability. Additionally, our products
interoperate with servers, network infrastructure and software applications predominantly through
the use of data-access protocols. While many of these protocols are created and maintained by
independent standards organizations, some of these protocols that exist today or that may be
created in the future are, or could be, proprietary technology and therefore require licensing the
proprietary protocols specifications from a third party or implementing the protocol without
specifications. Our development efforts to provide interoperability with our customers
information technology infrastructures require substantial capital investment and the devotion of
substantial employee resources. We may not accomplish these development efforts quickly,
cost-effectively or at all. If we fail for any reason to maintain interoperability, we may
experience a weakening in demand for our products, which would adversely affect our business,
operating results and financial condition.
If we fail to enhance our brand, our ability to expand our customer base will be impaired and our
operating results may suffer.
We believe that developing and maintaining awareness of the Netezza brand is critical to
achieving widespread acceptance of our products and is an important element in attracting new
customers and shortening our sales cycle. We expect the importance of brand recognition to
increase as competition further develops in our market. Successful promotion of our brand will
depend largely on the effectiveness of our marketing efforts and our ability to provide customers
with reliable and technically sophisticated products at competitive prices. If customers do not
perceive our products and services to be of high value, our brand and reputation could be harmed,
which could adversely impact our financial results. Despite our best efforts, our brand promotion
efforts may not yield increased revenue sufficient to offset the additional expenses incurred in
our brand-building efforts.
We may not receive significant revenues from our current research and development efforts for
several years, if at all.
Investment in product development often involves a long payback cycle. We have made and
expect to continue making significant investments in research and development and related product
opportunities. Accelerated product introductions and short product life cycles require high levels
of expenditures for research and development that
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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 April 30, 2010, the number of our employees increased from 140 to
447 and our installed base of customers grew from 15 to 345. In addition, during that time period
our number of office locations has increased from 3 to 19. 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 three months ended April 30, 2010 and the fiscal years ended January 31, 2010 and 2009,
we derived approximately 2%, 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 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
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pressure to constrain the governments collection and processing of personal information may
adversely affect the governments demand for our products and services and could have a material
adverse effect on our growth prospects and operating results.
Federal agency funding for information technology programs is subject to annual appropriations
established by Congress and spending plans adopted by individual agencies. Accordingly, government
purchasing commitments normally last no longer than one year. The amounts of available funding in
any year may be reduced to reflect budgetary constraints, economic conditions, or competing
priorities for federal funding. Constraints on federal funding for information technology could
harm our ability to sell products to government agencies, causing fluctuations in our revenues from
this segment from period to period and resulting in a weakening of our growth prospects, operating
results and financial condition.
Our contracts with government agencies may subject us to certain risks and give the government
rights and remedies not typically found in commercial contracts, including rights that allow the
government to, for example:
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terminate contracts for convenience at any time without cause; |
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obtain detailed cost or pricing information; |
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receive most favored customer pricing; |
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perform routine audits; |
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impose equal employment and hiring standards; |
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require products to be manufactured in specified countries; |
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restrict non-U.S. ownership or investment in our company; and |
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pursue administrative, civil or criminal remedies for contractual violations. |
Moreover, some of our contracts allow the government to use, or permit others to use, patented
inventions that we developed under those contracts, and to place conditions on our right to retain
title to such inventions. Likewise, some of our government contracts allow the government to use
or disclose software or technical data that we develop or deliver under the contract without
constraining subsequent uses of those data. Third parties authorized by the government to use our
patents, software and technical data may emerge as alternative sources for the products 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 three months ended April 30, 2010 and the fiscal years ended January 31, 2010 and 2009,
we derived approximately 20%, 20% and 26%, respectively, of our revenue from customers based
outside the United States, and we currently have sales personnel in ten different foreign
countries. We expect our revenue and operations outside the United States will expand in the
future. Our international operations are subject to a variety of risks that we do not face in the
United States, including:
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difficulties in staffing and managing our foreign offices and the increased travel,
infrastructure and legal and compliance costs associated with multiple international
locations; |
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general economic conditions in the countries in which we operate, including seasonal
reductions in business activity in the summer months in Europe, during Lunar New Year in
parts of Asia and in other periods in various individual countries; |
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longer payment cycles for sales in foreign countries and difficulties in enforcing
contracts and collecting accounts receivable; |
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additional withholding taxes or other taxes on our foreign income, and tariffs or other
restrictions on foreign trade or investment; |
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imposition of, or unexpected adverse changes in, foreign laws or regulatory
requirements, many of which differ from those in the United States; |
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increased length of time for shipping and acceptance of our products; |
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difficulties in repatriating overseas earnings; |
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increased exposure to foreign currency exchange rate risk; |
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tariffs and trade barriers, import/export controls, and other regulatory or contractual
limitations on our ability to sell or develop our products in certain foreign markets; |
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reduced protection for intellectual property rights in some countries; |
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costs and delays associated with developing products in multiple languages; and |
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political unrest, war, incidents of terrorism, or responses to such events. |
Our overall success in international markets depends, in part, on our ability to succeed in
differing legal, regulatory, economic, social and political conditions. We may not be successful in
developing and implementing policies and strategies that will be effective in managing these risks
in each country where we do business. Our failure to manage these risks successfully could harm our
international operations, reduce our international sales and increase our costs, thus adversely
affecting our business, operating results and financial condition.
Our future revenue growth will depend in part on our ability to further develop our indirect sales
channel, and our inability to effectively do so will impair our ability to grow our revenues.
Our future revenue growth will depend in part on the continued development of our indirect
sales channel to complement our direct sales force. Our indirect sales channel includes resellers,
systems integration firms and analytic service providers. In the three months ended April 30, 2010
and the fiscal years ended January 31, 2010 and 2009, we derived approximately 14%, 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.
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 26% of our revenue in the three months ended
April 30, 2010, 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
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security vulnerabilities discovered in our products after commercial release or that are
caused by another vendors products with which we interoperate but are nevertheless attributed to
us by our customers, as well as any computer virus or human error on the part of our customer
support or other personnel, that result in a customers data being misappropriated, unavailable,
lost or corrupted could have significant adverse consequences, including:
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loss of customers; |
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negative publicity and damage to our reputation; |
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diversion of our engineering, customer service and other resources; |
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increased service and warranty costs; and |
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loss or delay in revenue or market acceptance of our products. |
Any of these events could adversely affect our business, operating results and financial
condition. In addition, there is a possibility that we could face claims for product liability,
tort or breach of warranty, including claims from both our customers and our distribution partners.
The cost of defending such a lawsuit, regardless of its merit, could be substantial and could
divert managements attention from ongoing operations of the company. In addition, if our business
liability insurance coverage proves inadequate with respect to a claim or future coverage is
unavailable on acceptable terms or at all we may be liable for payment of substantial damages. Any
or all of these potential consequences could have an adverse impact on our operating results and
financial condition.
It is difficult to predict our future capital needs and we may be unable to obtain additional
financing that we may need, which could have a material adverse effect on our business, operating
results and financial condition.
We believe that our current balance of cash, cash equivalents and investments, together with
cash expected to be generated from operations, will be sufficient to fund our projected operating
requirements, including anticipated capital expenditures, for at least the next twelve months.
However, we may need to raise additional funds if we are presented with unforeseen circumstances or
opportunities in order to, among other things:
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develop or enhance our products; |
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support additional capital expenditures; |
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respond to competitive pressures; |
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fund operating losses in future periods; or |
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take advantage of acquisition or expansion opportunities. |
Any required additional financing may not be available on terms acceptable to us, or at all.
If we raise additional funds by issuing equity securities, you may experience significant dilution
of your ownership interest, and the newly issued securities may have rights senior to those of the
holders of our common stock. If we raise additional funds by obtaining loans from third parties,
the terms of those financing arrangements may include negative covenants or other restrictions on
our business that could impair our operational flexibility and would also require us to fund
additional interest expense, which would harm our profitability. Holders of debt would also have
rights, preferences or privileges senior to those of holders of our common stock.
A substantial portion of our 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
41
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
$11.5 million of auction rate securities as of April 30, 2010, that grants us the right to sell to
UBS $11.5 million of our total $47.8 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 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
42
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. In
the future, we may acquire additional companies, assets or technologies in an effort to complement
our existing offerings or enhance our market position. Any acquisitions we make could subject us
to a number of risks, including:
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the purchase price we pay could significantly deplete our cash reserves, impair our
future operating flexibility or result in dilution to our existing stockholders; |
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we may find that the acquired company, assets or technology do not further improve our
financial and strategic position as planned; |
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we may find that we overpaid for the company, asset or technology, or that the economic
conditions underlying our acquisition have changed; |
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we may have difficulty integrating the operations and personnel of the acquired company; |
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we may have difficulty retaining the employees with the technical skills needed to
enhance and provide services with respect to the acquired assets or technologies; |
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the acquisition may be viewed negatively by customers, financial markets or investors; |
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we may have difficulty incorporating the acquired technologies or products with our
existing product lines; |
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we may encounter difficulty entering and competing in new product or geographic markets; |
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we may encounter a competitive response, including price competition or intellectual
property litigation; |
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we may have product liability, customer liability or intellectual property liability
associated with the sale of the acquired companys products; |
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we may be subject to litigation by terminated employees or third parties; |
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we may incur debt, one-time write-offs, such as acquired in-process research and
development costs, and restructuring charges; |
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we may acquire goodwill and other intangible assets that are subject to impairment
tests, which could result in future impairment charges; |
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our ongoing business and managements attention may be disrupted or diverted by
transition or integration issues and the complexity of managing geographically or
culturally diverse enterprises; and |
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our due diligence process may fail to identify significant existing issues with the
target companys product quality, product architecture, financial disclosures, accounting
practices, internal controls, legal contingencies, intellectual property and other matters. |
These factors could have a material adverse effect on our business, operating results and
financial condition.
In addition, from time to time we may enter into negotiations for acquisitions or investments
that are not ultimately consummated. Such negotiations could result in significant diversion of
management time, as well as substantial out-of-pocket costs, any of which could have a material
adverse effect on our business, operating results and financial condition.
We are subject to governmental export controls that could impair our ability to compete in
international markets.
Our products are subject to U.S. export control laws and regulations and their distribution
outside the United States may be subject to export licensing or the conditions of a regulatory
exception to an export licensing requirement. In addition, various countries regulate the import
of certain encryption technology and have enacted laws that could limit our ability to distribute
our products or could limit our customers ability to deploy our products in those countries. The
introduction of new products, such as our new TwinFin appliance, changes in our products or changes
in export regulations may create delays in the introduction of our products in international
markets, prevent our customers with international operations from deploying our products throughout
their global systems or, in some cases, prevent the export of our products to certain countries
altogether. Any change in export
43
regulations or related legislation, shift in approach to the enforcement or scope of existing
regulations or change in the countries, persons or technologies targeted by these regulations could
result in decreased use of our products by, or in our decreased ability to export or sell our
products to, existing or potential customers with international operations. It may be costly to
implement systems and procedures to comply with these restrictions, and we may incur penalties,
including limits on foreign distribution, for any transactions that we conduct in violation of
these regulations. Any decreased use of our products or limitation on our ability to export or
sell our products would likely adversely affect our business, operating results and financial
condition.
We rely on 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
44
Systems, we may experience delays, incur increased costs or otherwise damage our customer
relationships. We cannot assure you that we will be able to establish an alternative contract
engineering firm relationship on acceptable terms or at all.
Future interpretations of existing accounting standards could adversely affect our operating
results.
Generally Accepted Accounting Principles in the United States, or GAAP, are subject to
interpretation by the Financial Accounting Standards Board, or FASB, the American Institute of
Certified Public Accountants, or AICPA, the SEC and various other bodies formed to promulgate and
interpret appropriate accounting principles. A change in these principles or interpretations could
have a significant effect on our reported operating results, and they could affect the reporting of
transactions completed before the announcement of a change. For example, 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.
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.
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; |
45
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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. |
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.
Provisions in our certificate of incorporation and by-laws and Delaware law might discourage, delay
or prevent a change in control of our company or changes in our management and, therefore, may
negatively impact the trading price of our common stock.
Provisions of our certificate of incorporation and our by-laws may discourage, delay or
prevent a merger, acquisition or other change in control that stockholders may consider favorable,
including transactions in which you might otherwise receive a premium for your shares of our common
stock. These provisions may also prevent or frustrate attempts by our stockholders to replace or
remove our management. These provisions:
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establish a classified board of directors so that not all members of our board are
elected at one time; |
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provide that directors may only be removed for cause; |
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authorize the issuance of blank check preferred stock that our board of directors
could issue to increase the number of outstanding shares and to discourage a takeover
attempt; |
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eliminate the ability of our stockholders to call special meetings of stockholders; |
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prohibit stockholder action by written consent, which has the effect of requiring all
stockholder actions to be taken at a meeting of stockholders; |
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provide that the board of directors is expressly authorized to make, alter or repeal our
by-laws; and |
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establish advance notice requirements for nominations for election to our board of
directors or for proposing matters that can be acted upon by stockholders at stockholder
meetings. |
In addition, Section 203 of the Delaware General Corporation Law may discourage, delay or
prevent a change in control of our company by prohibiting stockholders owning in excess of 15% of
our outstanding voting stock from merging or combining with us during a specified period unless
certain approvals are obtained.
Insiders own a significant portion of our outstanding common stock and will therefore have
substantial control over us and will be able to influence corporate matters.
Our executive officers, directors and their affiliates beneficially own, in the aggregate,
approximately 20% of our outstanding common stock. As a result, our executive officers, directors
and their affiliates are able to exercise significant influence over all matters requiring
stockholder approval, including the election of directors and approval of significant corporate
transactions, such as a merger or other sale of our company or its assets. This concentration of
ownership could limit your ability to influence corporate matters and may have the effect of
delaying or preventing another party from acquiring control over us.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
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Total Number of |
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Maximum Number of |
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Shares Purchased as |
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Shares that May Yet |
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Part of Publicly |
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Be Purchased Under |
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Total Number of Shares |
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Average Price Paid |
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Announced Plans or |
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the Plans or |
Period |
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Purchased(1) |
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Per Share |
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Programs |
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Programs |
February 1, 2010
February 28, 2010 |
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0 |
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0 |
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0 |
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0 |
March 1, 2010
March 31, 2010 |
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0 |
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0 |
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0 |
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0 |
April 1, 2010 April 30, 2010 |
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87,353 |
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$13.6 |
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0 |
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0 |
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Total |
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87,353 |
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$13.6 |
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0 |
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0 |
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(1) |
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In April 2010, the Company repurchased 87,353 shares of common stock from a former executive to
satisfy the exercise price of a stock option. |
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Item 6. Exhibits
See the Exhibit Index attached hereto which is herein incorporated by reference.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Netezza Corporation
(Registrant)
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Date: June 9, 2010 |
By: |
/s/ Patrick J. Scannell, Jr.
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Patrick J. Scannell, Jr. |
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Senior Vice President and Chief
Financial Officer
(Principal Financial and Accounting Officer) |
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EXHIBIT INDEX
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Exhibit No. |
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Description |
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31.1
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Certification of Chief Executive Officer, pursuant to Securities
Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2
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Certification of Chief Financial Officer, pursuant to Securities
Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1
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Certification of Chief Executive Officer and Chief Financial Officer
pursuant to Securities Exchange Act Rules 13a-14(b) and 15d-14(b), as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
50