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As filed with the Securities and Exchange Commission on March 20, 2015

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

 

APIGEE CORPORATION

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   7372   20-1367539
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)

 

10 S. Almaden Blvd., 16th Floor

San Jose, California 95113

(408) 343-7300

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

 

Chet Kapoor

Chief Executive Officer

Apigee Corporation

10 S. Almaden Blvd., 16th Floor

San Jose, California 95113

(408) 343-7300

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

 

Copies to:

 

David J. Segre

Mark B. Baudler

Andrew D. Hoffman

Wilson Sonsini Goodrich & Rosati, P.C.

650 Page Mill Road

Palo Alto, California 94304

(650) 493-9300

 

Stacey Giamalis

Apigee Corporation

10 S. Almaden Blvd., 16th Floor

San Jose, California 95113

(408) 343-7300

 

Andrew S. Williamson

Charles S. Kim

David Peinsipp

Cooley LLP

101 California Street, 5th Floor

San Francisco, California 94111

(415) 693-2000

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box:  ¨

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨  
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨  

 

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

 

Proposed

Maximum

Aggregate

Offering Price(1)(2)

 

Amount of

Registration Fee

Common Stock, $0.001 par value per share

  $86,250,000   $10,023

 

 

(1)   Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
(2)   Includes the aggregate offering price of additional shares that the underwriters have the option to purchase to cover over-allotments, if any.

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

PROSPECTUS (Subject to Completion)

 

Issued                 , 2015

 

            Shares

 

 

LOGO

 

COMMON STOCK

 

 

 

Apigee Corporation is offering             shares of its common stock. This is our initial public offering and no public market currently exists for our shares. We anticipate that the initial public offering price will be between $         and $         per share.

 

 

 

We have applied to list our common stock on The NASDAQ Global Select Market under the symbol “APIC.”

 

 

 

We are an “emerging growth company” as defined under the federal securities laws and, as such, may elect to comply with certain reduced public company reporting requirements for future filings. Investing in our common stock includes risks. See “Risk Factors” beginning on page 13.

 

 

 

PRICE $         A SHARE

 

 

 

      

Price to

Public

    

Underwriting

Discounts and

Commissions(1)

    

Proceeds to

Apigee

Per Share

     $                  $                  $            

Total

     $                          $                          $                    

 

(1)   See the section titled “Underwriting” for a description of the compensation payable to the underwriters.

 

We have granted the underwriters the right to purchase up to an additional             shares of common stock to cover over-allotments.

 

Neither the Securities and Exchange Commission nor any state securities regulators have approved or disapproved of these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

The underwriters expect to deliver the shares of common stock to purchasers on                     , 2015.

 

 

 

MORGAN STANLEY   J.P. MORGAN   CREDIT SUISSE
PACIFIC CREST SECURITIES   JMP SECURITIES   NOMURA

 

                    , 2015


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LOGO

 

Making every business a digital business

apigee


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LOGO

 

Apigee Intelligent API Platform Powers the Digital Value Chain Enabling companies to accelerate the pace at which they share, innovate and adapt. INTELLIGENT API PLATFORM APP API API TEAM USER DEVELOPER BACKEND API TEAM Apigee helps the API team create, secure, launch, analyze, even monetize their API-driven digital initiatives. DEVELOPER Using Apigee, enterprises create experiences that enable developers to explore and build apps using the enterprise’s APIs, resulting in faster innovation and time to market. USER Apigee enables digital businesses to build and operate the systems at the speed necessary to engage and transact with customers on a myriad devices 24/7. BACKEND Apigee’s Intelligent API Platform enables organizations to easily and securely expose services and data, unlocking the value from their back-end systems. API Using Apigee, companies quickly and securely publish intuitive APIs to share data and services, and onboard developers and partners with self-service provisioning. APP Modern mobile apps, smart devices, connected experiences and digital ecosystems are connected to the data and services that power them via APIs.


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TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1   

Risk Factors

     13   

Special Note Regarding Forward-Looking Statements

     45   

Market and Industry Data

     46   

Use of Proceeds

     47   

Dividend Policy

     47   

Capitalization

     48   

Dilution

     50   

Selected Consolidated Financial and Other Data

     53   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     56   

Business

     87   

Management

     110   

Executive Compensation

     118   
 

 

 

 

Neither we nor the underwriters have authorized anyone to provide you with any information or make any representations other than those contained in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we have referred you. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the common stock. Our business, financial condition, results of operations and prospects may have changed since that date.

 

Through and including                     , 2015 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 

For investors outside of the United States: Neither we nor the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus outside of the United States.


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PROSPECTUS SUMMARY

 

This summary highlights information contained elsewhere in this prospectus. You should read the following summary together with the more detailed information appearing in this prospectus, including “Risk Factors,” “Selected Consolidated Financial and Other Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business,” and our consolidated financial statements and related notes before deciding whether to purchase shares of our common stock. Unless the context otherwise requires, the terms “Apigee,” “Apigee Corporation,” “the company,” “we,” “us” and “our” in this prospectus refer to Apigee Corporation and its subsidiaries. Our fiscal year end is July 31, and our fiscal quarters end on October 31, January 31, April 30, and July 31. Our fiscal years ended July 31, 2012, 2013 and 2014 and our fiscal year ending July 31, 2015 are referred to herein as fiscal 2012, fiscal 2013, fiscal 2014 and fiscal 2015, respectively.

 

APIGEE CORPORATION

 

Overview

 

At Apigee, our mission is to make every business a digital business.

 

Unprecedented growth in mobile technologies, big data, cloud services and the connected devices that comprise the Internet of Things, or IoT, has disrupted or transformed the dynamics of business, changed consumer behavior and eroded the divide between the physical and digital worlds. To fully embrace the digital world, businesses must provide seamless customer experiences across a myriad of devices and channels, respond quickly to fast-changing customer expectations and market conditions, drive revenue through new business models and create or participate in digital ecosystems. A digital business creates value by unlocking its data and services to better serve customers in a real-time, anywhere-anytime fashion and uses data to continually improve the customer experience and drive additional revenue.

 

We believe that application programming interfaces, or APIs, are a critical enabling technology for the shifts in mobile, cloud computing, big data and the IoT and that APIs are a foundational technology on which digital business operates. We believe that a new and expansive market opportunity exists to help enterprises adopt digital strategies and navigate the digitally driven economy.

 

We provide an innovative software platform that allows businesses to design, deploy, and scale APIs as a connection layer between their core IT systems and data and the applications with which their customers, partners, employees and other users engage with their business. The foundations of our platform are Apigee Edge, a robust API-management solution, and Apigee Insights, our predictive analytics software solution. Our platform enables a comprehensive view of the enterprise data the user is consuming and generating, and data about the context in which the customer is using the digital product or service, or contextual data. In addition, our platform provides tools for businesses to drive usage and adoption of APIs by their business partners and developers. Using our platform, businesses in any industry can easily and securely connect their core services and data to developers to enable them to develop applications and experiences for customers, partners, employees and other users. Using our platform, businesses can forge new partnerships, build partner ecosystems, and participate fully in emerging digital business networks.

 

Today, it is difficult for many businesses to fully participate and innovate in the digital world because traditional enterprise software is not designed to interact with and connect to the rapidly evolving digital economy. The IT architectures deployed at most businesses are based on thousands of application servers communicating with databases, other applications and numerous middleware layers, each using thousands of custom integrations and connectors. These legacy architectures generally cannot publish APIs in a way that can be used by application developers. Furthermore, they are not equipped to consume or leverage the data that flow

 

 

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from digital interactions or the contextual data that exist in digital networks. A business with a legacy architecture will not have access to the data necessary to drive better business decisions nor to respond to customers in relevant and responsive ways.

 

We believe that in order to build, manage and extract valuable insights from APIs and data that are needed for digital business, nearly all businesses will require a new layer within their core application software stack. To enable this new layer, we provide a single secure platform for APIs and predictive analytics, which can be deployed either in the cloud or on premises. By using our platform, an organization can securely share its data and services, enabling users to easily engage and transact with the business. Because we provide API publishing, operations, and data visibility in our integrated solution, our platform enables more informed predictive analytics to help the business anticipate and adapt to customer behavior.

 

We have achieved significant scale, with a customer base that has grown over 35% from the end of fiscal 2012 to the end of fiscal 2014. Our customers include many leading businesses: 20 of the Fortune 100, five of the top 10 Global 2000 retail brands and six of the top 10 global telecommunications companies as of January 31, 2015. Our platform has been sold to customers in over 30 countries around the world.

 

We have experienced rapid growth in recent periods. Our total revenue was $27.6 million, $43.2 million and $52.7 million in fiscal 2012, fiscal 2013 and fiscal 2014, respectively, and $23.4 million and $32.6 million in the six months ended January 31, 2014 and 2015, respectively. Our gross billings were $36.7 million, $43.1 million and $63.8 million in fiscal 2012, fiscal 2013 and fiscal 2014, respectively, representing growth rates of 18% from fiscal 2012 to fiscal 2013 and 48% from fiscal 2013 to fiscal 2014. Our gross billings were $23.7 million and $37.6 million in the six months ended January 31, 2014 and 2015, respectively, representing a growth rate of 59%. We define gross billings as our total revenue plus the change in our deferred revenue in a period. For fiscal 2014, 33% of our revenue was derived from customers located outside the United States, up from 16% in fiscal 2013. For the six months ended January 31, 2015, we derived 38% of our revenue from customers located outside of the United States, up from 33% in the six months ended January 31, 2014. We incurred net losses of $8.3 million, $25.9 million and $60.8 million in fiscal 2012, fiscal 2013 and fiscal 2014, respectively, and $32.2 million and $26.8 million in the six months ended January 31, 2014 and 2015, respectively. See “Selected Consolidated Financial and Other Data—Certain Key Non-GAAP Financial Metrics” for information regarding the limitations of using gross billings as a financial measure and for a reconciliation of gross billings to total revenue, the most directly comparable financial measure calculated in accordance with generally accepted accounting principles in the United States, or GAAP.

 

Our Industry

 

Behind every mobile app, smart device and connected experience sits at least one API. An API is a set of programming instructions and standards that enables software applications to interact with other IT resources. APIs connect an enterprise’s services, content and data to developers and partners in an easy and secure way, making it possible for developers to create powerful new applications and experiences. As an example, when someone uses Yelp to look for the closest Italian restaurant, APIs make it work. An API is the code that allows an application such as Yelp to interact with the maps data and show the restaurant on a map. Although the foregoing example does not involve our platform (in this case the Google Maps API is involved), we believe that this example is a good illustration of the integral and ubiquitous nature of APIs generally.

 

Without APIs, a digital business would not be able to as effectively enhance existing assets and unlock the value of data. We believe that analyzing customer behavior to predict future actions is crucial for fostering business innovation in customer engagement and operational processes. By using predictive analytics, digital businesses have a unique opportunity to turn the significant volume of structured and unstructured data in their digital ecosystems

 

 

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into actionable business insights. Every event is rich with contextual information such as user demographics, time, location and activities such as purchases. Using real-time, API-driven insights into individual user behavior and aggregate user activity, businesses can predict user actions and respond in a relevant way.

 

The traditional approaches to integration, application architecture, data management and security make it difficult for a business to connect its customers, partners, employees and other users to its operations. As a result, businesses are not able to fully leverage the data streams generated by the user applications and experiences that characterize digital business. Fundamentally, these traditional approaches do not meet the technical demands of the modern digital experience—the new “systems of engagement,” that are used by customers, partners, employees and other users to engage with businesses across multiple channels and locations. These systems of engagement represent a new layer in the enterprise IT architecture on top of its systems of record—the enterprise resource planning systems companies rely on to run their business, such as databases, financial, manufacturing, customer relationship management and human resources software.

 

We believe that the key IT requirements to support digital business capabilities are as follows:

 

   

Speed: Legacy IT Integration Cannot Keep Up with Pace of Change. Traditional IT approaches to middleware demanded centralized planning and governance. Historically business decisions about the connectivity of systems required a lengthy planning process and the participation of specialists who were often removed from the business needs driving the projects. Today, modern adaptive IT processes are renouncing centralized planning and governance practices and embracing agile methodologies that allow the organization to more rapidly scale to meet the diverse and evolving demands of the digital business.

 

   

Hyper-connectivity: Legacy IT Cannot Meet the Demands of a Mobile World. Legacy middleware systems were primarily designed for server-to-server communication and not for enabling the modern, user-facing digital experiences that businesses need to deliver across a variety of mobile and connected devices. Most middleware technologies were built around the expectation of reliable and high-bandwidth communications over networks within a company’s data centers. However, the bandwidth constraints of mobile technologies place new constraints on the volume of data and latency between servers and applications.

 

   

Data: Narrow View of Data Does Not Adequately Support Business Insights. In a digital business, analytics is not about delivering reports on last month’s activity. Rather, it is about generating responsive actions based on predictive insights into individual and aggregate user behavior and activity. Most legacy architectures are unprepared for the enormous amount of contextual data that is generated through new digital channels.

 

   

Security: Perimeter Models of Security Provide Only Limited Protection. Traditional information security architectures have presupposed that the applications and users exist within the firewalled perimeters of the enterprise network. Software that assumes and even requires a “perimeter” where the software can be installed, or that requires a company “agent” to be installed on all mobile devices is ineffective for digital businesses that must support a myriad of new applications and devices, as well as external developers and partners.

 

Our Solution

 

Our platform enables digital business by providing the following features:

 

   

Purpose-built for People and Technology Across the Digital Value Chain. Our management tools, business and operational analytics, policy-based approach and advanced programmability provide a simple yet powerful platform that serves the entire digital value chain between the end user and the business’ backend systems. This digital value chain includes the applications, the developers who build them and the APIs that they use, all of which need to work together seamlessly, and each of which has requirements that can only be

 

 

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addressed by an integrated platform. Pre-built and configurable policies enable organizations to control traffic on their APIs, enhance performance, enforce security, simplify customer self-service and reduce time-to-value—all without coding or changing the backend systems of record.

 

   

Enterprise-grade Software Enables Web Scale, Reliability and Security. Our platform is web scale and flexible and is offered as a cloud service or as an on-premises deployment. Our cloud service provides up to 99.99% availability and uptime, and a multi-region API delivery network enabling low latency worldwide. We enable organizations to control access to APIs and services and protect customers and the business from threats, backend system overload, service issues and sensitive data exposure.

 

   

Built-in Developer Services to Foster Adoption and Enhance the Business Value of APIs. Our platform enables a business to provide a developer community experience that accelerates API adoption, simplifies learning, enables monetization and increases the business value of APIs. Using our platform, businesses can rapidly onboard developers and facilitate their secure interaction with their business data and systems. Our customizable developer portal helps businesses foster innovation among internal and external developers and partners by making it easy for developers to interact with the enterprise and with each other.

 

   

Analytics for End-to-end Business Visibility. Our platform provides end-to-end visibility across the entire digital value chain with unified operational and business metrics and application monitoring. Operational metrics and application monitoring enable monitoring of the health and performance of APIs, applications and digital ecosystems. Business metrics enable businesses to track product, service, and customer usage and trends, respond quickly to customer and market changes, and make data-driven decisions.

 

   

Predictive Analytics to Derive Actionable Insights at the Point of Engagement. With APIs positioned at the center of the application data stream, our platform enables businesses to gain actionable insights from the flow of data and effect a change of behavior that improves the customer experience. Our platform turns the intelligence derived from the enormous amount of data generated by increasingly connected customers into action, enabling the enterprise to deliver the right experience, at the right time, on the right device.

 

   

Support for New Forms of Interaction and Connectivity, Such as the Internet of Things. Our platform powers the APIs, and captures and derives insights from the data generated by the applications and experiences through which customers, partners and employees engage with a business. We believe that our platform is positioned to power complex, distributed systems such as the IoT, including wearable technology, intelligent cars, smart energy grids, and other forms of emerging connected interaction.

 

Our Growth Strategy

 

Our goal is to be the provider of the leading software platform that enables digital business acceleration for enterprises worldwide. The key elements of our growth strategy include:

 

   

Continue to Lead the Transformation to Digital Business Across Industries. We believe that the transformation of businesses in nearly every industry to digital business, enabled by APIs and big data analytics, is an emerging trend, and that we have a leadership position in this new market. We intend to extend our leadership position by continuing to innovate, bringing new technologies to market, and honing best practices and thought leadership by working closely with our global customer base.

 

   

Expand our Platform and Continue Building Our Technology Leadership. We intend to continue building innovative software products that extend the value of our existing solutions and further help enterprises realize digital business success, through new growth and operational efficiencies. For example, we continue to invest in Apigee Insights, a self-service predictive analytics solution that helps enterprises build customer journey models and adaptive applications. In addition to continued investments in product development, we may also pursue acquisitions of technology that complement our platform.

 

 

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Expand Sales to New Customers and Within Our Existing Customer Base. We intend to increase deployment of our solutions to new customers and within existing customers by targeting additional use cases and more functional areas and business units within the customer organization, and by meeting increasing capacity requirements.

 

   

Expand Partnerships to Acquire and Service New Customers. In August 2013, we formed a global alliance with Accenture to deliver enterprise API solutions and, in July 2014, we announced a reseller agreement with SAP. We intend to continue building partnerships with global systems integrators as well as OEMs to enable us to efficiently expand our sales capacity and to provide professional services related to our software platform that also afford us strategic insights into customer deployments.

 

   

Continue to Aggressively Grow our Business Internationally. We believe that there is a substantial opportunity to grow our international business. We plan to continue to aggressively market to customers located outside of the United States by building partnerships and by expanding our direct and indirect sales channels outside the United States and EMEA. For fiscal 2014 and the six months ended January 31, 2015, respectively, we derived approximately 33% and 38% of our revenue from customers located outside the United States.

 

Risks Associated with Our Business

 

Our business is subject to numerous risks and uncertainties, including those highlighted in the section titled “Risk Factors” immediately following this prospectus summary. These risks include, but are not limited to, the following:

 

   

we have a history of losses, and we expect to incur losses for the foreseeable future;

 

   

the market for our platform is new and unproven and may not grow or may decrease;

 

   

we have a short operating history for our recently released solutions, including the current version of our cloud-based solution and the current version of our predictive analytics solution, which makes it difficult to evaluate our future prospects and may increase the risk that we will not be successful;

 

   

because we currently derive substantially all of our revenue and cash flows from our Apigee Edge solution, failure of this solution to satisfy customer demands or achieve increased market acceptance would materially and adversely affect our business, results of operations, financial condition and growth prospects;

 

   

if we are not able to introduce new products successfully and to make enhancements to existing products, our growth rates would likely decline and our business, results of operations and competitive position could suffer;

 

   

we may not be able to compete successfully against current and future competitors;

 

   

our future quarterly results may fluctuate significantly, which could adversely affect our share price;

 

   

we expect our revenue mix to vary over time, which can affect our gross margin and operating results; and

 

   

our directors, executive officers and significant stockholders that beneficially own more than 5% of our common stock will continue to have substantial control over us after this offering, and could delay or prevent a change in corporate control. Such stockholders will beneficially own approximately     % of our common stock after the offering collectively, based on the beneficial ownership of our stock as of February 15, 2015, and after giving effect to the automatic conversion of all outstanding shares of our convertible preferred stock and the sale of common stock in this offering. See the section titled “Principal Stockholders” for additional information.

 

 

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Corporate Information

 

We were incorporated in the State of Delaware as Nexgen Machines, Inc. on June 3, 2004, changed our name to Sonoa Systems, Inc. on November 15, 2004 and changed our name to Apigee Corporation on September 21, 2010. Our principal executive offices are located at 10 South Almaden Blvd., 16th Floor, San Jose, California 95113. Our telephone number at that location is (408) 343-7300. Our website address is www.apigee.com. Information on our website is not part of this prospectus and should not be relied upon in determining whether to make an investment decision.

 

The Apigee design logo and the mark “Apigee” are the property of Apigee Corporation. This prospectus contains additional trade names, trademarks, and service marks of other companies. We do not intend our use or display of other companies’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, these other companies.

 

Implications of Being an Emerging Growth Company

 

As a company with less than $1.0 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting requirements that are otherwise applicable generally to public companies. These reduced reporting requirements include:

 

   

the requirement to present only two years of audited financial statements and only two years of related management’s discussion and analysis in this prospectus;

 

   

an exemption from compliance with the auditor attestation requirement on the effectiveness of our internal control over financial reporting;

 

   

an exemption from compliance with any requirement that the Public Company Accounting Oversight Board may adopt regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements;

 

   

reduced disclosure about our executive compensation arrangements; and

 

   

exemption from the requirements to obtain a non-binding advisory vote on executive compensation or shareholder approval of any golden parachute arrangements.

 

We will remain an emerging growth company until the earliest to occur of: (1) the first fiscal year following the fifth anniversary of our initial public offering; (2) the first fiscal year after our annual gross revenue is $1.0 billion or more; (3) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt securities; or (4) as of the end of any fiscal year in which the market value of our common stock held by non-affiliates exceeded $700.0 million as of the end of the second quarter of that fiscal year.

 

We may choose to take advantage of some, but not all, of the available benefits under the JOBS Act. We are choosing to irrevocably “opt out” of the extended transition periods available under the JOBS Act for complying with new or revised accounting standards, but we intend to take advantage of the other exemptions discussed above. Accordingly, the information contained herein may be different than the information you receive from other public companies in which you hold stock.

 

 

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The Offering

 

Common stock offered by us

               shares

Over-allotment option being offered by us

               shares

Common stock to be outstanding after this offering

               shares (            shares, if the underwriters exercise their over-allotment option in full)

Use of proceeds

  

We estimate that the net proceeds from our sale of shares of common stock in this offering at an assumed initial public offering price of $         per share, which is the midpoint of the estimated offering price range reflected on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, will be approximately $         million, or $         million if the underwriters exercise their over-allotment option in full.

 

The principal purposes of this offering are to increase our capitalization and financial flexibility, to create a public market for our stock and thereby enable access to the public equity markets for our employees and stockholders, to obtain additional capital and to increase our visibility in the marketplace.

 

We currently intend to use the net proceeds we receive from this offering primarily for general corporate purposes, including working capital, sales and marketing activities, solution and platform development, general and administrative matters, and capital expenditures, although we do not currently have any specific or preliminary plans with respect to the use of proceeds for such purposes. We may also use a portion of the net proceeds for the acquisition of, or investment in, technologies, solutions or businesses that complement our business, although we have no present commitments or agreements to enter into any acquisitions or investments. See “Use of Proceeds.”

Directed share program

   At our request, the underwriters have reserved up to 5% of the common stock being offered by this prospectus for sale at the initial public offering price to certain individuals associated with us and members of their families. None of our directors, executive officers or employees will participate in the directed share program. The sales will be made by Morgan Stanley, an underwriter of this offering, through a directed share program. We do not know if these individuals will choose to purchase all or any portion of these reserved shares, but any purchases they do make will reduce the number of shares that are available to the general public. Any reserved shares that are not so purchased will be offered by the underwriters to the general public on the same terms as the other shares of common stock.

Proposed NASDAQ trading symbol

   “APIC”

 

 

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The number of shares of our common stock to be outstanding after this offering is based on 181,441,420 shares of our common stock outstanding as of January 31, 2015, after giving effect to the automatic conversion of our convertible preferred stock outstanding as of such date into an aggregate of 149,907,620 shares of our common stock immediately prior to the completion of this offering, as well as the performance-based vesting condition of certain restricted stock units, or RSUs, outstanding as of January 31, 2015 that settle for 38,043 shares of common stock, which we expect to record upon completion of this offering, as further described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates—Stock-based Compensation,” and excludes:

 

   

32,451,089 shares of common stock issuable upon the exercise of options, including a non-plan option, outstanding as of January 31, 2015, with a weighted-average exercise price of $0.58 per share;

 

   

65,890 shares of common stock issuable upon the vesting of RSUs outstanding as of January 31, 2015;

 

   

526,562 shares of common stock issuable upon the exercise of warrants outstanding as of January 31, 2015, with a weighted-average exercise price of $0.31 per share (not including warrants to purchase 79,687 shares of common stock, which may become issuable in the future pursuant to our loan and security agreement with Silicon Valley Bank);

 

   

2,235,224 shares of common stock issuable upon the exercise of options granted after January 31, 2015, with an exercise price of $2.31 per share;

 

   

100,000 shares of common stock issuable upon the vesting of RSUs granted after January 31, 2015; and

 

   

            shares of common stock reserved for future issuance under our stock-based compensation plans, consisting of (1) 35,697,026 shares of common stock reserved for future issuance under our 2005 Stock Incentive Plan, or the 2005 Plan, which shares will be added to the shares to be reserved under our 2015 Equity Incentive Plan, or the 2015 Plan, which will become effective upon completion of this offering, (2)             shares of common stock reserved for future issuance under our 2015 Plan, which will become effective upon completion of this offering, (3)             shares of common stock reserved for future issuance under our 2015 Employee Stock Purchase Plan, or the ESPP, which will become effective upon completion of this offering, and (4)             shares of common stock that become available under our 2015 Plan and ESPP, pursuant to provisions thereof that automatically increase the share reserves under the plans each year, as more fully described in “Executive Compensation—Employee Benefit and Stock Plans.”

 

Except as otherwise indicated, all information in this prospectus assumes:

 

   

the effectiveness of our amended and restated certificate of incorporation immediately prior to the completion of this offering;

 

   

the automatic conversion of all shares of our convertible preferred stock outstanding as of January 31, 2015 into an aggregate of 149,907,620 shares of common stock immediately prior to the completion of this offering;

 

   

the vesting of RSUs outstanding as of January 31, 2015 that settle for 38,043 shares of common stock, which vest subject to a time-based vesting condition that has been partially met and a performance-based vesting condition related to the completion of our initial public offering, as further described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates—Stock-based Compensation;”

 

   

no exercise of outstanding options or warrants after January 31, 2015;

 

   

no exercise of the underwriters’ over-allotment option; and

 

   

a one-for-         reverse split of our common stock to be effected prior to the completion of this offering.

 

 

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Summary Consolidated Financial and Other Data

 

The following table summarizes our consolidated financial and other data. The summary consolidated statements of operations data presented below for fiscal 2012, fiscal 2013 and fiscal 2014, and the consolidated balance sheet data as of July 31, 2014, have been derived from audited consolidated financial statements that are included elsewhere in this prospectus. The consolidated statements of operations data for the six months ended January 31, 2014 and 2015, and the consolidated balance sheet data as of January 31, 2015, are derived from our unaudited consolidated financial statements appearing elsewhere in this prospectus. The following summary consolidated financial and other data should be read together with our audited and unaudited consolidated financial statements and the related notes, as well as the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. Our historical results are not necessarily indicative of our results in any future period.

 

     Fiscal Year Ended
July 31,
    Six Months Ended
January 31,
 
         2012             2013             2014             2014             2015      
                       (unaudited)  
     (in thousands, except per share data)  

Consolidated Statement of Operations Data:

          

Revenue

          

License

   $ 9,452      $ 13,917      $ 11,411      $ 3,566      $ 9,522   

Subscription and support

     7,308        15,243        20,237        9,651        14,164   

Professional services and other

     10,847        13,992        21,054        10,200        8,929   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     27,607        43,152        52,702        23,417        32,615   

Cost of revenue

          

License

     157        108        366        88        257   

Subscription and support(1)

     3,484        9,286        11,911        7,425        5,367   

Professional services and other(1)

     8,352        12,435        15,431        7,847        7,044   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     11,993        21,829        27,708        15,360        12,668   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     15,614        21,323        24,994        8,057        19,947   

Operating expenses

          

Research and development(1)

     10,922        16,848        22,273        9,152        14,385   

Sales and marketing(1)

     9,801        23,812        47,029        22,456        25,174   

General and administrative(1)

     4,033        5,885        14,415        6,767        6,704   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     24,756        46,545        83,717        38,375        46,263   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (9,142     (25,222     (58,723     (30,318     (26,316
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense), net

     1,228        (376     (1,678     (1,757     (290
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (7,914     (25,598     (60,401     (32,075     (26,606

Provision for income taxes

     367        273        392        137        203   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss and comprehensive loss

   $ (8,281   $ (25,871   $ (60,793   $ (32,212   $ (26,809
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share(2):

          

Basic and diluted

   $ (0.56   $ (1.39   $ (2.34   $ (1.33   $ (0.88
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares outstanding used in calculating net loss per share(1):

          

Basic and diluted

     14,862        18,576        25,938        24,165        30,467   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share (unaudited)(2):

          

Basic and diluted

       $ (0.39     $ (0.15
      

 

 

     

 

 

 

Weighted-average shares outstanding used in calculating pro forma net loss per share (unaudited)(2):

          

Basic and diluted

         157,297          180,004   
      

 

 

     

 

 

 

 

 

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  (1)   Includes stock-based compensation expense as follows:

 

     Fiscal Year Ended
July 31,
     Six Months Ended
January 31,
 
         2012              2013              2014              2014              2015      
            (unaudited)  
     (in thousands)  

Cost of subscription and support revenue

   $ 2       $ 21       $ 24       $ 12       $ 13   

Cost of professional services and other revenue

     30         65         133         47         91   

Research and development

     74         114         490         135         453   

Sales and marketing

     55         138         1,090         146         319   

General and administrative

     20         70         989         430         571   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $    181       $    408       $ 2,726       $    770       $ 1,447   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

  (2)   See Note 13 to our audited consolidated financial statements appearing elsewhere in this prospectus for an explanation of our basic and diluted net loss per share and pro forma net loss per share calculations.

 

Our consolidated balance sheet as of January 31, 2015, is presented on:

 

   

an actual basis;

 

   

a pro forma basis, giving effect to the automatic conversion of all outstanding shares of our convertible preferred stock into 149,907,620 shares of common stock and the effectiveness of our amended and restated certificate of incorporation (each of which will occur immediately prior to the completion of this offering), as if such conversion had occurred and our amended and restated certificate of incorporation had become effective on January 31, 2015, as well as the stock-based compensation expense associated with the performance-based vesting of certain RSUs, which we expect to record upon completion of our initial public offering, as described in footnote (1) below; and

 

   

a pro forma as adjusted basis, giving effect to the pro forma adjustments noted above and the sale of              shares of common stock by us in this offering, based on an assumed initial public offering price of $         per share, which is the midpoint of the estimated offering price range reflected on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

The pro forma as adjusted information set forth in the table below is illustrative only and will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing.

 

     January 31, 2015  
     Actual      Pro  Forma(1)      Pro Forma
As  Adjusted(2)
 
     (unaudited)  
     (in thousands)  

Consolidated Balance Sheet Data:

        

Cash and cash equivalents

   $ 29,133       $ 29,133       $                

Working capital

     12,045         12,045      

Total assets

     75,901         75,901      

Deferred revenue, current and long-term

     33,193         33,193      

Term debt, current and long-term

     4,899         4,899      

Additional paid-in capital

     197,100         197,123      

Total stockholders’ equity

     24,593         24,593      

 

 

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  (1)   Includes the stock-based compensation expense associated with RSUs that settle for 38,043 shares of common stock, which vest subject to a time-based vesting condition that has been partially met and a performance-based vesting condition related to the completion of our initial public offering, as further described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations— Critical Accounting Policies and Estimates — Stock-based Compensation.”
  (2)   Each $1.00 increase (decrease) in the assumed initial public offering price of $         per share, which is the midpoint of the estimated offering price range reflected on the cover page of this prospectus, would increase (decrease) each of our cash and cash equivalents, working capital (deficit), total assets, additional paid-in capital, and total stockholders’ equity by approximately $         million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each 1.0 million increase (decrease) in the number of shares offered by us as set forth on the cover page of this prospectus, would increase (decrease) each of our cash and cash equivalents, working capital (deficit), total assets, additional paid-in capital, and total stockholders’ equity by approximately $         million, assuming that the assumed initial public offering price of $         per share, which is the midpoint of the estimated offering price range reflected on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

Certain Key Non-GAAP Financial Metrics

 

We monitor the following key non-GAAP financial metrics:

 

     Fiscal Year Ended
July  31,
    Six Months Ended
January 31,
 
     2012     2013     2014     2014     2015  
     (dollar amounts in thousands)  

Gross billings

   $ 36,701      $ 43,136      $ 63,768      $ 23,684      $ 37,618   

Non-GAAP gross profit

   $ 15,646      $ 21,409      $ 25,763      $ 8,233      $ 20,505   

Non-GAAP gross margin

     56.7     49.6     48.9     35.2     62.9

Non-GAAP operating loss

   $ (8,912   $ (24,638   $ (55,117   $ (29,326   $ (24,269

 

Gross Billings. We define gross billings as our total revenue plus the change in our deferred revenue in a period. Gross billings in any period consists of sales to new customers plus renewals and additional sales to existing customers. Our management uses gross billings as a performance measurement because we generally bill our customers at the time of sale of our solutions and recognize revenue either upon delivery or ratably over subsequent periods, and a portion of our revenue may be recognized over a period of more than 12 months. We believe that gross billings provides valuable insight into the sales of our solutions and the performance of our business. See “Selected Consolidated Financial and Other Data—Certain Key Non-GAAP Financial Metrics” for information regarding the limitations of using gross billings as a financial measure and for a reconciliation of gross billings to total revenue, the most directly comparable financial measure calculated in accordance with GAAP.

 

Non-GAAP Gross Profit and Gross Margin. We define non-GAAP gross profit as our total revenue less our total cost of revenue, adjusted to exclude stock-based compensation expense associated with equity awards granted to professional services and maintenance personnel, and amortization of acquired intangible assets. We define non-GAAP gross margin as non-GAAP gross profit as a percentage of our total revenue. Non-GAAP gross profit and gross margin are key measures used by our management to understand and evaluate our operating performance and trends. In particular, non-GAAP gross profit and gross margin exclude certain non-cash expenses and can provide useful measures for period-to-period comparisons of our business. See “Selected Consolidated Financial and Other

 

 

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Data—Certain Key Non-GAAP Financial Metrics” for information regarding the limitations of using non-GAAP gross profit and gross margin as financial measures and for a reconciliation of non-GAAP gross profit to gross profit, the most directly comparable financial measure calculated in accordance with GAAP.

 

Non-GAAP Operating Loss. We define non-GAAP operating loss as our operating loss excluding stock-based compensation and amortization of acquired intangibles assets. Our management uses non-GAAP operating loss to understand and evaluate our operating performance and trends. In particular, non-GAAP operating loss excludes certain non-cash expenses and can provide useful measures for period-to-period comparisons of our business. See “Selected Consolidated Financial and Other Data—Certain Key Non-GAAP Financial Metrics” for information regarding the limitations of using non-GAAP operating loss as a financial measure and for a reconciliation of non-GAAP operating loss to operating loss, the most directly comparable financial measure calculated in accordance with GAAP.

 

 

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RISK FACTORS

 

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information contained in this prospectus, including our consolidated financial statements and the related notes thereto, before making a decision to invest in our common stock. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that affect us. If any of the following risks occur, our business, financial condition, operating results and prospects could be materially and adversely affected. In that event, the price of our common stock could decline, and you could lose part or all of your investment.

 

Risks Related to Our Business and Industry

 

We have a history of losses, and we expect to incur losses for the foreseeable future.

 

We have incurred significant net losses in each year since our inception, including net losses of $8.3 million, $25.9 million and $60.8 million in fiscal 2012, 2013 and 2014, respectively, and $32.2 million and $26.8 million for the six months ended January 31, 2014 and 2015, respectively. As a result, we had an accumulated deficit of $145.9 million at July 31, 2014 and $172.7 million at January 31, 2015, and we expect to continue to incur net losses for the foreseeable future. Because the market for our software is rapidly evolving and has not yet reached widespread adoption, it is difficult for us to predict our future operating results. We expect our operating expenses to significantly increase over the next several years as we hire additional personnel, particularly in sales and marketing, expand and improve the effectiveness of our distribution channels, expand our operations and infrastructure, both domestically and internationally, and continue to develop our platform. In addition, as we grow and as we become a newly public company, we will incur additional significant legal, accounting and other expenses that we did not incur as a private company. If our revenue does not increase to offset these increases in our operating expenses, we will not be profitable in future periods. While historically, our total revenue has grown, not all components of our total revenue have grown consistently. Further, in future periods, our revenue growth could slow or our revenue could decline for a number of reasons, including slowing demand for our software, increasing competition, any failure to gain or retain channel partners, a decrease in the growth of our overall market, or our failure, for any reason, to continue to capitalize on growth opportunities. As a result, our past financial performance should not be considered indicative of our future performance. Any failure by us to sustain or increase profitability on a consistent basis could cause the value of our common stock to materially decline.

 

The market for our platform is new and unproven and may not grow or may decrease.

 

We were founded in 2004 and since our inception have been creating products for the developing and rapidly evolving market for API-based software platforms, a market that is largely unproven and is subject to a number of inherent risks and uncertainties. We believe that our future success will depend in large part on the growth, if any, in the market for software platforms that provide features and functionality to create and implement APIs to enable applications that interact with an enterprise’s backend databases and services, and provide visibility across the entire digital value chain from end-user interactions to backend systems to allow an enterprise to optimize operations and make data-driven business decisions. The utilization of API software and predictive analytics is still relatively new, and enterprises may not recognize the need for APIs and predictive analytics or, if they do, they may decide that they do not need a solution that offers the range of functionalities that we offer, or may decide to build such capabilities in-house. In order to grow our business and extend our market position, we intend to expand the functionality of our product and bring new technologies to market to increase market acceptance and use of our platform. It is difficult to predict customer adoption and renewal rates, customer demand for our solutions, the size and growth rate of the overall market that our platform addresses, the entry of competitive products or the success of existing competitive products. Any expansion of the market our platform addresses depends upon a number of factors, including the cost, performance and perceived value associated with such solutions. If the market our platform addresses does not achieve significant additional growth or there is a reduction in demand for such solutions caused by a lack of customer acceptance, technological challenges, competing technologies and products, decreases in corporate spending, weakening

 

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economic conditions, or otherwise, it could result in reduced revenue and customer orders, early terminations, and reduced renewal rates, any of which would adversely affect our business, results of operations, financial condition and growth prospects.

 

We have a short operating history for our recently released solutions, including the current version of our cloud-based solution and the current version of our predictive analytics solution, which makes it difficult to evaluate our future prospects and may increase the risk that we will not be successful.

 

We have a short operating history in selling our recently released solutions, including the current version of our cloud-based solution that we began offering at the end of 2012 and the current version of our predictive analytics solution, Apigee Insights, that we began offering in 2014, which limits our ability to forecast our future operating results and plan for and model future growth. We also have encountered and will continue to encounter risks and uncertainties frequently experienced by growing companies in developing industries. If our assumptions regarding these uncertainties, which we use to plan our business, are incorrect or if we do not address these risks successfully, our business, results of operations, financial condition and growth prospects could differ materially from our expectations and our business could suffer.

 

Additionally, we have limited experience with respect to determining the optimal prices for our solutions. If the market for our solutions begins to mature or as new competitors introduce new products or services that compete with our solutions, we may be unable to attract new customers based on the pricing model we have used historically. Moreover, large customers, which are the focus of our sales efforts, may demand greater price concessions. As a result, in the future we may be required to reduce our prices, which could adversely affect our revenue, gross margin, and other results of operations, financial condition and cash flows.

 

Moreover, although we have experienced strong growth historically, we may not continue to grow in the future. Any success that we may experience in the future will depend in large part on our ability to, among other things:

 

   

maintain and expand our customer base and the ways in which our customers use our platform;

 

   

increase revenue from existing customers through increased or broader use of our platform within their organizations;

 

   

improve the performance and capabilities of our software through research and development;

 

   

successfully expand our business domestically and internationally;

 

   

successfully compete with other companies, open source initiatives and custom development efforts that are currently in, or may in the future enter, the markets for our software;

 

   

continue to invest in our platform to foster an ecosystem of developers and users to expand the use cases of our software;

 

   

continue to develop Apigee Edge, Apigee Insights and Apigee Developer;

 

   

generate leads and convert users of the trial version of our software to paying customers;

 

   

prevent users from circumventing the terms of their software licenses;

 

   

continue to enhance our website infrastructure to minimize interruptions or slower than expected download times when accessing our software from our website;

 

   

process, store and use our customers’ data in compliance with applicable governmental regulations and other legal obligations related to data privacy and security; and

 

   

hire, integrate and retain qualified talent.

 

If we fail to address these risks and challenges and those described elsewhere in this “Risk Factors” section, our business will be adversely affected and our operating results will suffer.

 

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Because we currently derive substantially all of our revenue and cash flows from our Apigee Edge solution, failure of this solution to satisfy customer demands or to achieve increased market acceptance would materially and adversely affect our business, results of operations, financial condition and growth prospects.

 

We derive substantially all of our revenue and cash flows from our Apigee Edge solution. As such, the market acceptance of Apigee Edge is critical to our continued success. Demand for Apigee Edge is affected by a number of factors beyond our control, including continued market acceptance of our solutions by referenceable accounts for existing and new use cases, the timing of development and release of new products by our competitors and additional capabilities and functionality by us, technological change, and growth or contraction of the market in which we compete. In addition, similar to the situation encountered by traditional APIs, we cannot assure you that our Apigee Edge solution and future enhancements to our platform and solutions will be able to address future advances in technology or requirements of digital businesses. Moreover, our platform may not be able to scale and perform to meet increased requirements, including any associated with the proliferation of mobile apps and devices. We also lacked a clear migration path to transition existing customers under prior versions of our Apigee Edge solution (versions prior to August 2012), which has limited our ability to sell add-on purchases to these existing customers. We have experienced, and may continue to experience, decline in add-on purchases from customers using prior versions of our Apigee Edge solution. If we are unable to continue to meet customer demands or to achieve more widespread market acceptance of our software, our business, results of operations, financial condition and growth prospects will be materially and adversely affected.

 

If we are not able to introduce new products successfully and to make enhancements to existing products, our growth rates would likely decline and our business, results of operations and competitive position could suffer.

 

We invest substantial resources in researching and developing new products and enhancing existing products by incorporating additional features, improving functionality and adding other improvements to meet our customers’ evolving demands in our highly competitive industry. In order to be competitive, our platform must address an ever-increasing array of mobile apps, networked devices and back end databases, applications and systems, as well as keep pace with technological innovations in our industry and with our customers’ business requirements. For example, we are focused on enhancing the features and functionality of our platform to enhance its adaptability for the Internet of Things, or IoT. Since developing our platform is complex, the timetable for the release of enhancements is difficult to predict and we may not offer updates as rapidly as our customers require or expect. The success of enhancements to our platform and their market acceptance may depend upon the timing of introduction of these enhancements, and any failure in this regard may significantly impair our revenue growth. We also have invested, and expect in the future to continue to invest, in the acquisition of complementary products or services that expand the solutions that we can offer our customers and help us enter into new markets. We often make these investments without being certain that they will result in products or enhancements that our target markets will accept or that they will expand our share of those markets. The sizes of the markets currently addressed by our products are not certain, and our ability to grow our business in the future may depend upon our ability to introduce new solutions or enhance and improve our existing products for those markets or entry into new markets. Our growth would likely be adversely affected and we would not be able to extend our leadership position if we fail to introduce these new solutions or enhancements, fail to manage successfully the transition to new solutions from the products they are replacing or do not invest our development efforts in appropriate products or enhancements for significant new markets, or if these new products or enhancements do not attain market acceptance.

 

Our new solutions or enhancements could fail to attain market acceptance for many reasons, including:

 

   

downtime or other lack of availability or performance of our cloud–based solution;

 

   

defects, errors or failures in our platform;

 

   

the inability of our platform to interoperate effectively with products from other vendors or to operate successfully when deployed within the networks of our customers;

 

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negative publicity about the performance or effectiveness of our new solutions or enhancements to our existing solutions;

 

   

the timeliness of the introduction and delivery of our solutions or enhancements;

 

   

our failure or inability to predict changes in our industry or customers’ requirements;

 

   

reluctance of customers to purchase products that include cloud-based solutions or incorporate elements of open source software;

 

   

failure of our channel partners to market, support or distribute our solutions; and

 

   

changes in government or industry standards and criteria.

 

If we do not respond to the rapidly changing needs of our customers by timely developing and introducing new and effective solution features, upgrades and services that can respond adequately to their needs, our competitive position, business and growth prospects will be harmed.

 

We may not be able to compete successfully against current and future competitors.

 

We compete against in-house or custom IT development efforts, a variety of large software vendors and smaller specialized companies and open source initiatives, all of which vary in the breadth and scope of the products and services offered. The principal competitive factors in our markets include domain expertise in API business practices and technologies, size of customer base and level of user and developer adoption, established status as a strategic IT platform, brand awareness and reputation, total cost of ownership, ease of deployment and use of our solution by paying customers and developers, breadth and depth of offering, performance, availability and support for our solution, capability for configurability, integration, security, scalability and reliability of applications, and the ability to innovate and respond to customer needs rapidly. Beyond in-house or custom IT development efforts, our competitors include, among others, International Business Machines Corporation and Oracle Corporation, both of which can bundle competing products and services with other software offerings, or offer them at a low price as part of a larger sale. Some of our actual and potential competitors have certain additional advantages over us, such as:

 

   

significantly greater financial, technical, marketing, research and development or other resources;

 

   

stronger brand and business user recognition;

 

   

larger installed customer bases;

 

   

larger intellectual property portfolios; and

 

   

broader global distribution and presence.

 

Our industry is evolving rapidly and is becoming increasingly competitive, and we expect further increased competition if our market continues to expand. Larger and more established companies may focus on API management and API-based platforms and could directly compete with us. Smaller companies could also launch new products and services that we do not offer and that could gain market acceptance quickly. Conditions in our market could change rapidly and significantly as a result of technological advancements, open source initiatives or other factors.

 

In recent years, there have been significant acquisitions and consolidation by and among our competitors. Consolidation in our industry may allow our competitors to take advantage of the greater resources of the larger organization or may increase the likelihood of our competitors offering bundled or integrated products with which we cannot effectively compete. As a result of these acquisitions, competitors might take advantage of the greater resources of the larger organization to compete more vigorously or broadly with us. If we are unable to differentiate our product from the integrated or bundled products of our competitors, such as by offering enhanced functionality or performance, we may see decreased demand for those solutions, which would

 

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adversely affect our business, operations, financial results and growth prospects. Further, it is possible that continued industry consolidation may impact customers’ perceptions of the viability of smaller or even medium-sized software firms and consequently their willingness to use software solutions from such firms. Similarly, if customers seek to concentrate their software license purchases in the product portfolios of a few large providers, we may be at a competitive disadvantage regardless of the performance and features of our software. We believe that to remain competitive at the large enterprise level, we may need to develop and expand relationships with resellers and large system integrators that provide a broad range of products and services. If we are unable to compete effectively, our business, results of operations, financial condition and growth prospects could be materially and adversely affected.

 

Our future quarterly results may fluctuate significantly, which could adversely affect our share price.

 

Our results of operations, including the levels of our revenue, cost of revenue, gross margin, operating expenses, cash flow and deferred revenue, have fluctuated from quarter to quarter in the past and may continue to vary significantly in the future so that period-to-period comparisons of our operating results may not be meaningful. Accordingly, our financial results in any one quarter should not be relied upon as indicative of future performance. Our quarterly financial results may fluctuate as a result of a variety of factors, many of which are outside of our control, may be difficult to predict, and may or may not fully reflect the underlying performance of our business. Because the timing and amount of our revenue is difficult to forecast and because our operating costs and expenses are relatively fixed in the short term, if our revenue does not meet our expectations, we are unlikely to be able to adjust our spending to levels commensurate with our revenue. As a result, the effect of revenue shortfalls on our results of operations may be more accentuated, and these and other fluctuations in quarterly results may negatively affect the market price of our common stock. Among the factors that may cause fluctuations in our quarterly financial results are those listed below:

 

   

our ability to attract and retain new customers;

 

   

the addition or loss of large customers;

 

   

our ability to successfully expand our business domestically and internationally;

 

   

our ability to gain new channel partners and retain existing channel partners;

 

   

fluctuations in the growth rate of the overall market that our solutions address;

 

   

fluctuations in the mix of our revenue;

 

   

the unpredictability of the timing of our receipt of orders for perpetual licenses, the revenue for which we typically recognize upfront;

 

   

the amount and timing of operating expenses related to the maintenance and expansion of our business and operations, including continued investments in sales and marketing, research and development and general and administrative resources;

 

   

network outages or performance degradation of our cloud service;

 

   

information security breaches;

 

   

general economic, industry and market conditions;

 

   

customer renewal rates;

 

   

increases or decreases in the number of elements of our services or pricing changes upon any renewals of customer agreements;

 

   

changes in our pricing policies or those of our competitors;

 

   

the budgeting cycles and purchasing practices of customers;

 

   

decisions by potential customers to purchase alternative solutions from larger, more established vendors, including from their primary software vendors;

 

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decisions by potential customers to develop in-house solutions as alternatives to our platform;

 

   

insolvency or credit difficulties confronting our customers, which could adversely affect their ability to purchase or pay for our software and services;

 

   

delays in our ability to fulfill our customers’ orders;

 

   

seasonal variations in sales of our solutions;

 

   

the cost and potential outcomes of future litigation or other disputes;

 

   

future accounting pronouncements or changes in our accounting policies;

 

   

our overall effective tax rate, including impacts caused by any reorganization in our corporate tax structure and any new legislation or regulatory developments;

 

   

fluctuations in stock-based compensation expense;

 

   

fluctuations in foreign currency exchange rates;

 

   

the timing and success of new products and service introductions by us or our competitors or any other change in the competitive dynamics of our industry, including consolidation among competitors, customers or strategic partners;

 

   

the timing of expenses related to the development or acquisition of technologies or businesses and potential future charges for impairment of goodwill from acquired companies; and

 

   

other risk factors described in this prospectus.

 

We expect our revenue mix to vary over time, which can affect our gross margin and operating results.

 

We expect our revenue mix to vary over time due to a number of factors, including the mix of perpetual licenses, time-based licenses, subscriptions and professional services. In addition, third-party hosting infrastructure costs associated with customer adoption of our cloud-based solution can vary over time. Our gross margins and operating results can be affected by such changes in revenue mix and costs, together with numerous other factors including:

 

   

entry into new markets or growth in lower margin markets;

 

   

entry into markets with different pricing and cost structures;

 

   

pricing discounts;

 

   

increased price competition;

 

   

changes in distribution channels; and

 

   

how well we execute our strategy and operating plans.

 

Reliance on orders, especially for perpetual licenses, at the end of a fiscal quarter could cause our revenue to vary from period to period or to fall below expected levels for a given period.

 

As a result of customer buying behavior and the efforts of our sales force and channel partners to meet or exceed their sales objectives, we have historically received and generated a substantial portion of bookings and generated a significant portion of our quarterly revenue related to perpetual licenses during the last month of each quarter. The unpredictability of the timing of customer licenses—particularly for perpetual licenses, the revenue for which we typically recognize upfront—and subscriptions could cause our revenue to vary from period to period or to fall below expected levels for a given period, which would adversely affect our business, financial condition, and results of operations, and result in a decline in the market price of our common stock.

 

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Our business and growth depend on our ability to obtain subscription and maintenance renewals from existing customers. Nonrenewals and subscription downgrades could adversely affect our future operating results.

 

We primarily sell our platform on a yearly subscription basis, either deployed in the cloud or on premises. At the end of the term of these subscriptions, customers can renew their existing subscriptions, upgrade their subscriptions, downgrade their subscriptions or not renew. In recent periods, a lesser portion of our total revenue has been derived from annual maintenance and support associated with perpetual licenses. During the six months ended January 31, 2015, our subscription and time-based licenses that were eligible for renewal were renewed at a dollar-based renewal rate of approximately 85%. We calculate dollar-based renewal rate based on the dollar value of renewed contracts divided by the dollar value of expiring contracts at any given period. However, due to limited historical data with respect to rates of subscription renewals by our customers, particularly for our cloud-based solution, we cannot accurately predict customer dollar-based renewal rates. The dollar-based renewal rate for the six months ended January 31, 2015, is not necessarily indicative of our dollar-based renewal rate for the full year or any future period. Our customers’ renewal rates may decline or fluctuate as a result of a number of factors, including customer dissatisfaction with our pricing or our products’ functionality, features or performance, competitors’ product offerings or in-house developed solutions, customers’ ability to continue their operations and spending levels, migration path issues for new versions of products (which we have experienced before) and other factors, a number of which are beyond our control. Our customers have no obligation to renew their subscriptions after the expiration of the initial term, and they may elect not to renew their subscriptions or to reduce the product quantity under their subscriptions or maintenance and support contracts, thereby reducing our future revenue. If our customers do not renew their subscriptions for our products on similar pricing terms, our revenue may decline and our business, results of operations and growth prospects could suffer. In addition, if the average term of our contracts were to decrease, this may afford us less visibility into our future financial performance.

 

We recognize a majority of our revenue over the term of our customer contracts. Consequently, downturns or upturns in new sales may not be immediately reflected in our operating results and may be difficult to discern.

 

We recognize a majority of our revenue ratably over the term, typically one year, of customer subscriptions for our cloud-based solution and on-premises time-based licenses. As a result, a portion of our total revenue in each quarter is derived from the recognition of deferred revenue relating to subscriptions and time-based licenses and maintenance and support contracts entered into during prior periods. Consequently, a decline in new or renewed subscriptions or time-based licenses in any single quarter may have a small impact on our revenue for that quarter. However, such a decline will negatively affect our revenue in future quarters. Accordingly, the effect of significant downturns in sales and market acceptance of our platform and potential changes in our rate of customer expansion or retention or in our pricing policies will not be fully reflected in our results of operations in a single quarter but only over several quarters. In addition, a significant majority of our operating costs are expensed as incurred, while a majority of our revenue is recognized over the term of our agreements with our customers. As a result, continued growth in the number of our customers may not result in increases in our revenue that offset increases in our operating costs and expenses. Our subscription model also makes it difficult for us to rapidly increase our revenue through additional sales in any period, as revenue from new customers is generally recognized ratably over the applicable term of our agreements.

 

We may require additional capital to support our business, and this capital might not be available on acceptable terms, if at all.

 

We intend to continue to make investments to support our business and may require additional funds, in particular as we seek to grow our business, including the need to develop new features or enhance our software, improve our operating infrastructure or acquire complementary businesses and technologies. Accordingly, we may need to engage in equity or debt financings to secure additional funds. If we raise additional funds through future issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing that we may secure in the future could involve restrictive

 

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covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. We may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support our business growth, scale our infrastructure, develop product enhancements and to respond to business challenges could be significantly impaired, and our business may be adversely affected.

 

To the extent that we are unable to timely recognize revenue from the provision of professional services to our customers or to develop additional channel partner relationships to deliver professional services for our solutions, we will continue to have a substantial portion of our revenue mix derived from our provision of such services which carry lower gross margins than our other revenue sources.

 

We generally offer professional services associated with implementing our solutions, and we recognize revenue from professional services primarily on a time and materials basis as services are delivered. Costs associated with maintaining a professional services department is fixed while professional services revenue is dependent on the amount of work actually billed to customers in a period, the combination of which may result in variability in our gross profit. In addition, the timing of the recognition of professional services revenue is dependent on several factors outside our control. If a customer deploys our solutions and utilizes our services more slowly than we expect, we may not be able to recognize the related revenue as quickly as we anticipated, which may adversely affecting our gross profit and other results of operations. We rely, in part, on our channel partners for professional services associated with implementing our solutions and we plan to continue to expand our channel relationships that provide these professional services to supplement our own resources and, to the extent that we are unable to adequately grow these channel partner relationships, we will continue to have a substantial portion of our revenue mix derived from our provision of such services which carry lower gross margins than our other revenue sources.

 

The seasonality of our business can create significant variance in our quarterly bookings, license revenue and cash flows from operations.

 

We operate on a July 31 fiscal year end and believe that there are significant seasonal factors which may cause us to experience lower levels of revenue in our first fiscal quarter ending October 31 and higher levels of revenue in our second fiscal quarter ending January 31 as compared with other quarters. We believe that this seasonality results from a number of factors, including:

 

   

slower enterprise buying patterns during the late summer months, both domestically and overseas, including from our telecommunications customers, as well as government customer procurement, budget and deployment cycles, and the timing of our training for our entire sales force, each of which impacts our revenue in our first fiscal quarter; and

 

   

larger customers with a December 31 fiscal year end choosing to spend remaining budgets shortly before their year end, which impacts our revenue in our second fiscal quarter.

 

We believe that these seasonal trends have been moderated in recent periods due to our growth, but we anticipate that they may be more pronounced in fiscal 2015 and in future periods.

 

If we are unable to attract and retain key personnel, our business could be adversely affected.

 

We depend on the continued contributions of our senior management and other key personnel, the loss of whom could adversely affect our business. All of our executive officers and key employees are at-will employees, which means they may terminate their employment relationship with us at any time. We do not maintain a key-person life insurance policy on any of our officers or other employees.

 

Our future success also depends in large part on our ability to identify, attract and retain highly skilled technical, managerial, finance and other personnel, particularly in our sales and marketing, research and development, general and administrative, and professional service departments. We face intense competition for qualified individuals from

 

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numerous software and other technology companies. In addition, competition for qualified personnel, particularly software engineers, is particularly intense in the San Francisco Bay Area, where our headquarters are located. We may incur significant costs to attract and retain them, and we may lose new employees to our competitors or other technology companies before we realize the benefit of our investment in recruiting and training them. As we move into new geographies, we will need to attract and recruit skilled personnel in those areas. If we are unable to attract and retain suitably qualified individuals who are capable of meeting our growing technical, operational and managerial requirements, on a timely basis or at all, our business will be adversely affected.

 

Volatility or lack of appreciation in our stock price may also affect our ability to attract and retain our key employees. Many of our senior management personnel and other key employees have become, or will soon become, vested in a substantial amount of stock or stock options. Employees may be more likely to leave us if the shares they own or the shares underlying their vested options have significantly appreciated in value relative to the original purchase prices of the shares or the exercise prices of the options, or, conversely, if the exercise prices of the options that they hold are significantly above the market price of our common stock. If we are unable to retain our employees, or if we need to increase our compensation expenses to retain our employees, our business, results of operations, financial condition and cash flows would be adversely affected.

 

If we do not effectively train and expand our sales force, we may be unable to add new customers or increase sales to our existing customers and our business will be adversely affected.

 

Currently, we sell our solutions primarily through our direct sales force. Our ability to increase our sales to both new and existing customers is in part dependent on our ability to continue to train and expand our sales force, which from July 31, 2012 to July 31, 2014, grew nearly 300%. There is significant competition for sales personnel with the skills and technical knowledge that we require. Moreover, newly hired sales personnel require substantial training and typically take a significant amount of time before they achieve full productivity. Our recent hires and planned hires may not become productive as quickly as we expect, and we may be unable to hire or retain sufficient numbers of qualified individuals in the markets where we do business or plan to do business. In addition, as we continue to grow, a large percentage of our sales force can be expected to be new to the company and our platform. Identifying, recruiting and effectively training sufficient sales personnel to support our growth requires significant time, expenses and management and other resources. If we are unable to hire, develop and retain sales personnel or if our new direct sales personnel are unable to achieve expected sales productivity levels in a reasonable period of time or at all, we may not be able to increase our revenue and grow our business, which would adversely affect our results of operations.

 

If we fail to manage our growth effectively, our business, operating results and financial condition would be adversely affected.

 

In recent periods, we have been adding personnel and other resources as we focus on growing our business, entering new geographic markets and increasing our market share, and we expect to incur significant additional expenses in further expanding our personnel, particularly in sales and marketing and our international operations in order to grow our business, operations and customer base, and we intend to continue to make significant additional investments in these areas. The number of our full-time employees was 241 as of July 31, 2012, 352 as of July 31, 2013, 437 as of July 31, 2014 and 396 as of February 15, 2015. The return on these investments in terms of increases in revenue, operating margin and number of customers may be lower, or may be realized more slowly, than we expect. If we do not achieve the benefits anticipated from our investments, or if the achievement of these benefits is delayed, our business, results of operations and financial condition would be adversely affected.

 

In addition, our growth has placed, and is expected to continue to place, a significant strain on our managerial, administrative, operational, financial and other resources. To effectively manage growth, we must continue to improve our operational, financial and management controls, and our reporting systems and procedures.

 

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If we are not able to maintain and enhance our brand and increase market awareness of our company and solutions, our business and operating results may be adversely affected.

 

We believe that maintaining and enhancing the “Apigee” brand identity and increasing market awareness of our company and solutions is critical to achieving widespread acceptance of our platform, to our relationships with our customers and channel partners and to our ability to attract new customers and channel partners. The successful promotion of our brand will depend largely upon our marketing efforts, our ability to continue to offer high-quality software, our ability to be thought leaders in API-based software platforms and our ability to successfully differentiate our platform from those of our competitors. Our thought leadership and brand promotion activities may not be successful or yield increased revenue. In addition, independent industry analysts often provide reviews of our products, as well as those of our competitors, and perception of our product in the marketplace may be significantly influenced by these reviews. If these reviews are negative, or less positive as compared to those of our competitors’ products and services, our brand may be adversely affected.

 

In addition, the promotion of our brand requires us to make substantial expenditures, and we anticipate that the expenditures will increase as our market becomes more competitive, as we expand into new markets and as more sales are generated through our channel partners. To the extent that these activities yield increased revenue, this revenue may not offset the increased expenses we incur. If we do not successfully maintain and enhance our brand, our business may not grow, we may have reduced pricing power relative to competitors with stronger brands, and we may lose customers and channel partners, all of which would adversely affect our business, results of operations, and financial condition.

 

Our growth depends in part on the success of our strategic relationships with third parties, which relationships are at an early stage of development.

 

In order to grow our business, we anticipate that we will continue to depend on relationships with third parties, such as Accenture LLP and SAP AG, to resell and co-sell and provide services related to our platform. Our relationships with these partners are at an early stage of development, we have generated very limited revenue through these relationships to date, and we cannot assure you that these partners will be successful in marketing and selling our platform or solutions based upon our platform. Identifying partners such as these, negotiating and supporting relationships with them and maintaining relationships requires significant commitment of time and resources that may not yield a significant return on our investment in these relationships. Our channel partners are not required to exclusively market or sell our solutions in our target markets and have only limited commitments to dedicate resources to the marketing and promoting our solutions. In addition, our competitors may be more effective in providing incentives to our strategic partners or prospective partners to favor their products or services over our solutions. If we are unsuccessful in establishing or maintaining our relationships with strategic partners, or if these partners are unsuccessful in marketing or selling our solutions, or are unable or unwilling to devote sufficient resources to these activities, our ability to compete in the marketplace or to grow our revenue could be impaired and our operating results may suffer.

 

Our sales cycles can be long and unpredictable, and our sales efforts require considerable time and expense. As a result, our sales and revenue are difficult to predict and may vary substantially from period to period.

 

The timing of our sales and related revenue recognition is difficult to predict because of the length and unpredictability of the sales cycle for our platform. We are often required to spend time and resources to better familiarize potential customers with the value proposition of API software generally. Customers often view the purchase of our products as a significant and strategic decision and, as a result, frequently require considerable time to evaluate, test and qualify our products prior to making a purchase decision and placing an order. A number of factors influence the length and variability of our sales cycles, including, for example:

 

   

the need to educate potential customers about the uses and benefits of our platform;

 

   

the discretionary nature of potential customers’ purchasing and budget cycles and decisions;

 

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the competitive nature of potential customers’ evaluation and purchasing approval processes; and

 

   

the availability of in-house solutions, either currently or through addition internal development, to our potential and current customers.

 

The amount of time that customers devote to their evaluation, contract negotiation and budgeting processes varies significantly. The length of the sales cycle for our platform averages approximately seven months, but specific transactions can be significantly longer. During the sales cycle, we expend significant time and money on sales and marketing and contract negotiation activities, which may not result in a sale. For all of these reasons, it is difficult to predict whether and when a sale will be completed, and when revenue from a sale will be recognized or begin to be recognized. If our sales cycles lengthen, our revenue could be lower than expected, which would have an adverse effect on our business, results of operations and financial condition.

 

We rely upon Amazon Web Services to operate certain aspects of our service and any disruption of or interference with our use of Amazon Web Services would impact our operations and our business would be adversely impacted.

 

Amazon Web Services, or AWS, provides a distributed computing infrastructure platform for business operations, or what is commonly referred to as a cloud computing service. We have architected our software and computer systems so as to utilize data processing, storage capabilities and other services provided by AWS. Currently, the vast majority of our cloud service infrastructure is run on AWS. Given this, along with the fact that we cannot easily switch our AWS operations to another cloud provider, any disruption of or interference with our use of AWS would impact our operations and our business would be adversely impacted.

 

If we fail to adequately maintain cloud-based infrastructure capacity through third parties, our existing customers may experience service outages, and our new customers may experience delays in the deployment of our platform.

 

Customers of our cloud-based solution need to be able to access our platform 24 hours a day, seven days a week, without interruption or degradation of performance. We outsource all of our data centers to third parties, including AWS. The number of API calls trafficked through our platform is increasing substantially. An API call is a request for data or services from within an application, made through an API, to another application or system. Although we expend considerable effort to ensure that our platform performance is able to handle existing and anticipated traffic levels, we are dependent upon third parties in order to meet these uptime and performance requirements of our customers and we may not be able to maintain the level of uptime and performance required by our customers, especially to cover peak levels or spikes in the number of API calls trafficked through our platform. The provisioning of new cloud hosting capacity and data center infrastructure requires lead time. If we do not accurately predict our infrastructure capacity requirements with sufficient lead time, our customers could experience service shortfalls.

 

We do not control the operation of the third-party infrastructure on which our cloud service is deployed and we are therefore vulnerable to any information security breaches, power outages or other issues the data center may experience. We have in the past experienced, and expect that we will in the future experience, interruptions, delays and outages in service and availability from time to time due to a variety of factors, including infrastructure changes, human or software errors, website or third-party hosting disruptions or capacity constraints due to a number of potential causes including technical failures, natural disasters or fraud or security attacks. For example, in the fall of 2014, we were unable to process all of the API calls for one of our customers due to initial capacity constraints in connection with a spike in the number of API calls for this customer. As a result, this customer experienced a momentary outage in service and availability, and during a period of less than two hours the performance of our platform was degraded for this customer while we provisioned additional capacity for this customer. We assessed the impact of the outage and determined that it did not have a material impact on our business or operating results. If our security, or that of our third-party infrastructure providers, is compromised, our

 

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platform is unavailable or our users are unable to deploy our solutions within a reasonable amount of time or at all, our business could be negatively affected. In some instances, we may not be able to identify the cause or causes of these performance problems within an acceptable period of time. It may become increasingly difficult to maintain and improve our platform performance, especially during peak usage times and as our software becomes more complex and the number of API calls trafficked through our platform increases. To the extent that we do not effectively address capacity constraints, upgrade third-party infrastructure as needed and continually develop our technology and network architecture to accommodate actual and anticipated changes in technology, our business and results of operations may be adversely affected. In addition, any changes in service levels from our cloud infrastructure provider may adversely affect our ability to meet our customers’ requirements.

 

Any of the above circumstances or events may harm our reputation, cause customers to terminate their agreements with us, impair our ability to obtain subscription and maintenance renewals from existing customers, impair our ability to grow our customer base, subject us to financial penalties and liabilities under our service level agreements, and otherwise harm our business, results of operations and financial condition.

 

Breaches of our networks or systems, or those of our third-party cloud infrastructure providers, could degrade our ability to conduct our business operations, delay our ability to recognize revenue, compromise the integrity of our solutions and products, result in significant data losses and the theft of our intellectual property, damage our reputation, expose us to liability to third parties and require us to incur significant additional costs to maintain the security of our networks and data.

 

We increasingly depend upon our IT systems to conduct virtually all of our business operations, ranging from our internal operations and product development activities to our marketing and sales efforts and communications with our customers and business partners. Computer programmers or other individuals or entities may attempt to penetrate our network security, or that of our platform, including both customer deployments and our third-party cloud infrastructure, and to cause adverse effects on our business operations, including by misappropriating our proprietary information or that of our customers, employees and business partners or to cause interruptions of our service. Because the techniques used by such individuals or entities to access, disrupt or sabotage computing devices, systems and networks change frequently and may not be recognized until launched against a target, we may be unable to anticipate these techniques, and we may not become timely aware of such a security breach which could exacerbate any damage we experience. Any data security incidents, unauthorized access, unauthorized usage, virus or similar breach or disruption of us or of third-party infrastructure provider could result in loss of confidential information, damage to our reputation, early termination of our contracts, litigation, regulatory investigations, fines, penalties and other liabilities. Additionally, we depend upon our employees and contractors to appropriately handle confidential and sensitive data and to deploy our IT resources in safe and secure fashion that does not expose our network systems to security breaches or the loss of data. Accordingly, if our cybersecurity defenses and those of our contractors, including our third-party infrastructure providers, fail to protect against unauthorized access, attacks (which may include sophisticated cyberattacks) and the mishandling of data by our employees and contractors, our ability to conduct our business effectively could be damaged in a number of ways, including:

 

   

sensitive data regarding our business, including intellectual property and other proprietary data, could be stolen or compromised;

 

   

sensitive customer data running through our cloud-based solution or through on-premises customer deployments could be stolen or compromised;

 

   

our electronic communications systems, including email and other methods, could be disrupted, and our ability to conduct our business operations could be seriously impeded until such systems can be restored;

 

   

our ability to process customer orders, electronically deliver solutions and services and perform our contractual obligations could be degraded, and our distribution channels could be disrupted, resulting in delays in revenue recognition;

 

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defects and security vulnerabilities could be introduced into our software, thereby damaging the reputation and perceived reliability and security of our solutions and potentially making the data systems of our customers vulnerable to further data loss and cyberincidents; and

 

   

personally identifiable data of our customers, employees and business partners could be stolen or compromised.

 

If our security measures or those of our third-party infrastructure providers are breached as a result of third-party action, employee error, malfeasance or otherwise and, as a result, someone obtains unauthorized access to or engages in unauthorized use of customer data, our reputation may be damaged, our business may suffer and we could incur significant liability. Also, the regulatory and contractual actions, litigation, investigations, fines, penalties and liabilities relating to any such incidents can be significant in terms of the dedication of management and financial resources, reputational impact and may necessitate changes to our business operations that may be disruptive to us. Additionally, we could incur significant costs, both in terms of monetary expense and in management and technical attention, in order to upgrade our information security systems and methods and remediate damages. Consequently, our financial performance and results of operations could be adversely affected.

 

Our international sales and operations subject us to additional risks that can adversely affect our operating results and financial condition.

 

In fiscal 2013 and fiscal 2014, respectively, we derived approximately 16% and 33% of our total revenue from customers located outside the United States. In the six months ended January 31, 2014 and 2015, respectively, we derived approximately 33% and 38% of our total revenue from customers located outside the United States, and we are continuing to expand our international operations as part of our growth strategy. Sales to our customers in foreign countries have typically been denominated in U.S. dollars. Fluctuations in currency exchange rates could cause our products to become relatively more expensive to end customers in a particular country, leading to a reduction in sales in that country. We are also exposed to movements in foreign currency exchange rates since the operating expenses we incur for our operations and personnel outside the United States are denominated in local currencies. We have research and development personnel in India and the United Kingdom, engage contractors in various international locations, and have testing and support personnel in the United States, India and the United Kingdom, and we may expand our offshore development efforts. In addition, we have sales and support personnel in numerous countries worldwide and expect to continue to substantially expand our overseas headcount. Our international operations subject us to a variety of additional risks, including:

 

   

the difficulty of managing and staffing international offices and the increased travel, infrastructure and legal compliance costs associated with numerous international locations;

 

   

reduced demand for technology products outside the United States;

 

   

difficulties in enforcing contracts and collecting accounts receivable, and longer payment cycles, especially in emerging markets;

 

   

demanding data protection standards in certain jurisdictions that can interrupt or delay the transfer and processing of personal data;

 

   

tariffs and trade barriers, import requirements, export control and trade sanctions regulations and other regulatory or contractual limitations on our ability to sell or develop our products in certain foreign markets;

 

   

heightened exposure to political instability, war and terrorism;

 

   

added legal compliance obligations and complexity;

 

   

reduced protection for intellectual property rights in some countries;

 

   

multiple conflicting tax laws and regulations;

 

   

lack of familiarity and burdens of complying with foreign laws, accounting and legal standards, regulatory requirements, tariffs, and other barriers;

 

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compliance with laws and regulations applicable to domestic and international operations, including the United States Foreign Corrupt Practices Act of 1977, as amended, or FCPA, the United Kingdom Bribery Act of 2010, or Bribery Act, privacy and data protection laws and regulations, import and export control laws, tariffs, trade barriers, economic sanctions and other regulatory or contractual limitations on our ability to sell our software in certain foreign markets, and the risks and costs of non-compliance;

 

   

heightened risks of unfair or corrupt business practices in certain geographies and of improper or fraudulent sales arrangements that may impact financial results and result in restatements of financial statements and irregularities in financial statements;

 

   

difficulties in adapting to differing technology standards;

 

   

the need to localize our products for international end customers and our lack of experience in connection with the localization of our solutions, including translation into foreign languages and adaptation for local practices and regulatory requirements; and

 

   

complexities and increased costs in retaining and terminating employees in some countries.

 

As noted above, we are subject to the FCPA and the Bribery Act in certain cases. We are also subject to the U.S. domestic bribery statute contained in 18 U.S.C. § 201, the U.S. Travel Act, the USA PATRIOT Act, and possibly other anti-bribery and anti-money laundering laws and regulations in countries in which we conduct activities. Failure to comply with these laws and regulations could cause delays in revenue recognition and financial reporting misstatements, and subject us to other serious adverse consequences discussed below. Anti-corruption and anti-bribery laws such as the FCPA and Bribery Act generally prohibit companies and their employees and third-party intermediaries from making corrupt payments to government officials or private parties for the purpose of obtaining or keeping business, permits or other regulatory approvals, securing an advantage, or directing business to another. These laws also require companies to maintain accurate books and records and a system of internal accounting controls. We plan to increase our international sales and business and engage with an increasing number of business partners and other third-party intermediaries to conduct our business and sell our products and services abroad. We, our business partners, or our third-party intermediaries may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities. Under the FCPA, the company may be held liable for the corrupt actions taken by directors, officers, employees, agents, or other strategic or local partners or representatives. Similarly, under the Bribery Act, we may be held strictly liable for the corrupt acts of any person associated with us. As such, if we or our intermediaries fail to comply with the requirements of the FCPA, the Bribery Act or similar legislation, we could be subject to whistleblower complaints, investigations, sanctions, settlements, prosecution, other enforcement actions, significant criminal fines, civil penalties, tax penalties, disgorgement, and other remedial measures, suspension or debarment from contracting with certain governments or other persons, the loss of export privileges, reputational harm, adverse media coverage, civil litigation, and other collateral consequences. In addition, responding to any allegation or action will likely result in a materially significant diversion of management’s attention and resources and investigation, compliance, and defense costs and other professional fees, and could result in a material adverse effect on our business, prospects, financial condition, or results of operations. We also face the risk of multijurisdictional liability for the same act. This is due to the fact that many countries have broad laws and regulations in place which overlap with the laws and regulations of other countries.

 

As we continue to expand our business globally, our success will depend, in large part, on our ability to anticipate and manage effectively these and other risks associated with our international operations. In addition, compliance with laws and regulations applicable to our international operations increases our cost of doing business in foreign jurisdictions. We may be unable to keep current with changes in government requirements as they change from time to time. Failure to comply with these regulations could have adverse effects on our business. Although we will implement policies and procedures designed to ensure compliance with these laws and policies, we cannot assure you that all of our employees, contractors, channel partners and agents will comply with these laws and policies.

 

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Our ability to sell our products is highly dependent on the quality of our software, support and services offerings, and our failure to offer high-quality software, support and services could have a material and adverse effect on our business and results of operations.

 

Once our platform is deployed for our customers, those customers depend on our support organization and those of our channel partners to resolve any issues relating to our platform. Customers using our cloud-based solution are similarly dependent upon our ability to resolve these platform issues. Because our software is complex, undetected errors, failures or bugs may occur. Our platform may be installed and used in large-scale computing environments with different operating systems, system management software and equipment and networking configurations, which may cause errors or failures of our software or other aspects of the computing environment into which it is deployed. Despite testing by us, errors, failures or bugs may not be found in enhancements to our platform until they are used by our customers. In the past, we have discovered software errors, failures and bugs in our platform. Real or perceived errors, failures or bugs in our software could result in negative publicity, loss of or delay in market acceptance of our software, loss of competitive position, claims by customers for losses sustained by them or, in the case of our cloud-based solution, failure to meet the stated service level commitments in our customer agreements. In such an event, we may be required, or may choose, for customer relations or other reasons, to expend significant additional resources in order to help correct the problem.

 

High-quality software, support and services are critical for the successful marketing and sale of our products. If we or our channel partners do not devote sufficient resources or are otherwise unsuccessful in assisting our customers in deploying our products effectively, succeed in helping our customers resolve post-deployment issues quickly, or provide ongoing support, it could adversely affect our ability to sell our products to existing end customers and could harm our reputation with potential customers. In addition, as we expand our operations internationally, our support organization will face additional challenges, including those associated with delivering support, training and documentation in languages other than English. Our failure or the failure of our channel partners to maintain high-quality software, support and services could have an adverse effect on our business, results of operations and financial condition.

 

Incorrect implementation or use of our software could result in customer dissatisfaction and negatively affect our business, operations, financial results and growth prospects.

 

Our platform is designed to be operated in a “self-service” manner by our customers who subscribe to our cloud-based solution. In addition, our platform may be deployed in large scale, complex technology environments of our customers. Our customers and channel partners require training and experience in the proper use of and the variety of benefits that can be derived from our platform to maximize its potential. If our software is not implemented or used correctly or as intended, inadequate performance or security vulnerabilities may result. Because our customers rely on our software to manage a wide range of operations, the incorrect implementation or use of our software, our failure to train customers on how to productively use our software may result in customer dissatisfaction, negative publicity and adversely affect our reputation and brand. Failure by us to provide these training and implementation services to our customers would result in lost opportunities for follow-on sales to these customers and adoption of our platform by new customers, and adversely affect our business and growth prospects.

 

In cases where our platform has been deployed on premises within a customer’s environment, if we or our customers are unable to configure or implement our software properly, or unable to do so in a timely manner, customer perceptions of our platform may be impaired, our reputation and brand may suffer, and customers may choose not to increase their use of our software or to discontinue its use. In addition, our on-premises solution imposes server load and data storage requirements for implementation. If our customers do not have the server load capacity or the storage capacity required, they may not be able to effectively implement and use our software and, therefore, may not choose to increase their use of our software or to discontinue its use.

 

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We typically provide service level commitments of up to 99.99% under our customer contracts. If we fail to meet these contractual commitments, we could be obligated to provide credits or refunds for prepaid amounts related to unused subscription services or face contract terminations, which could adversely affect our business, results of operations and financial condition.

 

Subscriptions for our cloud-based solution typically provide our customers with service level commitments on a monthly basis. If we are unable to meet the stated service level commitments to our customers or suffer extended periods of unavailability of our cloud-based solution, we may be contractually obligated to provide these customers with service credits, refunds for prepaid amounts related to unused subscription services, and could face contract terminations. As a result, our revenue, other operating results and financial condition could be adversely affected if we suffer unscheduled downtime that exceeds the service level commitments under our agreements with our customers, and any extended service outages could adversely affect our business and reputation.

 

Our reliance on Software-as-a-Service technologies from third parties may adversely affect our business and operating results.

 

We rely heavily on hosted Software-as-a-Service, technologies from third parties in order to operate critical functions of our business, including enterprise resource planning services from NetSuite and customer relationship management services from salesforce.com. If these services become unavailable due to extended outages, interruptions or because they are no longer available on commercially reasonable terms or prices, our expenses could increase, our ability to manage our finances could be interrupted and our processes for managing sales of our software and supporting our customers could be impaired until equivalent services, if available, are identified, obtained and implemented, all of which could adversely affect our business.

 

We could incur substantial costs in protecting or defending our intellectual property rights, and any failure to protect our intellectual property could impair our business.

 

Our success depends, in part, on our ability to protect proprietary methods and technologies that we develop under patent and other intellectual property laws of the United States and foreign jurisdictions so that we can prevent others from using our inventions and proprietary information. We have only been issued nine U.S. patents to date and have been issued no foreign patents and there can be no assurance that additional patents will be issued or that any patents that have been issued or that may be issued in the future will provide significant protection for our intellectual property. If we fail to protect our intellectual property rights adequately, our competitors might gain access to our technology and our business might be harmed. There is no assurance that the particular forms of intellectual property protection that we seek, including business decisions about when to file patents and when to maintain trade secrets, will be adequate to protect our business. We could be required to spend significant resources to monitor and protect our intellectual property rights. Litigation may be necessary in the future to enforce our intellectual property rights, protect our trade secrets, determine the validity and scope of the proprietary rights of us or others or defend against claims of infringement or invalidity. Such litigation could be costly, time-consuming and distracting to management, result in a diversion of significant resources, the narrowing or invalidation of portions of our intellectual property and have an adverse effect on our business, results of operations and financial condition. Our efforts to enforce our intellectual property rights may be met with defenses, counterclaims and countersuits attacking the validity and enforceability of our intellectual property rights or alleging that we infringe the counterclaimant’s own intellectual property. These steps may be inadequate to protect our intellectual property. Any of our patents, copyrights, trademarks or other intellectual property rights could be challenged by others or invalidated through administrative process or litigation.

 

We also rely, in part, on confidentiality agreements with our technology partners, employees, consultants, advisors, customers and others in our efforts to protect our proprietary technology, processes and methods,. These agreements may not effectively prevent disclosure of our confidential information, and it may be possible for unauthorized parties to copy our software or other proprietary technology or information, or to develop similar software independently without our having an adequate remedy for unauthorized use or disclosure of our

 

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confidential information. In addition, others may independently discover our trade secrets and proprietary information, and in these cases we would not be able to assert any trade secret rights against those parties. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.

 

In addition, the laws of some countries do not protect proprietary rights to the same extent as the laws of the United States. To the extent we expand our international activities, our exposure to unauthorized copying, transfer and use of our solutions and proprietary technology or information may increase.

 

There can be no assurance that our means of protecting our proprietary rights will be adequate or that our competitors will not independently develop similar technology. If we fail to meaningfully protect our intellectual property, our business, brand, operating results and financial condition could be materially harmed.

 

We could incur substantial costs as a result of any claim of infringement of another party’s intellectual property rights.

 

In recent years, there has been significant litigation involving patents and other intellectual property rights in the software industry. Companies providing software are increasingly bringing and becoming subject to suits alleging infringement of proprietary rights, particularly patent rights, and to the extent we gain greater market visibility, we face a higher risk of being the subject of intellectual property infringement claims. We do not have a significant patent portfolio, which could prevent us from deterring patent infringement claims through our own patent portfolio, and our competitors and others may now and in the future have significantly larger and more mature patent portfolios than we have. The risk of patent litigation has been amplified by the increase in the number of a type of patent holder, which we refer to as a non-practicing entity, whose sole business is to assert such claims and against whom our own intellectual property portfolio may provide little deterrent value. We could incur substantial costs in prosecuting or defending any intellectual property litigation. If we sue to enforce our rights or are sued by a third party that claims that our solutions infringe its rights, the litigation could be expensive and could divert our management resources.

 

Any intellectual property litigation to which we might become a party, or for which we are required to provide indemnification, may require us to do one or more of the following:

 

   

cease selling or using solutions that incorporate the intellectual property that we allegedly infringe;

 

   

make substantial payments for legal fees, settlement payments or other costs or damages;

 

   

obtain a license, which may not be available on reasonable terms or at all, to sell or use the relevant technology; or

 

   

redesign the allegedly infringing solutions to avoid infringement, which could be costly, time-consuming or impossible.

 

If we are required to make substantial payments or undertake any of the other actions noted above as a result of any intellectual property infringement claims against us or any obligation to indemnify our customers for such claims, such payments or actions could harm our business.

 

Our use of open source software could negatively affect our ability to sell our solutions and subject us to possible litigation.

 

A portion of our technologies incorporate open source software, and we expect to continue to incorporate open source software in our solutions in the future. Few of the licenses applicable to open source software have been interpreted by courts, and there is a risk that these licenses could be construed in a manner that could impose unanticipated conditions or restrictions on our ability to commercialize our products. Moreover, we cannot assure you that we have not incorporated additional open source software in our software in a manner that

 

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is inconsistent with the terms of the license or our current policies and procedures. If we fail to comply with these licenses, we may be subject to certain requirements, including requirements that we offer our solutions that incorporate the open source software for no cost, that we make available source code for modifications or derivative works we create based upon, incorporating or using the open source software and that we license such modifications or derivative works under the terms of applicable open source licenses. If an author or other third party that distributes such open source software were to allege that we had not complied with the conditions of one or more of these licenses, we could be required to incur significant legal expenses defending against such allegations and could be subject to significant damages, enjoined from the sale of our solutions that contained the open source software and required to comply with onerous conditions or restrictions on these solutions, which could disrupt the distribution and sale of these solutions. In addition, there have been claims challenging the ownership of open source software against companies that incorporate open source software into their products. In any of these events, we and our customers could be required to seek licenses from third parties in order to continue offering our products, and to re-engineer our products or discontinue the sale of our products in the event re-engineering cannot be accomplished on a timely basis. We and our customers may also be subject to suits by parties claiming infringement due to the reliance by our solutions on certain open source software, and such litigation could be costly for us to defend or subject us to an injunction. Any of the foregoing could require us to devote additional research and development resources to re-engineer our solutions, could result in customer dissatisfaction, and may adversely affect our business, results of operations and financial condition.

 

We may have additional tax liabilities, which could harm our business, operating results, financial condition and prospects.

 

Significant judgments and estimates are required in determining our provision for income taxes and other tax liabilities. Our tax expense may be impacted if our intercompany transactions, which are required to be computed on an arm’s-length basis, are challenged and successfully disputed by the tax authorities. Also, our tax expense could be impacted depending on the applicability of withholding and other taxes (including withholding and indirect taxes on software licenses and related intercompany transactions) under the tax laws of certain jurisdictions in which we have business operations. In determining the adequacy of income taxes, we assess the likelihood of adverse outcomes that could result if our tax positions were challenged by the Internal Revenue Service, or IRS, and other tax authorities. The tax authorities in the United States and other countries where we do business regularly examine our income and other tax returns. The ultimate outcome of these examinations cannot be predicted with certainty. Should the IRS or other tax authorities assess additional taxes as a result of examinations, we may be required to record charges to operations that could have a material impact on the results of operations, financial position or cash flows.

 

Taxing authorities may successfully assert that we should have collected or in the future should collect sales and use, value added or similar taxes, and we could be subject to liability with respect to past or future sales, which could adversely affect our results of operations.

 

We do not collect sales and use, value added and similar taxes in all jurisdictions in which we have sales, based on our belief that such taxes are not applicable. Sales and use, value added and similar tax laws and rates vary greatly by jurisdiction. Certain jurisdictions in which we do not collect such taxes may assert that such taxes are applicable, which could result in tax assessments, penalties and interest, and we may be required to collect such taxes in the future. Such tax assessments, penalties and interest or future requirements may adversely affect our results of operations.

 

Indemnity provisions in various agreements potentially expose us to substantial liability for intellectual property infringement and other losses.

 

Our agreements with clients and other third parties may include indemnification provisions under which we agree to indemnify them for losses suffered or incurred as a result of claims of intellectual property infringement, damages caused by us to property or persons, or other liabilities relating to or arising from our products, services,

 

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or other contractual obligations. Some of these indemnity agreements provide for uncapped liability for which we would be responsible. The term of these indemnity provisions generally survives termination or expiration of the applicable agreement. Large indemnity payments could harm our business, operating results and financial condition. From time to time, we are requested by clients to indemnify them for breach of confidentiality with respect to personal data or other security breaches. Although we typically do not agree to, or contractually limit our liability with respect to, such requests, the existence of such a dispute with a client may have adverse effects on our client relationships and reputation.

 

We may become involved in litigation that may materially adversely affect us.

 

From time to time, we may become involved in various legal proceedings relating to matters incidental to the ordinary course of our business, including patent, commercial, product liability, employment, class action, whistleblower and other litigation and claims, and governmental and other regulatory investigations and proceedings. Such matters can be time-consuming, divert management’s attention and resources, cause us to incur significant expenses or liability and/or require us to change our business practices. Because of the potential risks, expenses and uncertainties of litigation, we may, from time to time, settle disputes, even where we have meritorious claims or defenses, by agreeing to settlement agreements. Because litigation is inherently unpredictable, we cannot assure you that the results of any of these actions will not have a material adverse effect on our business, financial condition, results of operations and prospects.

 

We employ third-party licensed software for use in or with our products, and the inability to maintain these licenses or errors in the software we license could result in increased costs, or reduced service levels, which would adversely affect our business.

 

Our products incorporate certain third-party software obtained under licenses from other companies. We anticipate that we will continue to rely on such third-party software and development tools from third parties in the future. Such third-party companies may discontinue their products, go out of business, or otherwise cease to make support available for such third-party software. Although we believe that there are commercially reasonable alternatives to the third-party software we currently license, this may not always be the case, or it may be difficult or costly to replace. In addition, integration of the software used in our products with new third-party software may require significant work and require substantial investment of our time and resources. Also, to the extent that our products depend upon the successful operation of third-party software in conjunction with our software, any undetected errors or defects in this third-party software could prevent the deployment or impair the functionality of our products, delay new product introductions, result in a failure of our products and injure our reputation. Our use of additional or alternative third-party software would require us to enter into license agreements with third parties.

 

Future acquisitions could disrupt our business and adversely affect our results of operations, financial condition and cash flows.

 

We may choose to expand by making acquisitions that could be material to our business, results of operations, financial condition and cash flows. Our ability as an organization to successfully acquire and integrate technologies or businesses is unproven. Acquisitions involve many risks, including the following:

 

   

an acquisition may negatively affect our results of operations, financial condition or cash flows because it may require us to incur charges or assume substantial debt or other liabilities, may cause adverse tax consequences or unfavorable accounting treatment, may expose us to claims and disputes by third parties, including intellectual property claims and disputes, or may not generate sufficient financial return to offset additional costs and expenses related to the acquisition;

 

   

we may encounter difficulties or unforeseen expenditures in integrating the business, technologies, products, personnel or operations of any company that we acquire, particularly if key personnel of the acquired company decide not to work for us;

 

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an acquisition may disrupt our ongoing business, divert resources, increase our working capital requirements and expenses, and distract our management;

 

   

the need to implement or improve internal controls, procedures and policies appropriate for a public company at businesses that, prior to our acquisition of them, may have lacked effective controls, procedures or policies, including but not limited to, processes required for the effective and timely reporting of the financial condition and results of operations of the acquired business, both for historical periods prior to the acquisition and on a forward basis following the acquisition;

 

   

an acquisition may result in a delay or reduction of customer purchases for both us and the company acquired due to customer uncertainty about continuity and effectiveness of service from either company;

 

   

we may encounter difficulties in, or may be unable to, successfully sell any acquired products;

 

   

an acquisition may involve the entry into geographic or business markets in which we have little or no prior experience or where competitors have stronger market positions;

 

   

our use of cash to pay for acquisition would limit other potential uses for our cash;

 

   

if we incur debt to fund such acquisition, such debt may subject us to material restrictions on our ability to conduct our business as well as financial maintenance covenants; and

 

   

to the extent that we issue a significant amount of equity securities in connection with future acquisitions, existing stockholders may be diluted and earnings per share may decrease.

 

The occurrence of any of these risks could have a material adverse effect on our business, results of operations, financial condition and cash flows.

 

If our goodwill or intangible assets become impaired, we may be required to record a significant charge to earnings.

 

We review our intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is required to be tested for impairment at least annually. As of July 31, 2014 and January 31, 2015, we had goodwill and intangible assets with a net book value of $18.8 million and $18.3 million, respectively, related to our acquisition of InsightsOne Systems, Inc., or InsightsOne. An adverse change in market conditions, particularly if such change has the effect of changing one of our critical assumptions or estimates, could result in a change to the estimation of fair value that could result in an impairment charge to our goodwill or intangible assets. Any such charges may have a material negative impact on our operating results.

 

If currency exchange rates fluctuate substantially in the future, the results of our operations, which are reported in U.S. dollars, could be adversely affected.

 

As we continue to expand our international operations, we become more exposed to the effects of fluctuations in currency exchange rates. Our sales contracts are denominated in U.S. dollars, and therefore substantially all of our revenue are not subject to foreign currency risk. However, a strengthening of the U.S. dollar could increase the real cost of our software to our customers located outside of the United States, which could adversely affect our business, results of operations, financial condition and cash flows. In addition, we incur expenses for employee compensation and other operating expenses at our non-U.S. locations in the local currency. Fluctuations in the exchange rates between the U.S. dollar and other currencies could result in the dollar equivalent of such expenses being higher. This could have a negative impact on our reported operating results. To date, we have not engaged in any hedging strategies, and any such strategies, such as forward contracts, options and foreign exchange swaps related to transaction exposures that we may implement to mitigate this risk may not eliminate our exposure to foreign exchange fluctuations.

 

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Our ability to use our net operating losses to offset future taxable income may be subject to certain limitations.

 

In general, under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change net operating losses, or NOLs, to offset future taxable income. Our existing NOLs may be subject to limitations arising from previous ownership changes, and if we undergo an ownership change in connection with or after this offering, our ability to utilize NOLs could be further limited by Section 382 of the Code. Future changes in our stock ownership, some of which are outside of our control, could result in an ownership change under Section 382 of the Code. Furthermore, our ability to utilize NOLs of companies that we may acquire in the future may be subject to limitations. There is also a risk that due to regulatory changes, such as suspensions on the use of NOLs, or other unforeseen reasons, our existing NOLs could expire or otherwise be unavailable to offset future income tax liabilities. For these reasons, we may not be able to utilize a material portion of the NOLs reflected on our balance sheet, even if we attain profitability.

 

Our international operations may give rise to potentially adverse tax consequences.

 

We generally conduct our international operations through wholly-owned subsidiaries and report our taxable income in various jurisdictions worldwide based upon our business operations in those jurisdictions. Our intercompany relationships are subject to complex transfer pricing regulations administered by taxing authorities in various jurisdictions. The relevant taxing authorities may disagree with our determinations as to the income and expenses attributable to specific jurisdictions. In addition, a taxing authority in a jurisdiction in which we have substantial business operations could assert that withholding or other taxes in such jurisdiction could apply, including in connection with a future disposition of our shares. If such a disagreement were to occur or such assertion by a taxing authority made, we could be required to pay additional taxes, interest and penalties, which could result in one-time tax charges, higher effective tax rates and reduced cash flows. We believe that our financial statements reflect adequate reserves to cover such a contingency, but there can be no assurances in that regard. If our reserves are not sufficient to cover such contingency, our financial results could be harmed.

 

The enactment of legislation implementing changes in the U.S. taxation of international business activities or the adoption of other tax reform policies could materially impact our financial position and results of operations.

 

Recent changes to U.S. tax laws, including limitations on the ability of taxpayers to claim and utilize foreign tax credits and the deferral of certain tax deductions until earnings outside of the United States are repatriated to the United States, as well as changes to U.S. tax laws that may be enacted in the future, could impact the tax treatment of our foreign earnings. Due to expansion of our international business activities, any changes in the U.S. taxation of such activities may increase our worldwide effective tax rate and adversely affect our financial position and results of operations.

 

Our business is subject to the risks of earthquakes, fire, floods and other natural catastrophic events, and to interruption by man-made problems such as power disruptions or terrorism.

 

Our corporate headquarters are located in the San Francisco Bay Area, a region known for seismic activity. We also have significant facilities in India, a region known for typhoons, floods and other natural disasters. A significant natural disaster, such as an earthquake, fire or a flood, occurring at our headquarters, at one of our other facilities or where a channel partner or supplier is located could have a material adverse effect on our business, operating results and financial condition. In addition, natural disasters and acts of terrorism could cause disruptions in our or our customers’ businesses, national economies or the world economy as a whole. We also rely on IT systems to communicate among our workforce located worldwide and, in particular, our research and development activities that are coordinated between our corporate headquarters in the San Francisco Bay Area and our operations in other states and countries. Any disruption to our internal communications, whether caused by a natural disaster or by man-made problems, such as power disruptions or terrorism, could delay our research and development efforts. To the extent that these disruptions result in delays or cancellations of customer orders or delays in our research and development efforts or the deployment of our solutions, our business and operating results would be materially and adversely affected.

 

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Unfavorable conditions in our industry or the global economy or reductions in information technology spending could limit our ability to grow our business and negatively affect our operating results.

 

Our operating results may vary based on the impact of changes in our industry or the global economy on us or our customers. The revenue growth and potential profitability of our business depend on demand for business software applications and services generally and for API-based software platforms in particular. Current or future economic uncertainties or downturns could adversely affect our business and results of operations. Negative conditions in the general economy both in the United States and abroad, including conditions resulting from changes in gross domestic product growth, financial and credit market fluctuations, political deadlock, natural catastrophes, warfare and terrorist attacks on the United States, Europe, the Asia Pacific region or elsewhere, could cause a decrease in business investments, including corporate spending on API-based software platforms in general and negatively affect the rate of growth of our business. Historically, during economic downturns there have been reductions in spending on information technology as well as pressure for extended billing terms and other financial concessions. If economic conditions deteriorate, our customers and prospective customers may elect to decrease their information technology, which would limit our ability to grow our business and negatively affect our operating results.

 

To the extent purchases of our platform perceived by customers and potential customers to be discretionary, our revenue may be disproportionately affected by delays or reductions in general information technology spending. Also, customers may choose to develop in-house software as an alternative to using our products. Moreover, competitors may respond to market conditions by lowering prices and attempting to lure away our customers. In addition, the increased pace of consolidation in certain industries may result in reduced overall spending on our software.

 

We cannot predict the timing, strength or duration of any economic slowdown, instability or recovery, generally or within any particular industry. If the economic conditions of the general economy or industries in which we operate do not improve, or worsen from present levels, our business, results of operations, financial condition and cash flows could be adversely affected.

 

The estimates of market opportunity and forecasts of market growth included in this prospectus may prove to be inaccurate, and even if the market in which we compete achieves the forecasted growth, our business could fail to grow at similar rates, if at all.

 

Market opportunity estimates and growth forecasts included in this prospectus, including those we have generated ourselves, are subject to significant uncertainty and are based on assumptions and estimates that may not prove to be accurate. Even if the market in which we compete meets the size estimates and growth forecasted in this prospectus, our business could fail to grow at similar rates, if at all. For more information regarding the estimates of market opportunity and the forecasts of market growth included in this prospectus, see the section titled “Market and Industry Data.”

 

We are subject to governmental export and import controls that could impair our ability to compete in international markets due to licensing requirements and subject us to liability if we are not in compliance with applicable laws.

 

Our solutions are subject to export control and import laws and regulations, including the U.S. Export Administration Regulations, U.S. Customs regulations and various economic and trade sanctions regulations administered by the U.S. Treasury Department’s Office of Foreign Assets Controls. Exports of our solutions must be made in compliance with these laws and regulations. If we fail to comply with these laws and regulations, we and certain of our employees could be subject to substantial civil or criminal penalties, including: the possible loss of export or import privileges; fines, which may be imposed on us and responsible employees or managers; and, in extreme cases, the incarceration of responsible employees or managers. Obtaining the necessary authorizations, including any required license, for a particular sale may be time-consuming, is not guaranteed and may result in the delay or loss of sales opportunities. In addition, changes in our solutions or

 

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changes in applicable export or import regulations may create delays in the introduction and sale of our solutions in international markets, prevent our customers with international operations from deploying our solutions or, in some cases, prevent the export or import of our solutions to certain countries, governments or persons altogether. Any change in export or import regulations, shift in the enforcement or scope of existing regulations, or change in the countries, governments, persons or technologies targeted by such regulations, could also result in decreased use of our solutions, or in our decreased ability to export or sell our solutions to existing or potential customers with international operations. Any decreased use of our solutions or limitation on our ability to export or sell our solutions would likely adversely affect our business.

 

Furthermore, we incorporate encryption technology into certain of our solutions. Various countries regulate the import of certain encryption technology, including through import permitting and licensing requirements, and have enacted laws that could limit our ability to distribute our solutions or could limit our customers’ ability to implement our solutions in those countries. Encrypted solutions and the underlying technology may also be subject to export control restrictions. Governmental regulation of encryption technology and regulation of imports or exports of encryption products, or our failure to obtain required import or export approval for our solutions, when applicable, could harm our international sales and adversely affect our revenue. Compliance with applicable regulatory requirements regarding the export of our solutions, including with respect to new releases of our solutions, may create delays in the introduction of our solutions in international markets, prevent our customers with international operations from deploying our solutions throughout their globally-distributed systems or, in some cases, prevent the export of our solutions to some countries altogether.

 

Moreover, U.S. export control laws and economic sanctions programs prohibit the shipment of certain products and services to countries, governments and persons that are subject to U.S. economic embargoes and trade sanctions. Any violations of such economic embargoes and trade sanction regulations could have negative consequences, including government investigations, penalties and reputational harm.

 

Our platform and our business are subject to a variety of U.S. and international laws and regulations, including those regarding privacy, data protection and information security, and our customers may be subject to regulations related to the handling and transfer of certain types of sensitive and confidential information. Any failure of our products or solutions to comply with or enable our customers and channel partners to comply with applicable laws and regulations would harm our business, financial condition and operating results.

 

We and our customers that use our solutions may be subject to privacy- and data protection-related laws and regulations that impose obligations in connection with the collection, processing and use of personal data, financial data, health data or other similar data. Existing U.S. federal and various state and foreign privacy- and data protection-related laws and regulations are evolving and subject to potentially differing interpretations, and various legislative and regulatory bodies may expand current or enact new laws and regulations regarding privacy- and data protection-related matters. New laws, amendments to or re-interpretations of existing laws and regulations, rules of self-regulatory bodies, industry standards and contractual obligations may impact our business and practices, and we may be required to expend significant resources to adapt to these changes. These developments could harm our business, financial condition and results of operations.

 

The U.S. federal and various state and foreign governments have adopted or proposed limitations on, or requirements regarding, the collection, distribution, use, security and storage of personally identifiable information of individuals. The U.S. Federal Trade Commission and numerous state attorneys general are applying federal and state consumer protection laws to impose standards on the online collection, use and dissemination of data, and to the security measures applied to such data. Similarly, many foreign countries and governmental bodies, including the EU member states, have laws and regulations concerning the collection and use of personally identifiable information obtained from their residents or by businesses operating within their jurisdiction, which are often more restrictive than those in the United States. Laws and regulations in these jurisdictions apply broadly to the collection, use, storage, disclosure and security of personally identifiable

 

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information that identifies or may be used to identify an individual, such as names, email addresses and, in some jurisdictions, Internet Protocol, or IP, addresses. Although we are working to have our platform comply with applicable laws and regulations, these and other obligations may be modified, they may be interpreted and applied in an inconsistent manner from one jurisdiction to another, and they may conflict with one another, other regulatory requirements or our internal practices. In addition, we may find it necessary or desirable to join industry or other self-regulatory bodies or other privacy or data protection-related organizations that require compliance with their rules pertaining to privacy and data protection. We also may be bound by contractual obligations relating to our collection, use and disclosure of personal, financial and other data.

 

As part of our efforts as a global business to comply with the obligations related to personal data under EU member state laws, we self-certify under—and are subject to—the U.S. Department of Commerce U.S.-EU Safe Harbor Framework and U.S.-Swiss Safe Harbor Framework. The Safe Harbor Frameworks are intended for organizations operating within the EU and Switzerland that transfer personal data, as the term is used in the context of the EU Data Protection Directive, to the United States and require U.S.-based companies that have certified with the Department of Commerce as part of the Safe Harbor Frameworks to provide assurance that they are adhering to relevant European standards for data protection. As we expand into new verticals and regions, we will need to comply with these and any new or changed requirements. Self-certification under the Safe Harbor Frameworks subjects us to oversight by the U.S. Federal Trade Commission, and potential non-compliance could result in an investigation and enforcement action brought by the Federal Trade Commission. Additionally, non-compliance could cause us to be in violation of applicable laws and regulations of the EU and its member states, which could result in investigations by relevant authorities of the EU and its member states, as well as fines and other penalties. Responding to an investigation or enforcement action could divert management’s attention and resources, cause us to incur investigation, compliance and defense costs and other professional fees, and adversely affect our business, results of operations, financial condition and cash flows. Recently, the Safe Harbor Frameworks have come under scrutiny in the EU and in the future could be modified or invalidated, in which case it is possible that we will no longer be in compliance with laws and regulations of the EU or its member states.

 

We facilitate our customers’ compliance with a number of diverse data protection, security, privacy and other government- and industry-specific requirements, including those that require companies to notify individuals of data security incidents involving certain types of personal data. For example, our solutions must conform, in certain circumstances, to requirements set forth in the U.S. Health Insurance Portability and Accountability Act of 1996, or HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, or HITECH, and their respective implementing regulations, including the final omnibus rule published on January 25, 2013. Among other things, HITECH, through its implementing regulations, makes certain of HIPAA’s privacy and security standards directly applicable to business associates, defined as persons or organizations that create, receive, maintain or transmit protected health information, or PHI, for or on behalf of a HIPAA-covered entity for a function or activity regulated by HIPAA. Because certain customers that are HIPAA-covered entities receive and transmit PHI through our platform, we are a business associate with respect to these customers and therefore subject to the HIPAA requirements applicable to business associates. In addition, state laws govern the privacy and security of personal information and health information in certain circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts. Noncompliance with applicable HIPAA and related state law requirements could result in monetary and criminal penalties, which could adversely impact our business, financial condition and cash flows as well as our reputation.

 

Similarly, because a number of our clients interface with payment card systems through our platform, including those for the processing of debit or credit cards, we maintain Payment Card Industry Data Security Standard, or PCI DSS, compliance as part of our information security program. If we are unable to comply with PCI DSS, whether due to changes in the PCI DSS standard or for another reason, we might incur significant liability and may suffer an adverse effect to our reputation.

 

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With respect to all of the above, any failure or perceived failure by us or our platform to comply with U.S., EU or other foreign privacy or security laws, policies, industry standards or legal obligations, or any security incident that results in the unauthorized access to, or acquisition, release or transfer of, personally identifiable information or other customer data may result in governmental investigations, inquiries, enforcement actions and prosecutions, private litigation, fines and penalties or adverse publicity. Such actions and penalties could divert management’s attention and resources, adversely affect our business, results of operations, financial condition and cash flows, and cause our customers and channel partners to lose trust in our solutions, which could have an adverse effect on our reputation and business.

 

We expect that there will continue to be new proposed laws, regulations and industry standards concerning privacy, data protection and information security in the United States, the European Union and other jurisdictions, and we cannot yet determine the impact such future laws, regulations and standards may have on our business. Because global laws, regulations and industry standards concerning privacy, data protection and information security have continued to develop and evolve rapidly, it is possible that we or our platform and solutions may not be, or may not have been, compliant with each such applicable law, regulation, and industry standard.

 

Any such new laws, regulations, other legal obligations or industry standards, or any changed interpretation of existing laws, regulations or other standards may require us to incur additional costs and restrict our business operations. If our privacy or data security measures fail to comply with current or future laws, regulations, policies, legal obligations or industry standards, we may be subject to litigation, regulatory investigations, fines or other liabilities, as well as negative publicity and a potential loss of business. Moreover, if future laws, regulations, other legal obligations or industry standards, or any changed interpretations of the foregoing limit our customers’ or partners’ ability to use and share personally identifiable information or our ability to store, process and share personally identifiable information or other data, demand for our solutions could decrease, our costs could increase and our business, financial condition and operating results could be harmed.

 

Changes in laws and regulations related to the Internet or changes in the Internet infrastructure itself may diminish the demand for our platform, and could have a negative impact on our business.

 

The future success of our business depends upon the continued use of the Internet as a primary medium for commerce, communication, and business applications. Federal, state, or foreign government bodies or agencies have in the past adopted, and may in the future adopt, laws or regulations affecting the use of the Internet as a commercial medium. Changes in these laws or regulations could require us to modify our platform in order to comply with these changes. In addition, government agencies or private organizations have imposed and may impose additional taxes, fees, or other charges for accessing the Internet or commerce conducted via the Internet. These laws or charges could limit the growth of Internet-related commerce or communications generally, or result in reductions in the demand for Internet-based platforms and services such as ours. In addition, the use of the Internet as a business tool could be adversely affected due to delays in the development or adoption of new standards and protocols to handle increased demands of Internet activity, security, reliability, cost, ease-of-use, accessibility, and quality of service. The performance of the Internet and its acceptance as a business tool has been adversely affected by “viruses,” “worms,” and similar malicious programs and the Internet has experienced a variety of outages and other delays as a result of damage to portions of its infrastructure. If the use of the Internet is adversely affected by these issues, demand for our platform could decline.

 

The terms of our existing loan and security agreement with Silicon Valley Bank and future indebtedness could restrict our operations, particularly our ability to respond to changes in our business or to take specified actions.

 

The terms of our existing loan and security agreement with Silicon Valley Bank, or SVB, contains, and any future indebtedness would likely contain, a number of restrictive covenants that impose significant operating and financial restrictions on us, including restrictions on our ability, and the ability of our subsidiaries, to take actions that may be in our best interests, including, among others, disposing of assets, entering into change of control transactions, mergers or acquisitions, incurring additional indebtedness, granting liens on our assets and paying

 

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dividends. Our loan and security agreement requires us to satisfy specified financial covenants, including a minimum revenue covenant and a minimum liquidity ratio. Our ability to meet those financial covenants can be affected by events beyond our control, and we may not be able to continue to meet those covenants. A breach of any of these covenants or the occurrence of other events specified in the loan and security agreement could result in an event of default under the loan and security agreement. Upon the occurrence of an event of default, SVB could elect to declare all amounts outstanding under the loan and security agreement to be immediately due and payable and terminate all commitments to extend further credit. If we were unable to repay those amounts, SVB could proceed against the collateral granted to them to secure such indebtedness. We have pledged substantially all of our assets, other than our intellectual property, as collateral under the loan and security agreement. If SVB accelerates the repayment of borrowings, if any, we may not have sufficient funds to repay our existing debt.

 

The nature of our business requires the application of complex revenue and expense recognition rules and the current legislative and regulatory environment affecting GAAP is uncertain. Significant changes in current principles could affect our financial statements going forward and changes in financial accounting standards or practices may cause adverse, unexpected financial reporting fluctuations and harm our operating results.

 

The accounting rules and regulations that we must comply with are complex and subject to interpretation by the Financial Accounting Standards Board, or FASB, the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. Recent actions and public comments from FASB and the SEC have focused on the integrity of financial reporting. In addition, many companies’ accounting policies are being subject to heightened scrutiny by regulators and the public. Further, the accounting rules and regulations are continually changing in ways that could materially impact our financial statements. For example, in May 2014, FASB issued a new accounting guidance on revenue recognition, Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers, that becomes effective for us beginning August 1, 2017. The standard permits the use of either the retrospective or cumulative effect transition method.

 

We have not yet selected a transition method and continue to evaluate the impact that this guidance will have on our financial condition and results of operations. Regardless of the transition method, the application of this new guidance may result in exclusion of certain future licensing revenues in the statement of comprehensive loss after the adoption date, which, despite no change in associated cash flows, could have a material adverse effect on our net income or loss. We cannot predict the impact of future changes to accounting principles or our accounting policies on our financial statements going forward, which could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before the announcement of the change. In addition, were we to change our critical accounting estimates, including the timing of recognition of license revenue and other revenue sources, our results of operations could be significantly impacted.

 

Risks Related to Ownership of Our Common Stock and This Offering

 

Our stock price may be volatile or may decline, regardless of our operating performance, resulting in substantial losses for investors purchasing shares in this offering.

 

The trading prices of the securities of technology companies have been highly volatile. The market price of our common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:

 

   

actual or anticipated fluctuations in our operating results;

 

   

the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;

 

   

failure of securities analysts to initiate or maintain coverage of our company, changes in financial estimates by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;

 

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ratings changes by any securities analysts who follow our company;

 

   

announcements by us or our competitors of significant technical innovations, acquisitions, strategic partnerships, joint ventures or capital commitments;

 

   

the addition or loss of large customers;

 

   

network outages or performance issues of our cloud service;

 

   

information security breaches of our internal systems, our cloud service or customer on-premises deployments of our platform;

 

   

changes in operating performance and stock market valuations of other technology companies generally, or those in our industry in particular;

 

   

price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;

 

   

any major change in our board of directors or management;

 

   

lawsuits threatened or filed against us; and

 

   

other events or factors, including those resulting from war, incidents of terrorism or responses to these events.

 

In addition, the stock markets, and in particular the market on which our common stock will be listed, have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many technology companies. Stock prices of many technology companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business and adversely affect our business, results of operations, financial condition and cash flows.

 

We cannot assure you that a market will develop for our common stock or what the market price of our common stock will be.

 

We have applied to list our common stock on The NASDAQ Global Select Market under the symbol “APIC.” However, we cannot assure you that an active trading market for our common stock will develop on such exchange or elsewhere or, if developed, that any market will be sustained. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. An inactive market may also impair our ability to raise capital by selling shares and may impair our ability to acquire other businesses, applications or technologies using our shares as consideration. We cannot predict the prices at which our common stock will trade. The initial public offering price of our common stock was determined by negotiations with the underwriters and may not bear any relationship to the market price at which our common stock will trade after this offering or to any other established criteria of the value of our business and prospects.

 

Our directors, executive officers and significant stockholders will continue to have substantial control over us after this offering and could delay or prevent a change in corporate control.

 

After this offering, our directors, executive officers and holders of more than 5% of our common stock, together with their affiliates, will beneficially own, in the aggregate,     % of our outstanding common stock. As a result, these stockholders, acting together, would have the ability to control the outcome of matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation or sale of all or substantially all of our assets. In addition, these stockholders, acting together, would have the ability to control the management and affairs of our company. Accordingly, this concentration of ownership might adversely affect the market price of our common stock by:

 

   

delaying, deferring or preventing a change in control of the company;

 

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impeding a merger, consolidation, takeover or other business combination involving us; or

 

   

discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of the company.

 

If securities or industry analysts do not publish research or reports about our business, or publish negative reports about our business, our share price and trading volume could decline.

 

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business, our market and our competitors. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade our shares or change their opinion of our shares, our share price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.

 

Purchasers in this offering will experience immediate and substantial dilution in the book value of their investment.

 

The initial public offering price per share will be substantially higher than the pro forma net tangible book value per share of our common stock outstanding prior to this offering. As a result, investors purchasing common stock in this offering will experience immediate dilution of $         per share. This dilution is due in large part to the fact that our earlier investors paid substantially less than the initial public offering price when they purchased their shares of common stock. In addition, we have issued options to acquire common stock at prices significantly below the initial public offering price. To the extent outstanding options are ultimately exercised, there will be further dilution to investors in this offering. In addition, if the underwriters exercise their option to purchase additional shares from us or if we issue additional equity securities, you will experience additional dilution.

 

Substantial future sales of shares of our common stock could cause the market price of our common stock to decline.

 

The market price of shares of our common stock could decline as a result of substantial sales of our common stock, particularly sales by our directors, executive officers and significant stockholders, a large number of shares of our common stock becoming available for sale or the perception in the market that holders of a large number of shares intend to sell their shares. After this offering, we will have outstanding             shares of our common stock, based on the number of shares outstanding as of January 31, 2015. This includes the shares included in this offering, which may be resold in the public market immediately. The remaining             shares are currently restricted as a result of market stand-off agreements. In addition, certain of these shares are also subject to lock-up agreements, as more fully described in “Underwriting.”

 

After this offering, the holders of an aggregate of             shares of our common stock as of January 31, 2015, will have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or our stockholders. Substantially all of these shares are subject to lock-up agreements restricting their sale for 180 days after the date of this prospectus, subject to potential extension in the event we release earnings results or a material event relating to us occurs near the end of the lock-up period. We also intend to register shares of common stock that we may issue under our employee equity incentive plans. Once we register these shares, they will be able to be sold freely in the public market upon issuance, subject to existing market stand-off and/or lock-up agreements. Morgan Stanley & Co. LLC may, in its sole discretion, permit our officers, directors, employees and current stockholders who are subject to the 180-day contractual lock-up to sell shares prior to the expiration of the lock-up agreements.

 

We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.

 

We are an “emerging growth company,” as defined in the Jumpstart our Business Startups Act of 2012, or JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are

 

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applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

 

In addition, Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we are choosing to “opt out” of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

 

We may invest or spend the proceeds of this offering in ways with which you may not agree or in ways which may not yield a return.

 

The principal purposes of this offering are to raise additional capital, to create a public market for our common stock and to facilitate our future access to the public equity markets. We currently intend to use the net proceeds we receive from this offering primarily for general corporate purposes, including working capital, sales and marketing activities, solution and platform development, general and administrative matters, and capital expenditures, although we do not currently have any specific or preliminary plans with respect to the use of proceeds for such purposes. We may also use a portion of the net proceeds for the acquisition of, or investment in, technologies, solutions or businesses that complement our business, although we have no present commitments or agreements to enter into any acquisitions or investments. Our management will have considerable discretion in the application of the net proceeds, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. Investors in this offering will need to rely upon the judgment of our management with respect to the use of proceeds. If we do not use the net proceeds that we receive in this offering effectively, our business, financial condition, results of operations and prospects could be harmed, and the market price of our common stock could decline.

 

Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of our company more difficult, limit attempts by our stockholders to replace or remove our current management and limit the market price of our common stock.

 

Provisions in our certificate of incorporation and bylaws, as amended and restated in connection with this offering, may have the effect of delaying or preventing a change of control or changes in our management. Our amended and restated certificate of incorporation and bylaws include provisions that:

 

   

authorize our board of directors to issue, without further action by the stockholders, shares of undesignated preferred stock with terms, rights and preferences determined by our board of directors;

 

   

require that any action to be taken by our stockholders be effected at a duly called annual or special meeting and not by written consent;

 

   

specify that special meetings of our stockholders can be called only by our board of directors, the Chairman of our board of directors, or our Chief Executive Officer;

 

   

establish an advance notice procedure for stockholder proposals to be brought before an annual meeting, including proposed nominations of persons for election to our board of directors;

 

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establish that our board of directors is divided into three classes, Class I, Class II and Class III, with each class serving three-year staggered terms;

 

   

prohibit cumulative voting in the election of directors;

 

   

provide that our directors may be removed only for cause;

 

   

provide that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum; and

 

   

require the approval of our board of directors or the holders of a supermajority of our outstanding shares of capital stock to amend our bylaws and certain provisions of our certificate of incorporation.

 

These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “interested” stockholder for a period of three years following the date on which the stockholder became an “interested” stockholder.

 

The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain executive management and qualified board members.

 

As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, or the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Act, the accounting provisions of the FCPA, the listing requirements of the NASDAQ Stock Market and other applicable securities rules and regulations. Compliance with these rules and regulations will increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources, particularly after we are no longer an “emerging growth company.” The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and operating results. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. In order to maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight may be required. As a result, management’s attention may be diverted from other business concerns, which could adversely affect our business and operating results. Although we have already hired additional employees to comply with these requirements, we may need to hire more employees in the future or engage outside consultants, which will increase our costs and expenses.

 

In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and our business may be adversely affected.

 

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companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We may take advantage of these reporting exemptions until we are no longer an “emerging growth company.”

 

We will remain an “emerging growth company” for up to five years, although if the market value of our common stock that is held by non-affiliates exceeds $700 million as of any July 31 before that time, we would cease to be an “emerging growth company” as of the following January 31.

 

We also expect that being a public company and these new rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee and compensation committee, and qualified executive officers.

 

As a result of disclosure of information in this prospectus and in filings required of a public company, our business and financial condition will become more visible, which we believe may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and operating results could be adversely affected, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and adversely affect our business and operating results.

 

As a result of becoming a public company, we will be obligated to develop and maintain proper and effective internal control over financial reporting. We may not complete our analysis of our internal control over financial reporting in a timely manner, or these internal controls may not be determined to be effective, which may adversely affect investor confidence in our company and, as a result, the value of our common stock.

 

We will be required, pursuant to Section 404 of the Sarbanes–Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting for the first fiscal year beginning after the effective date of this offering. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting, as well as a statement that our independent registered public accounting firm has issued an opinion on our internal control over financial reporting.

 

We are in the very early stages of the costly and challenging process of compiling the system and processing documentation necessary to perform the evaluation needed to comply with Section 404. We may not be able to complete our evaluation, testing and any required remediation in a timely fashion. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal controls are effective.

 

If we are unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal controls, we could lose investor confidence in the accuracy and completeness of our financial reports, which would cause the price of our common stock to decline, and we may be subject to investigation or sanctions by the SEC.

 

We will be required to disclose changes made in our internal control and procedures on a quarterly basis. However, our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 until the later of the year following our first annual report required to be filed with the SEC, or the date we are no longer an “emerging growth company” as defined in the JOBS Act if we take advantage of the exemptions contained in the JOBS Act.

 

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We will remain an “emerging growth company” for up to five years, although if the market value of our common stock that is held by non-affiliates exceeds $700 million as of any July 31 before that time, we would cease to be an “emerging growth company” as of the following January 31. To comply with the requirements of being a public company, we may need to undertake various actions, such as implementing new internal controls and procedures and hiring accounting or internal audit staff.

 

Our independent registered public accounting firm is not required to formally attest to the effectiveness of our internal control over financial reporting until the later of the year following our first annual report required to be filed with the SEC, or the date we are no longer an “emerging growth company.” At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed or operating. Our remediation efforts may not enable us to avoid a material weakness in the future.

 

We do not intend to pay dividends for the foreseeable future.

 

We have never declared or paid any cash dividends on our common stock and do not intend to pay any cash dividends in the foreseeable future. We anticipate that we will retain all of our future earnings for use in the development of our business and for general corporate purposes. Any determination to pay dividends in the future will be at the discretion of our board of directors. In addition, our loan and security agreement with SVB restricts, and any future indebtedness may restrict, our ability to pay dividends. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investments.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus, including the sections entitled “Prospectus Summary,” “Risk Factors,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” contains forward-looking statements. The words “believe,” “may,” “will,” “potentially,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “would,” “project,” “plan,” “expect” and similar expressions that convey uncertainty of future events or outcomes are intended to identify forward-looking statements.

 

These forward-looking statements include, but are not limited to, statements concerning the following:

 

   

our future financial performance, including our expectations regarding our revenue, cost of revenue, gross profit or gross margin, operating expenses including changes in research and development, sales and marketing and general and administrative expenses, and our ability to achieve and maintain future profitability;

 

   

our business plan and beliefs and objectives for future operations;

 

   

the anticipated benefits associated with the use of our solutions;

 

   

our plans to further invest in and grow our business, and our ability to effectively manage our growth and associated investments;

 

   

anticipated trends, growth rates and challenges in our business and in the markets in which we operate;

 

   

market adoption of our solutions;

 

   

our sales and marketing strategy and related activities;

 

   

our ability to increase sales of our solutions and renewals of our subscriptions;

 

   

our ability to attract and retain customers;

 

   

our ability to expand sales to our existing customers;

 

   

maintaining and expanding our customer base and our relationships with our channel partners;

 

   

our ability to timely and effectively scale and adapt our solutions;

 

   

our ability to develop new solutions and bring them to market in a timely manner and make enhancements to our existing solutions;

 

   

expanding the delivery of professional services to our customers through our channel partners;

 

   

the effects of increased competition in our markets and our ability to compete effectively;

 

   

our ability to maintain, protect and enhance our brand and intellectual property;

 

   

our ability to continue to expand internationally;

 

   

our future capital requirements and estimates regarding the sufficiency of our cash resources;

 

   

the effects of seasonal trends on our business;

 

   

future acquisitions or investments;

 

   

our ability to stay in compliance with laws and regulations that currently apply or become applicable to our business both in the United States and internationally;

 

   

economic and industry trends or trend analysis;

 

   

the attraction and retention of qualified employees and key personnel;

 

   

the estimates and estimate methodologies used in preparing our consolidated financial statements and determining option exercise prices; and

 

   

the future trading prices of our common stock.

 

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These forward-looking statements are subject to a number of risks, uncertainties, and assumptions, including those described in “Risk Factors” and elsewhere in this prospectus. Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is difficult for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties, and assumptions, the forward-looking events and circumstances discussed in this prospectus may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

 

You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this prospectus to conform these statements to actual results or to changes in our expectations, except as required by law.

 

You should read this prospectus and the documents that we reference in this prospectus and have filed with the Securities and Exchange Commission, or the SEC, as exhibits to the registration statement of which this prospectus is a part with the understanding that our actual future results, levels of activity, performance, and events and circumstances may be materially different from what we expect.

 

MARKET AND INDUSTRY DATA

 

Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate, including our general expectations and market position, market opportunity, and market size, is based on information and data from various sources, including S&P Capital IQ and Gartner, Inc. or Gartner, on assumptions that we have made that are based on that information and data and other similar sources and on our knowledge of the markets for our products and services. This information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. While we believe the market position, market opportunity and market size information included in this prospectus is generally reliable, such information is inherently imprecise. In addition, projections, assumptions and estimates of our future performance and the future performance of the industry in which we operate is necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the section titled “Risk Factors” and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

 

The S&P Capital IQ data described herein represents proprietary data gathered by S&P Capital IQ and is not a representation of fact. The S&P Capital IQ data is as of March 3, 2015 (and not as of the date of this prospectus) and is subject to change without notice.

 

The Gartner Reports described herein, or Gartner Reports, represent data, research opinion or viewpoints published as part of a syndicated subscription service, by Gartner, and are not representations of fact. The Gartner Reports speak as of their original publication dates (and not as of the date of this prospectus) and the opinions expressed in the Gartner Reports are subject to change without notice. The Gartner Reports consist of:

 

  (1)   Gartner, Press Release dated May 15, 2014: “Gartner Says Worldwide Application Infrastructure and Middleware Market Revenue Grew 5.6 Percent in 2013.”

 

  (2)   Gartner, Forecast Enterprise Software Markets WW 2011-2018 3Q14, Sept 2014.

 

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USE OF PROCEEDS

 

We estimate that the net proceeds from our sale of             shares of common stock in this offering will be approximately $         million, or $         million if the underwriters exercise their over-allotment option in full, based on an assumed initial public offering price of $         per share, which is the midpoint of the estimated offering price range reflected on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. A $1.00 increase (decrease) in the assumed initial public offering price would increase (decrease) the net proceeds to us from this offering by $         million, assuming that the number of shares offered by us, as reflected on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. A 1.0 million increase (decrease) in the number of shares offered by us, as set forth on the cover page of this prospectus, would increase (decrease) the net proceeds to us from this offering by $             million, assuming that the assumed initial public offering price, which is the midpoint of the estimated offering price range reflected on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

The principal purposes of this offering are to increase our capitalization and financial flexibility, to create a public market for our stock and thereby enable access to the public equity markets for our employees and stockholders, to obtain additional capital and to increase our visability in the marketplace. We currently intend to use the net proceeds we receive from this offering primarily for general corporate purposes, including working capital, sales and marketing activities, solution and platform development, general and administrative matters, and capital expenditures, although we do not currently have any specific or preliminary plans with respect to the use of proceeds for such purposes. We may also use a portion of the net proceeds for the acquisition of, or investment in, technologies, solutions or businesses that complement our business, although we have no present commitments or agreements to enter into any acquisitions or investments. We will have broad discretion over the uses of the net proceeds of this offering. Pending these uses, we intend to invest the net proceeds from this offering in short-term, investment-grade, interest-bearing securities such as money market accounts, certificates of deposit, commercial paper, and guaranteed obligations of the U.S. government.

 

DIVIDEND POLICY

 

We have never declared or paid cash dividends on our common stock. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any dividends on our common stock in the foreseeable future. Additionally, our ability to pay dividends on our common stock is limited by restrictions on our ability to pay dividends or make distributions under the terms of our loan and security agreement with SVB. Any future determination to declare dividends will be made at the discretion of our board of directors and will depend on our financial condition, operating results, capital requirements, general business conditions and other factors that our board of directors may deem relevant.

 

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CAPITALIZATION

 

The following table sets forth our cash and cash equivalents and capitalization as of January 31, 2015 on:

 

   

an actual basis;

 

   

a pro forma basis, giving effect to the automatic conversion of all outstanding shares of our convertible preferred stock into an aggregate of 149,907,620 shares of common stock and the effectiveness of our amended and restated certificate of incorporation (each of which will occur immediately prior to the completion of this offering), as if such conversions had occurred and our amended and restated certificate of incorporation had become effective on January 31, 2015, as well as the stock-based compensation expense associated with the performance-based vesting of certain RSUs, which we expect to record upon completion of our initial public offering, as described in footnote (1) below; and

 

   

a pro forma as adjusted basis, giving effect to the pro forma adjustments noted above and the sale of             shares of common stock by us in this offering, based on an assumed initial public offering price of $             per share, which is the midpoint of the estimated offering price range reflected on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

The pro forma as adjusted information set forth in the table below is illustrative only and will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing.

 

You should read this table together with “Selected Consolidated Financial and Other Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited and unaudited consolidated financial statements and related notes included elsewhere in this prospectus.

 

     January 31, 2015  
     Actual     Pro  Forma(1)     Pro Forma
As  Adjusted(2)
 
     (in thousands, except share and per share data)  

Cash and cash equivalents

   $ 29,133      $ 29,133      $                
  

 

 

   

 

 

   

 

 

 

Term debt, current and non-current

   $ 4,899      $ 4,899      $     

Stockholders’ equity:

      

Convertible preferred stock: $0.001 par value; 142,194,666 shares authorized, 141,513,411 issued and outstanding, actual; no shares authorized, issued and outstanding, pro forma and pro forma as adjusted

     142            

Preferred stock: par value $0.001; no shares authorized, issued and outstanding, actual; 200,000,000 shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted

                

Common stock: $0.001 par value; 230,000,000 shares authorized, 31,495,757 shares issued and outstanding, actual; 1,000,000,000 shares authorized, 181,441,420 shares issued and outstanding, pro forma; 1,000,000,000 shares authorized,             shares issued and outstanding, pro forma as adjusted

     31        181     

Additional paid-in capital

     197,100        197,123     

Accumulated deficit

     (172,680     (172,711  
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

     24,593        24,593     
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 29,492      $ 29,492      $     
  

 

 

   

 

 

   

 

 

 

 

  (1)  

Also reflects the stock-based compensation expense associated with RSUs outstanding as of January 31, 2015 that settle for 38,043 shares of common stock, which vest subject to a time-based

 

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  vesting condition that has been partially met and a performance-based vesting condition related to the completion of our initial public offering, as further described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates—Stock-based Compensation.”
  (2)   Each $1.00 increase (decrease) in the assumed initial public offering price of $             per share, which is the midpoint of the estimated offering price range reflected on the cover page of this prospectus, would increase (decrease) each of our pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders’ equity, and total capitalization by approximately $             million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each 1.0 million increase (decrease) in the number of shares offered by us, as set forth on the cover page of this prospectus, would increase (decrease) each of our cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization by approximately $             million, assuming that the assumed initial public offering price of $             per share, which is the midpoint of the estimated offering price range reflected on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

The number of shares of our common stock to be outstanding after this offering is based on 181,441,420 shares of our common stock outstanding as of January 31, 2015, after giving effect to the automatic conversion of our convertible preferred stock outstanding as of such date into an aggregate of 149,907,620 shares of our common stock immediately prior to the completion of this offering, as well as the performance-based vesting condition of certain RSUs outstanding as of January 31, 2015 that settle for 38,043 shares of common stock, which we expect to record upon completion of this offering, as further described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates—Stock-based Compensation,” and excludes:

 

   

32,451,089 shares of common stock issuable upon the exercise of options, including a non-plan option, outstanding as of January 31, 2015, with a weighted-average exercise price of $0.58 per share;

 

   

65,890 shares of common stock issuable upon the vesting of RSUs outstanding as of January 31, 2015;

 

   

526,562 shares of common stock issuable upon the exercise of warrants outstanding as of January 31, 2015, with a weighted-average exercise price of $0.31 per share; (not including warrants to purchase 79,687 shares of common stock, which may become issuable in the future pursuant to our loan and security agreement with Silicon Valley Bank);

 

   

2,235,224 shares of common stock issuable upon the exercise of options granted after January 31, 2015, with an exercise price of $2.31 per share;

 

   

100,000 shares of common stock issuable upon the vesting of RSUs granted after January 31, 2015; and

 

   

            shares of common stock reserved for future issuance under our share-based compensation plans, consisting of (1) 35,697,026 shares of common stock reserved for future issuance under our 2005 Plan, which shares will be added to the shares to be reserved under our 2015 Plan, which will become effective upon completion of this offering, (2)             shares of common stock reserved for future issuance under our 2015 Plan, which will become effective upon completion of this offering, (3)             shares of common stock reserved for future issuance under our ESPP which will become effective upon completion of this offering, and (4)             shares of common stock that become available under our 2015 Plan and ESPP, pursuant to provisions thereof that automatically increase the share reserves under the plans each year, as more fully described in “Executive Compensation—Employee Benefit and Stock Plans.”

 

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DILUTION

 

If you invest in our common stock, your interest will be diluted to the extent of the difference between the amount per share paid by purchasers of shares of common stock in this initial public offering and the pro forma as adjusted net tangible book value per share of common stock immediately after this offering.

 

As of January 31, 2015, our net tangible book value was approximately $6.1 million, or $0.03 per share of common stock. Our net tangible book value per share represents the amount of our total tangible assets reduced by the amount of our total liabilities and divided by the total number of shares of our common stock outstanding as of January 31, 2015, after giving effect to the automatic conversion of all outstanding shares of our convertible preferred stock into 149,907,620 shares of common stock, as well as the vesting of RSUs that settle for 38,043 shares of common stock, which vest subject to a time-based vesting condition that has been partially met and a performance-based vesting condition related to the completion of our initial public offering, as further described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates—Stock-based Compensation.”

 

After giving effect to our sale in this offering of             shares of our common stock, at an assumed initial public offering price of $         per share, which is the midpoint of the estimated offering price range reflected on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of January 31, 2015, would have been approximately $         million, or $         per share of our common stock. This represents an immediate increase in pro forma net tangible book value of $         per share to our existing stockholders and an immediate dilution of $         per share to investors purchasing shares in this offering.

 

The following table illustrates this dilution:

 

Assumed initial public offering price per share

      $                

Pro forma net tangible book value per share as of January 31, 2015

   $ 0.03      

Increase in pro forma net tangible book value per share attributable to this offering

     
  

 

 

    

Pro forma net tangible book value, as adjusted to give effect to this offering

     
     

 

 

 

Dilution in pro forma net tangible book value per share to new investors in this offering

      $     
     

 

 

 

 

The dilution information discussed above is illustrative only and will change based on the actual initial public offering price and other terms of this offering determined at pricing. Each $1.00 increase (decrease) in the assumed initial public offering price of $             per share, which is the midpoint of the estimated offering price range reflected on the cover page of this prospectus, would increase (decrease) our pro forma net tangible book value, as adjusted to give effect to this offering, by $         per share, the increase (decrease) attributable to this offering by $         per share, and the dilution in pro forma as adjusted net tangible book value per share to new investors in this offering by $         per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each 1.0 million increase (decrease) in the number of shares offered by us, as set forth on the cover page of this prospectus, would increase (decrease) our pro forma net tangible book value, as adjusted to give effect to this offering, by $         per share, the increase (decrease) attributable to this offering by $         per share, and the dilution in pro forma as adjusted net tangible book value per share to new investors in this offering by $         per share, assuming that the assumed initial public offering price of $         per share, which is the midpoint of the estimated offering price range reflected on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

If the underwriters exercise their over-allotment option in full, the pro forma net tangible book value per share of our common stock after giving effect to this offering would be $         per share, and the dilution in net tangible book value per share to investors in this offering would be $         per share.

 

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The following table summarizes, on a pro forma as adjusted basis as of January 31, 2015, after giving effect to (1) the automatic conversion of all of our convertible preferred stock into common stock and the effectiveness of our amended and restated certificate of incorporation, as well as the vesting of RSUs that settle for 38,043 shares of common stock, which vest subject to a time-based vesting condition that has been partially met and a performance-based vesting condition related to the completion of our initial public offering, as further described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates—Stock-based Compensation,” and (2) the sale of shares of common stock by us in this offering at an assumed initial public offering price of $         per share, which is the midpoint of the estimated offering price range reflected on the cover page of this prospectus, the difference between existing stockholders and new investors with respect to the number of shares of common stock purchased from us, the total consideration paid to us, and the average price per share paid, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us:

 

     Shares Purchased     Total Consideration     Average Price
Per Share
 
     Number      Percent     Amount      Percent    

Existing stockholders

     181,441,420                  173,131,556                $ 0.95   

New public investors

             $     
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

        100.0   $           100.0  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

The information discussed above is illustrative only and will change based on the actual initial public offering price and other terms of this offering determined at pricing. Each $1.00 increase (decrease) in the assumed initial public offering price of $         per share, which is the midpoint of the estimated offering price range reflected on the cover page of this prospectus, would increase (decrease) each of the total consideration paid by new investors and total consideration paid by all stockholders by approximately $         million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each 1.0 million increase (decrease) in the number of shares offered by us, as set forth on the cover page of this prospectus, would increase (decrease) each of the total consideration paid by new investors and total consideration paid by all stockholders by approximately $         million, assuming that the assumed initial public offering price of $         per share, which is the midpoint of the estimated offering price range reflected on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

To the extent that any outstanding options or warrants are exercised, investors will experience further dilution.

 

Except as otherwise indicated, the above discussion and tables assume no exercise of the underwriters’ over-allotment option. If the underwriters exercise their over-allotment option in full, our existing stockholders would own     % and our new investors would own     % of the total number of shares of our common stock outstanding upon the completion of this offering.

 

The number of shares of our common stock to be outstanding after this offering is based on 181,441,420 shares of our common stock outstanding as of January 31, 2015, after giving effect to the automatic conversion of our convertible preferred stock outstanding as of such date into an aggregate of 149,907,620 shares of our common stock immediately prior to the completion of this offering, as well as the performance-based vesting condition of certain RSUs outstanding as of January 31, 2015 that settle for 38,043 shares of common stock, which we expect to record upon completion of this offering, as further described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates—Stock-based Compensation,” and excludes:

 

   

32,451,089 shares of common stock issuable upon the exercise of options, including a non-plan option, outstanding as of January 31, 2015, with a weighted-average exercise price of $0.58 per share;

 

   

65,890 shares of common stock issuable upon the vesting of RSUs outstanding as of January 31, 2015;

 

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526,562 shares of common stock issuable upon the exercise of warrants outstanding as of January 31, 2015, with a weighted-average exercise price of $0.31 per share; (not including warrants to purchase 79,687 shares of common stock, which may become issuable in the future pursuant to our loan and security agreement with Silicon Valley Bank);

 

   

2,235,224 shares of common stock issuable upon the exercise of options granted after January 31, 2015, with an exercise price of $2.31 per share;

 

   

100,000 shares of common stock issuable upon the vesting of RSUs granted after January 31, 2015; and

 

   

            shares of common stock reserved for future issuance under our share-based compensation plans, consisting of (1) 35,697,026 shares of common stock reserved for future issuance under our 2005 Plan, which shares will be added to the shares to be reserved under our 2015 Plan, which will become effective upon completion of this offering, (2)             shares of common stock reserved for future issuance under our 2015 Plan, which will become effective upon completion of this offering, (3)             shares of common stock reserved for future issuance under our ESPP, which will become effective upon completion of this offering, and (4)             shares of common stock that become available under our 2015 Plan and ESPP, pursuant to provisions thereof that automatically increase the share reserves under the plans each year, as more fully described in “Executive Compensation—Employee Benefit and Stock Plans.”

 

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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

 

The following selected consolidated financial and other data should be read together with our consolidated financial statements and accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. The selected consolidated financial and other data in this section is not intended to replace our consolidated financial statements and the related notes. We derived the selected consolidated statements of operations data for fiscal 2012, fiscal 2013 and fiscal 2014 and the consolidated balance sheet data as of July 31, 2013 and 2014 from our audited consolidated financial statements included elsewhere in this prospectus. We derived the selected consolidated balance sheet data as of July 31, 2012 from our audited consolidated financial statements not included in this prospectus. The consolidated statements of operations data for the six months ended January 31, 2014 and 2015, and the consolidated balance sheet data as of January 31, 2015, are derived from our unaudited consolidated financial statements appearing elsewhere in this prospectus. Our historical results presented below are not necessarily indicative of financial results to be achieved in future periods.

 

     Fiscal Year Ended
July  31,
    Six Months Ended
January 31,
 
     2012     2013     2014     2014     2015  
                       (unaudited)  
    

(in thousands, except per share data)

 
                                

Consolidated Statement of Operations Data:

          

Revenue

          

License

   $ 9,452      $ 13,917      $ 11,411      $ 3,566      $ 9,522   

Subscription and support

     7,308        15,243        20,237        9,651        14,164   

Professional services and other

     10,847        13,992        21,054        10,200        8,929   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     27,607        43,152        52,702        23,417        32,615   

Cost of revenue

          

License

     157        108        366        88        257   

Subscription and support(1)

     3,484        9,286        11,911        7,425        5,367   

Professional services and other(1)

     8,352        12,435        15,431        7,847        7,044   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     11,993        21,829        27,708        15,360        12,668   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     15,614        21,323        24,994        8,057        19,947   

Operating expenses

          

Research and development(1)

     10,922        16,848        22,273        9,152        14,385   

Sales and marketing(1)

     9,801        23,812        47,029        22,456        25,174   

General and administrative(1)

     4,033        5,885        14,415        6,767        6,704   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     24,756        46,545        83,717        38,375        46,263   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (9,142     (25,222     (58,723     (30,318     (26,316
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense), net

     1,228        (376     (1,678     (1,757     (290
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (7,914     (25,598     (60,401     (32,075     (26,606

Provision for income taxes

     367        273        392        137        203   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss and comprehensive loss

   $ (8,281   $ (25,871   $ (60,793   $ (32,212   $ (26,809
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share(2):

          

Basic and diluted

   $ (0.56   $ (1.39   $ (2.34   $ (1.33   $ (0.88
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares outstanding used in calculating net loss per share(1):

          

Basic and diluted

     14,862        18,576        25,938        24,165        30,467   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share (unaudited)(2):

          

Basic and diluted

       $ (0.39     $ (0.15
      

 

 

     

 

 

 

Weighted-average shares outstanding used in calculating pro forma net loss per share (unaudited)(2):

          

Basic and diluted

         157,297          180,004   
      

 

 

     

 

 

 

 

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  (1)   Includes stock-based compensation expense as follows:

 

     Fiscal Year Ended
July  31,
     Six Months Ended
January 31,
 
         2012              2013              2014              2014              2015      
                          (unaudited)  
     (in thousands)  

Cost of subscription and support revenue

   $ 2       $ 21       $ 24       $ 12       $ 13   

Cost of professional services and other revenue

     30         65         133         47         91   

Research and development

     74         114         490         135         453   

Sales and marketing

     55         138         1,090         146         319   

General and administrative

     20         70         989         430         571   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $    181       $    408       $ 2,726       $    770       $ 1,447   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

  (2)   See Note 13 to our audited consolidated financial statements appearing elsewhere in this prospectus for an explanation of our basic and diluted net loss per share and pro forma net loss per share calculations.

 

     July 31,      January  31,
2015
 
     2012      2013      2014     
                          (unaudited)  
     (in thousands)  

Consolidated Balance Sheet Data:

           

Cash and cash equivalents

   $ 32,583       $ 44,243       $ 51,759       $ 29,133   

Working capital

     18,201         31,051         36,317         12,045   

Total assets

     49,997         56,550         95,622         75,901   

Deferred revenue, current and long-term

     17,140         17,124         28,190         33,193   

Term debt, current and long-term

     1         3,681         5,243         4,899   

Additional paid-in capital

     76,488         112,279         195,221         197,100   

Total stockholders’ equity

     17,395         27,336         49,522         24,593   

 

Certain Key Non-GAAP Financial Metrics

 

We monitor the following key non-GAAP financial metrics:

 

     Fiscal Year Ended
July  31,
    Six Months Ended
January 31,
 
     2012     2013     2014     2014     2015  
     (dollar amounts in thousands)  

Gross billings

   $ 36,701      $ 43,136      $ 63,768      $ 23,684      $ 37,618   

Non-GAAP gross profit

   $ 15,646      $ 21,409      $ 25,763      $ 8,233      $ 20,505   

Non-GAAP gross margin

     56.7     49.6     48.9     35.2     62.9

Non-GAAP operating loss

   $ (8,912   $ (24,638   $ (55,117   $ (29,326   $ (24,269

 

Gross Billings. We define gross billings as our total revenue plus the change in our deferred revenue in a period. Gross billings in any period consists of sales to new customers plus renewals and additional sales to existing customers. Our management uses gross billings as a performance measurement because we generally bill our customers at the time of sale of our solutions and recognize revenue either upon delivery or ratably over subsequent periods, and a portion of our revenue may be recognized over a period of more than 12 months. We believe that gross billings provides valuable insight into the sales of our solutions and the performance of our business.

 

Non-GAAP Gross Profit and Gross Margin. We define non-GAAP gross profit as our total revenue less our total cost of revenue, adjusted to exclude stock-based compensation associated with equity awards granted to

 

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professional services and maintenance personnel, and amortization of acquired intangible assets. We define non-GAAP gross margin as non-GAAP gross profit as a percentage of our total revenue. Non-GAAP gross profit and gross margin are key measures used by our management to understand and evaluate our operating performance and trends. In particular, non-GAAP gross profit and gross margin exclude certain non-cash expenses and can provide useful measures for period-to-period comparisons of our business.

 

Non-GAAP Operating Loss. We define non-GAAP operating loss as our operating loss excluding stock-based compensation and amortization of acquired intangibles assets. Our management uses non-GAAP operating loss to understand and evaluate our operating performance and trends. In particular, non-GAAP operating loss excludes certain non-cash expenses and can provide useful measures for period-to-period comparisons of our business.

 

Reconciliation of Non-GAAP Financial Measures

 

The non-GAAP measures discussed above under “—Certain Key Non-GAAP Financial Metrics” have limitations as analytical tools, and you should not consider them in isolation or as a substitute for the most directly comparable financial measures prepared in accordance with GAAP. Gross billings, non-GAAP gross profit and gross margin, and non-GAAP operating loss are not substitutes for total revenue, gross profit and gross margin, and operating loss, respectively. In addition, other companies may calculate non-GAAP financial measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measures as tools for comparison. For example, other companies may not use gross billings, may calculate gross billings differently, may have different billing frequencies, or may use other financial measures to evaluate their performance, all of which could reduce the usefulness of gross billings as a comparative measure. Also, the non-GAAP gross profit and gross margin, and non-GAAP operating loss measures do not consider the dilutive impact of equity awards and the associated stock-based compensation, which is an ongoing expense for us, and these non-GAAP measures exclude amortization of acquired intangible assets, even though we may engage in future acquisitions that may result in additional amortization. We urge you to review the reconciliation of our non-GAAP financial measures to the most directly comparable GAAP financial measures included below, and not to rely on any single financial measure to evaluate our business.

 

The following table reflects the reconciliation of the most directly comparable GAAP financial measure to each of the non-GAAP financial measures discussed above:

 

     Fiscal Year Ended
July  31,
    Six Months Ended
January, 31
 
     2012     2013     2014     2014     2015  
     (in thousands)              

Gross billings:

          

Total revenue

   $ 27,607      $ 43,152      $ 52,702      $ 23,417      $ 32,615   

Total deferred revenue, end of period

     17,140        17,124        28,190        17,391        33,193   

Less: Total deferred revenue, beginning of period

     (8,046     (17,140     (17,124     (17,124     (28,190
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total change in deferred revenue

     9,094        (16     11,066        267        5,003   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross billings

   $ 36,701      $ 43,136      $ 63,768      $ 23,684      $ 37,618   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP gross profit:

          

Gross profit

   $ 15,614      $ 21,323      $ 24,994      $ 8,057      $ 19,947   

Add: Stock-based compensation expense

     32        86        157        59        104   

Add: Amortization of intangible assets

                   612        117        454   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP gross profit

   $ 15,646      $ 21,409      $ 25,763      $ 8,233      $ 20,505   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP operating loss:

          

Operating loss

   $ (9,142   $ (25,222   $ (58,723   $ (30,318   $ (26,316

Add: Stock-based compensation expense

     181        408        2,726        770        1,447   

Add: Amortization of intangible assets

     49        176        880        222        600   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP operating loss

   $ (8,912)      $ (24,638   $ (55,117   $ (29,326   $ (24,269
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

You should read the following discussion and analysis of our financial condition and results of operations together with the consolidated financial statements and related notes that are included elsewhere in this prospectus. This discussion contains forward looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward looking statements as a result of various factors, including those set forth under the section titled “Risk Factors” or in other parts of this prospectus. The last day of our fiscal year is July 31.

 

Overview

 

At Apigee, our mission is to make every business a digital business.

 

Unprecedented growth in mobile technologies, big data, cloud services and the connected devices that comprise the Internet of Things, or IoT, has disrupted or transformed the dynamics of business, changed consumer behavior and eroded the divide between the physical and digital worlds. To fully embrace the digital world, businesses must provide seamless customer experiences across a myriad of devices and channels, respond quickly to fast-changing customer expectations and market conditions, drive revenue through new business models and create or participate in digital ecosystems. A digital business creates value by unlocking its data and services to better serve customers in a real-time, anywhere-anytime fashion and uses data to continually improve the customer experience and drive additional revenue.

 

We believe that application programming interfaces, or APIs, are a critical enabling technology for the shifts in mobile, cloud computing, big data and the IoT and that APIs are a foundational technology on which digital business operates. We believe that a new and expansive market opportunity exists to help enterprises adopt digital strategies and navigate the digitally driven economy.

 

We provide an innovative software platform that allows businesses to design, deploy, and scale APIs as a connection layer between their core IT systems and data and the applications with which their customers, partners, employees and other users engage with their business. The foundations of our platform are Apigee Edge, a robust API-management solution, and Apigee Insights, our predictive analytics software solution. Our platform enables a comprehensive view of the enterprise data the user is consuming and generating, and data about the context in which the customer is using the digital product or service, or contextual data. In addition, our platform provides tools for businesses to drive usage and adoption of APIs by their business partners and developers. Using our platform, businesses in any industry can easily and securely connect their core services and data to developers to enable them to develop applications and experiences for customers, partners, employees and other users. Using our platform, businesses can forge new partnerships, build partner ecosystems, and participate fully in emerging digital business networks.

 

We believe that in order to build, manage and extract valuable insights from APIs and data needed for digital business, nearly all businesses will require a new layer within their core application software stack to achieve this. To enable this new layer, we provide a purpose-built, self-service, scalable platform that can be deployed either in the cloud or on premises to securely expose a business’ data and services needed to enable users to engage and transact with the business. Because we provide API publishing, operations, and data visibility in our integrated solution, our platform enables more informed predictive analytics to help the business anticipate and adjust to customer behavior.

 

We were incorporated in fiscal 2004. From fiscal 2004 to fiscal 2007, our activities were focused on research and development that resulted in the first commercial release of our software in fiscal 2007—our Apigee Edge on-premises platform. In fiscal 2009, we extended our Apigee Edge solution to a cloud offering to enable deployment flexibility for our customers. In fiscal 2012, we further extended our platform with the release of our

 

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first predictive analytics solution, Apigee Insights. In December 2013, we acquired InsightsOne Systems, Inc., or InsightsOne, to further advance predictive analytics as part of our platform strategy and to bolster our developer adoption strategy. In fiscal 2013, we expanded our network of channel partners by entering into a master alliance agreement with Accenture, under which either we co-sell or they resell our solutions as part of larger installations. In fiscal 2014, we announced an OEM and reseller partnership with SAP under which SAP will deliver a comprehensive API management application built on our Apigee Edge product on SAP’s Hana Cloud to SAP’s cloud customers, and sell our Apigee Edge product on a standalone basis to its on-premises customers.

 

We generate our revenue primarily from licenses and subscriptions for our Apigee Edge products and from professional services. We also generate revenue from licenses of and subscriptions to our Apigee Insights product, although such revenue has been immaterial to date because we re-released our Apigee Insights product in fiscal year 2014 and currently have few active customers. We also offer a free trial version of Apigee Developer to the developer community. We provide our customers the flexibility to deploy our software as a cloud service or on premises. For those customers that deploy our products as a cloud service, we license our software on a subscription basis. For those customers that deploy our products on premises, we offer two licensing options, a time-based license or a perpetual license. We recognize revenue from subscription fees ratably over the service period, and have been increasing the proportion of our revenue mix that we derive from subscriptions. We therefore believe that gross billings provides valuable insight into the performance of our business. We expect professional services and other revenue to account for a decreasing percentage of our total revenue over the long term as we continue to increase our subscriptions and as our customers increase their use of professional services provided by our channel partners and other third parties. However, we expect to continue to provide professional services as an important part of our solution to our customers because digital infrastructure transformation frequently involves core business strategy.

 

We sell our products through direct field sales, direct inside sales and indirect channel sales. We utilize a wide range of online and offline marketing activities to drive brand awareness, thought leadership, developer trials and lead volume. Many of our customers initially use our product as a free trial by visiting our website, creating an account and testing the free cloud version of our platform. In addition, we offer open source solutions that introduce developers to the key technical concepts and technologies of APIs and mobile app development, and that allow their APIs and applications to be migrated or deployed to our paid products. After signing up, developers are able to experience the power of our platform and learn how to interact with our solutions, enabling them to understand the benefits of our paid products. We use the trial program as a source of lead volume for our direct sales team.

 

We have achieved significant scale, with a customer base that has grown over 35% from the end of fiscal 2012 to the end of fiscal 2014. Our customers include many leading businesses: 20 of the Fortune 100, five of the top 10 Global 2000 retail brands and six of the top 10 global telecommunications companies as of January 31, 2015. Our solution has been sold to customers in over 30 countries around the world. Our current focus is on acquiring new customers and increasing revenue from our existing customers as they realize the value of our platform and expand the use of our software through additional use cases and broader deployment within their organizations. We are also focused on increasing adoption of our platform through our Apigee developer program.

 

We have experienced rapid growth in recent periods. Our gross billings were $36.7 million, $43.1 million and $63.8 million in fiscal 2012, 2013 and 2014, respectively, representing growth rates of 18% from fiscal 2012 to fiscal 2013 and 48% from fiscal 2013 to fiscal 2014. Our gross billings were $23.7 million and $37.6 million in the six months ended January 31, 2014 and 2015, respectively, representing a growth rate of 59%. Our total revenue was $27.6 million, $43.2 million and $52.7 million in fiscal 2012, 2013 and 2014, respectively, and $23.4 million and $32.6 million in the six months ended January 31, 2014 and 2015, respectively. AT&T accounted for 38% of our total revenue in fiscal 2012, 36% of our total revenue in fiscal 2013 and 15% of our total revenue in fiscal 2014. For the six months ended January 31, 2014 and 2015, respectively, AT&T accounted for 17% and 6% of our total revenue. Excluding our revenue from AT&T, our total revenue was $17.0 million, $27.5 million and $45.0 million in fiscal 2012, 2013 and 2014, respectively, and $19.4 million and $30.6 million in the six months ended January 31, 2014 and 2015, respectively. No other customer accounted for more than

 

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10% of our total revenue in fiscal 2012, 2013 or 2014, or in the six months ended January 31, 2014 and 2015. Our revenue derived from sales to customers located outside the United States was approximately 16%, 16% and 33% in fiscal 2012, 2013 and 2014, respectively, and 33% and 38% in the six months ended January 31, 2014 and 2015, respectively. We expect that sales to customers located outside the United States will continue to comprise a significant portion of our total revenue for the foreseeable future.

 

We have made substantial investments in developing and improving our platform and solutions, in expanding our sales and marketing capabilities and geographic coverage, and in providing general and administrative resources to support our growth. As a result, we have incurred net losses of $8.3 million, $25.9 million and $60.8 million in fiscal 2012, 2013 and 2014, respectively, and $32.2 million and $26.8 million in the six months ended January 31, 2014 and 2015, respectively. We had an accumulated deficit of $145.9 million and $172.7 million as of July 31, 2014 and January 31, 2015, respectively, and we expect to continue to incur net losses for the foreseeable future. We expect that continued investments will drive further growth in our gross billings and total revenue. While increases in our gross billings and total revenue may trail the increases in our operating expenses in the near term, we expect to realize operating leverage in our business model over the long term. See “Selected Consolidated Financial and Other Data—Certain Key Non-GAAP Financial Metrics” for more information and a reconciliation of gross billings to total revenue.

 

Key Opportunities and Challenges Affecting Our Performance

 

Market Adoption of Our Platform

 

We are affected by the pace at which enterprises adopt APIs, mobile apps and cloud computing, and make the transition to become digital businesses. We believe that the transformation to digital business, enabled by APIs and powerful analytics, is an emerging trend. We believe that we have established a leadership position in this new market, both as a provider of API management and data analytics and also as a thought leader helping to define the architecture and vision of API-enabled and data-driven businesses. We intend to extend our leadership position by continuing to innovate, bringing new technologies to market, and honing best practices and thought leadership by working closely with our global customer base, both at a technology level and with senior executives. The degree to which prospective customers recognize the need to transform their businesses into digital businesses will determine the rate at which we are able to sell our platform to new and existing customers.

 

Investment in Our API and Predictive Analytics Solutions

 

We have invested, and intend to continue to invest, in expanding the breadth and depth of our platform to enable organizations to deploy robust APIs, big data, and predictive analytics solutions. We intend to continue to invest in research and development to enhance the application development and technology capabilities of our platform. We have had four significant product releases or enhancements in calendar 2014. We typically provide our customers with updates to our solutions at least monthly in the cloud and quarterly on premises.

 

Ability to Grow Our Worldwide Sales Capacity

 

We have invested, and intend to continue to invest, in expanding our sales capacity and improving our sales operations to drive additional revenue and support the growth of our global customer base. We sell our platform through direct field sales, direct inside sales and indirect channel sales. Our sales to date have been primarily through our direct field sales force, which grew nearly 300% from July 31, 2012 to July 31, 2014. We are continuing to develop and expand a partner community to supplement our sales and support operations through system integrators, OEM partners, resellers and other partners to further influence customer decision making and drive adoption of our solutions. Our partners may also co-sell with our direct field sales organization. Our channel partners provide us with additional sales leverage by sourcing new prospects, providing professional services and technical support to existing customers and upselling additional use cases. These channel partners expand our geographic sales reach worldwide, particularly in key international markets in EMEA and APAC. All of these factors will influence timing and overall levels of sales capacity, impacting the rate at which we will be able to acquire customers to drive revenue growth. In fiscal 2014, we derived very limited revenue through our channel partners.

 

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Expansion and Upsell Within Our Existing Customer Base

 

After the initial sale to and successful deployment by a new customer, we focus on expanding our relationship with the customer to sell additional software licenses and add-on features of our current platform. Historically, we have often realized sales of additional software licenses and add-on features on prior versions of our Apigee Edge platform as well. However, upon the introduction of our current platform in August 2012, there was no viable migration path for transitioning existing customers to the current Apigee Edge platform. Accordingly, we believe our upsell opportunities with customers on our prior platforms to be limited. We expect our opportunity to expand our customer relationships through additional sales to increase as we add new customers to the current Apigee Edge platform, broaden our product portfolio to meet additional mobile IT requirements, increase the benefits provided to both users and the enterprise and enhance platform functionality. Additional sales over the lifecycle of a customer relationship can significantly increase the return on our sales and marketing investments. Accordingly, our financial performance will depend in part on the degree to which our expansion and upsell sales strategy is successful.

 

Mix of Products Sold as Subscription and Perpetual Licenses

 

We offer our customers the flexibility to use our software as a cloud service or on premises. For those customers that use our platform as a cloud service, we license our software on a subscription basis. For those customers that use our platform on premises, we offer two licensing options, a time-based license or a perpetual license. In addition, we also offer our customers software support and professional services. We expect the proportion of our subscription and support revenue to our total revenue to increase over time. However, because we recognize subscription and term revenue ratably over the duration of the related contracts, increases in total revenue will lag any increase in subscription arrangements. Furthermore, the unpredictability of the timing of our receipt of orders for perpetual licenses, the revenue for which we typically recognize upfront, may cause fluctuations in our quarterly financial results.

 

Future Investment in Growth and Product Development

 

We intend to extend our leadership position by continuing to innovate, bringing new technologies to market, and honing best practices and thought leadership by working closely with our global customer base, both at a technology level and with senior executives. We intend to continue building innovative software products that extend the value of our existing offering and further help enterprises realize digital business success, through new growth and operational efficiencies. We develop technology to address emerging technology markets such as the IoT. We have steadily increased our focus on partner and channel development efforts to drive efficient new customer acquisition across geographies and industries. We believe that there is substantial opportunity to grow our international business. We plan to continue to aggressively market to customers located outside the United States by building partnerships that help us add customers internationally and by expanding our direct and indirect sales channels outside the United States and EMEA.

 

Components of Our Operating Results

 

Revenue

 

License Revenue. License revenue reflects the revenue recognized from sales of on-premises software licenses. A substantial majority of our license revenue consists of revenue from perpetual licenses, under which we generally recognize the license fee portion of the arrangement upfront, assuming all revenue recognition criteria are satisfied. Customers can also purchase time-based licenses, under which we typically recognize the license fee ratably over the term of the license after all other revenue recognition criteria are met. Due to the differing revenue recognition criteria applicable to perpetual and time-based licenses, shifts in the mix between perpetual and time-based licenses from quarter to quarter could produce substantial variation in the revenue we recognize.

 

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Subscription and Support Revenue. We generate subscription and support revenue primarily from subscription fees from the customer accessing our software in the cloud. We also generate revenue from maintenance and support agreements with customers for on-premises licenses, which represented approximately 10% of our total revenue for fiscal 2012, 2013 and 2014. Going forward, we expect our maintenance and support revenue to remain flat or to account for a decreasing percentage of our total revenue over the long term. We typically recognize subscription and support revenue ratably over the term of the arrangement after all other revenue recognition criteria are met.

 

To assess our renewals with respect to our licenses, we utilize a dollar–based renewal rate, which is calculated by the dollar value of renewed contracts divided by the dollar value of expiring contracts in any given period. During the six months ended January 31, 2015, our subscription and time-based licenses that were eligible for renewal were renewed at a dollar-based renewal rate of approximately 85%. The dollar-based renewal rate for the six months ended January 31, 2015, is not necessarily indicative of our dollar-based renewal rate for a full year or any future period.

 

Professional Services and Other Revenue. Professional services and other revenue consists of fees recognized from consulting services. We recognize fees from consulting services as revenue as the services are performed. We recognize fees from time and material services as revenue as services are rendered based on inputs to the project, such as billable hours incurred, after all other revenue recognition criteria are met. For fixed-fee professional service arrangements, we recognize revenue under the proportional performance method of accounting and estimate the proportional performance on a monthly basis, utilizing hours incurred to date as a percentage of the total estimated hours to complete the project. If we do not have a sufficient basis to measure progress towards completion, we recognize revenue upon completion of the arrangement.

 

Our professional services and other revenue represented 40% of our total revenue for fiscal 2014. We have experienced continued growth in our professional services and other revenue primarily due to the deployment of our software with some customers that have large, highly complex IT environments. However, going forward, we expect our professional services and other revenue to account for a decreasing percentage of our total revenue over the long term as we continue to increase our subscription and support revenue and as our customers increase their use of professional services provided by our channel partners and other third parties. We have also started to refer professional services opportunities to our partners and have started to field requests from customers to use their current third-party service providers for professional services engagements.

 

Cost of Revenue

 

Cost of License Revenue. Cost of license revenue consists primarily of the cost of third-party software royalties and amortization of acquired intangible assets.

 

Cost of Subscription and Support Revenue. Cost of subscription and support revenue includes all direct costs to deliver our cloud-based solution and software support, including salaries, benefits and stock-based compensation for our customer support organization, third-party hosting costs, third-party software royalties, allocated overhead for facilities and IT, and amortization of acquired intangible assets.

 

Cost of Professional Services and Other Revenue. Cost of professional services and other revenue includes salaries, benefits and stock-based compensation for our professional services organization, consulting services and allocated overhead for facilities and IT.

 

Gross Profit and Gross Margin

 

Gross profit, or total revenue less total cost of revenue, and gross margin, or gross profit as a percentage of total revenue, has been and will continue to be affected by various factors, including the mix among our license, subscription and professional services and other revenue, the costs associated with third-party hosting facilities and the extent to which we expand our customer support and professional services organizations. Our gross margin on license revenue and subscription and support revenue is significantly higher than our gross margin on

 

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professional services and other revenue, and our gross margin on license revenue is significantly higher than our gross margin on subscription and support revenue. We expect our gross margin to increase modestly over the long term, although our gross margin will fluctuate from period to period depending on the interplay of all of these factors.

 

Operating Expenses

 

We classify our operating expenses into three categories: research and development, sales and marketing, and general and administrative. For each category, the largest component is personnel costs, which include salaries and bonuses, employee benefits costs, stock-based compensation and, in the case of sales and marketing expenses, sales commissions. Operating expenses also include allocated overhead costs for facilities and IT, which include compensation of personnel and costs associated with our facilities and IT infrastructure.

 

Research and Development. Research and development expenses primarily consist of personnel costs and allocated overhead attributable to our research and development personnel. We have devoted our product development efforts primarily to enhancing the functionality and expanding the capabilities of our software platform. We intend to continue to make significant investments in research and development to enhance and further develop our platform. As a result, we expect our research and development expenses to continue to increase in dollar amount for the foreseeable future. However, we expect our research and development expenses to decrease as a percentage of our total revenue over the long term, although our research and development expenses may fluctuate as a percentage of our total revenue from period to period.

 

Sales and Marketing. Sales and marketing expenses primarily consist of personnel costs and allocated overhead for our sales, marketing and business development personnel, commissions earned by our sales personnel, and the cost of marketing and business development programs. We intend to continue to make significant investments in sales and marketing to drive additional revenue and grow our global customer base. As a result, we expect our sales and marketing expenses to increase in dollar amount and to continue to be our largest operating expenses category as we continue to grow our global customer base and expand our geographic coverage. However, we expect our sales and marketing expenses to decrease as a percentage of our total revenue over the long term, although our sales and marketing expenses may fluctuate as a percentage of our total revenue from period to period.

 

General and Administrative. General and administrative expenses primarily consist of personnel costs and allocated overhead for our executive and administrative personnel, legal, accounting and other professional services fees, and other corporate expenses. We have recently incurred, and expect to continue to incur, additional general and administrative expenses to support the growth of our operations and to prepare to operate as a public company. As a result, we expect our general and administrative expenses to increase in dollar amount for the foreseeable future. However, we expect our general and administrative expenses to decrease as a percentage of our total revenue over the long term, although our general and administrative expenses may fluctuate as a percentage of our total revenue from period to period.

 

Other Income (Expense), Net

 

Other income (expense), net consists primarily of the changes in the fair value of common stock warrants, foreign currency exchange gains or losses, interest expense on outstanding debt and interest income earned on our cash and cash equivalents balances.

 

Provision for Income Taxes

 

Provision for income taxes is based on the amount of earnings and enacted federal, state and foreign tax rates and is adjusted for allowable credits and deductions. Our provision for income taxes consists of state and foreign taxes. Our income tax provision may be significantly affected by changes to our estimates for tax in jurisdictions in which we operate and other estimates utilized in determining the global effective tax rate.

 

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Because of our history of U.S. net operating losses, we have established a full valuation allowance against potential future benefits for our U.S. deferred tax assets including loss carryforwards and research and development and other tax credits. Our income tax provision could be significantly impacted by estimates surrounding our uncertain tax positions and changes to our valuation allowance in future periods. We reevaluate the judgments surrounding our estimates and make adjustments as appropriate each reporting period. See Note 7 of our audited consolidated financial statements appearing elsewhere in this prospectus for more information concerning our provision for income taxes.

 

Results of Operations

 

The following tables set forth our results of operations for the periods presented and as a percentage of our total revenue for those periods. The period-to-period comparison of financial results are not necessarily indicative of financial results to be achieved in future periods.

 

     Fiscal Year Ended
July  31,
    Six Months Ended
January 31,
 
     2012     2013     2014     2014     2015  
                       (unaudited)  
     (in thousands)  

Consolidated Statement of Operations Data:

          

Revenue

          

License

   $ 9,452      $ 13,917      $ 11,411      $ 3,566      $ 9,522   

Subscription and support

     7,308        15,243        20,237        9,651        14,164   

Professional services and other

     10,847        13,992        21,054        10,200        8,929   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     27,607        43,152        52,702        23,417        32,615   

Cost of revenue

          

License

     157        108        366        88        257   

Subscription and support(1)

     3,484        9,286        11,911        7,425        5,367   

Professional services and other(1)

     8,352        12,435        15,431        7,847        7,044   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     11,993        21,829        27,708        15,360        12,668   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     15,614        21,323        24,994        8,057        19,947   

Operating expenses

          

Research and development(1)

     10,922        16,848        22,273        9,152        14,385   

Sales and marketing(1)

     9,801        23,812        47,029        22,456        25,174   

General and administrative(1)

     4,033        5,885        14,415        6,767        6,704   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     24,756        46,545        83,717        38,375        46,263   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (9,142     (25,222     (58,723     (30,318     (26,316

Other income (expense), net

     1,228        (376     (1,678     (1,757     (290
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (7,914     (25,598     (60,401     (32,075     (26,606

Provision for income taxes

     367        273        392        137        203   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (8,281   $ (25,871   $ (60,793   $ (32,212   $ (26,809
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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  (1)   Includes stock-based compensation expense as follows:

 

     Fiscal Year Ended
July  31,
     Six Months Ended
January 31,
 
       2012          2013          2014           2014            2015     
                          (unaudited)  
     (in thousands)  

Cost of subscription and support revenue

   $ 2       $ 21       $ 24       $ 12       $ 13   

Cost of professional services and other revenue

     30         65         133         47         91   

Research and development

     74         114         490         135         453   

Sales and marketing

     55         138         1,090         146         319   

General and administrative

     20         70         989         430         571   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 181       $ 408       $ 2,726       $ 770       $ 1,447   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Fiscal Year Ended
July  31,
    Six Months Ended
January 31,
 
         2012             2013             2014             2014             2015      
     (as a percentage of total revenue)        (unaudited)  

Consolidated Statement of Operations Data:

          

Revenue

          

License

     34.2     32.3     21.7     15.2     29.2

Subscription and support

     26.5        35.3        38.4        41.2        43.4   

Professional services and other

     39.3        32.4        39.9        43.6        27.4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     100.0        100.0        100.0        100.0        100.0   

Cost of revenue

          

License

     0.6        0.3        0.7        0.4        0.8   

Subscription and support

     12.6        21.5        22.6        31.7        16.4   

Professional services and other

     30.3        28.8        29.3        33.5        21.6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     43.5        50.6        52.6        65.6        38.8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     56.5        49.4        47.4        34.4        61.2   

Operating expenses

          

Research and development

     39.6        39.0        42.3        39.1        44.1   

Sales and marketing

     35.5        55.2        89.2        95.9        77.2   

General and administrative

     14.6        13.6        27.4        28.9        20.6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     89.7        107.8        158.9        163.9        141.9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (33.2     (58.4     (111.5     (129.5     (80.7

Other income (expense), net

     4.4        (0.9     (3.2     (7.5     (0.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (28.8     (59.3     (114.7     (137.0     (81.6

Provision for income taxes

     1.3        0.6        0.7        0.6        0.6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (30.1 )%      (59.9 )%      (115.4 )%      (137.6 )%      (82.2 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Six Months Ended January 31, 2014 and 2015

 

Revenue

 

     Six Months Ended
January 31,
    %
Change
 
         2014             2015        
    

(unaudited)
(dollar amounts in thousands)

       

Revenue

      

License

   $ 3,566      $ 9,522        167.0

Subscription and support

     9,651        14,164        46.8

Professional services and other

     10,200        8,929        (12.5 )% 
  

 

 

   

 

 

   

Total revenue

   $ 23,417      $ 32,615        39.3
  

 

 

   

 

 

   

Percentage of revenue

      

License

     15.2     29.2  

Subscription and support

     41.2        43.4     

Professional services and other

     43.6        27.4     
  

 

 

   

 

 

   

Total

     100.0     100.0  
  

 

 

   

 

 

   

 

Total revenue increased $9.2 million, or 39%, in the six months ended January 31, 2015, compared to six months ended January 31, 2014, primarily due to an increase in license revenue of $6.0 million, or 167%, and growth in subscription and support revenue of $4.5 million, or 47%. The increase in license revenue was driven primarily by growth in our on-premises deployments. The decline in professional services and other revenue of $1.3 million, or 13%, was primarily due to professional services and other revenue we recognized from AT&T in the six months ended January 31, 2014. AT&T accounted for 17% of our total revenue in the six months ended January 31, 2014, and 6% of total revenue in the six months ended January 31, 2015. No other customers accounted for more than 10% of our total revenue in the six months ended January 31, 2014 or 2015. Excluding revenue from AT&T, our total revenue increased $11.1 million, or 57%, in the six months ended January 31, 2015, compared to the six months ended January 31, 2014. Excluding our license revenue from AT&T, our license revenue increased $5.9 million, or 166%, in the six months ended January 31, 2015, compared to the six months ended January 31, 2014. Excluding our subscription and support revenue from AT&T, our subscription and support revenue increased $4.6 million, or 51%, in the six months ended January 31, 2015, compared to the six months ended January 31, 2014. Excluding our professional services and other revenue from AT&T, our professional services and other revenue increased $0.6 million, or 9%, in the six months ended January 31, 2015, compared to the six months ended January 31, 2014. We also experienced an increase in the proportion of our total revenue that we derive from customers located outside the United States, rising from 33% in the six months ended January 31, 2014 to 38% in the six months ended January 31, 2015.

 

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Cost of Revenue and Gross Margin

 

     Six Months Ended
January 31,
    % Change  
         2014             2015        
     (unaudited)        
     (dollar amounts in
thousands)
       

Cost of revenue

      

License

   $ 88      $ 257        192.0

Subscription and support

     7,425        5,367        (27.7 )% 

Professional services and other

     7,847        7,044        (10.2 )% 
  

 

 

   

 

 

   

Total cost of revenue

   $ 15,360      $ 12,668        (17.5 )% 
  

 

 

   

 

 

   

Gross margin

      

License

     97.5     97.3  

Subscription and support

     23.1     62.1  

Professional services and other

     23.1     21.1  
  

 

 

   

 

 

   

Total gross margin

     34.4     61.2  
  

 

 

   

 

 

   

 

Total cost of revenue decreased $2.7 million, or 18%, in the six months ended January 31, 2015, compared to the six months ended January 31, 2014, primarily due to a decrease in cost of subscription and support revenue of $2.1 million, or 28%, and a decrease in cost of professional services and other revenue of $0.8 million, or 10%. The decrease in cost of subscription and support revenue primarily reflected $1.1 million in decreased salaries and benefits and stock-based compensation costs due to decreased headcount in our customer support organization and a $0.8 million decrease in third-party hosting and consulting costs as we gained efficiencies in our customer support organization and substantially completed the migration of customers to our current digital platform. The decrease in cost of professional services and other revenue primarily reflected a $0.9 million decrease in third-party consulting costs as we gained efficiencies in our professional services organization. Cost of license revenue was nominal in both periods.

 

Total gross margin increased due to the impact of revenue mix between our license, subscription and support and professional services and other revenue. More specifically, our license revenue accounted for a significantly higher percentage of our total revenue in the six months ended January 31, 2015, compared to the six months ended January 31, 2014. This increase in total gross margin also reflected increased efficiencies in our customer support organization and substantial completion of customer migration to our current digital platform. In addition, this increase was partially offset by a decline in gross margin realized on our professional services and other revenue as we continued to expand our professional services organizations to support our growing customer base.

 

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Operating Expenses

 

     Six Months Ended
January 31,
    % Change  
         2014             2015        
    

(unaudited)

(dollar amounts in
thousands)

       

Operating expenses

      

Research and development

   $ 9,152      $ 14,385        57.2

Sales and marketing

     22,456        25,174        12.1

General and administrative

     6,767        6,704        (0.9 )% 
  

 

 

   

 

 

   

Total operating expenses

   $ 38,375      $ 46,263        20.6

Percentage of revenue

      

Research and development

     39.1     44.1  

Sales and marketing

     95.9        77.2     

General and administrative

     28.9        20.6     
  

 

 

   

 

 

   

Total operating expenses

     163.9     141.9  
  

 

 

   

 

 

   

 

Research and Development Expense

 

Research and development expense increased $5.2 million, or 57%, in the six months ended January 31, 2015, compared to the six months ended January 31, 2014, primarily due to a $5.0 million increase in salaries and benefits expense and stock-based compensation as we increased engineering headcount to support ongoing development and enhancement of our product offerings.

 

Sales and Marketing Expense

 

Sales and marketing expense increased $2.7 million, or 12%, in the six months ended January 31, 2015, compared to the six months ended January 31, 2014, primarily due to a $3.0 million increase in salaries and benefits expense and stock-based compensation as we increased head count to expand our sales operations as well as increased commissions reflecting our higher sales levels.

 

General and Administrative Expense

 

General and administrative expense was relatively flat in the six months ended January 31, 2015, compared to the six months ended January 31, 2014, and primarily related to a $0.8 million increase in personnel-related expenses to support our overall growth partially offset by a decrease of $0.7 million in professional services fees related to accounting, legal and recruiting activities.

 

Other Income (Expense), Net

 

     Six Months Ended
January 31,
    % Change  
         2014             2015        
    

(unaudited)

(dollar amounts in
thousands)

       

Other income (expense), net

   $ (1,757   $ (290     (83.5 )% 

Percentage of revenue

      

Other income (expense), net

     (7.5 )%      (0.9 )%   

 

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Other income (expense), net decreased primarily due to $1.6 million of expense associated with the revaluation of our common stock warrants during the six months ended January 31, 2014, that did not recur in the six months ended January 31, 2015.

 

     Six Months Ended
January 31,
    % Change  
         2014             2015        
     (unaudited)        
     (dollar amounts in
thousands)
       

Provision for income taxes

   $ 137      $ 203        48.2

Percentage of revenue

      

Provision for income taxes

     0.6     0.6  

 

Provision for income taxes remained flat in the six months ended January 31, 2015, compared to the six months ended January 31, 2014, and primarily relates to state and foreign taxes.

 

Fiscal 2012, Fiscal 2013 and Fiscal 2014

 

Revenue

 

     Fiscal Year Ended
July 31,
    2012 to 2013
% Change
    2013 to 2014
% Change
 
         2012             2013             2014          
     (dollar amounts in thousands)              

Revenue

          

License

   $ 9,452      $ 13,917      $ 11,411        47.2     (18.0 )% 

Subscription and support

     7,308        15,243        20,237        108.6     32.8

Professional services and other

     10,847        13,992        21,054        29.0     50.5
  

 

 

   

 

 

   

 

 

     

Total revenue

   $ 27,607      $ 43,152      $ 52,702        56.3     22.1
  

 

 

   

 

 

   

 

 

     

Percentage of revenue

          

License

     34.2     32.3     21.7    

Subscription and support

     26.5        35.3        38.4       

Professional services and other

     39.3        32.4        39.9       
  

 

 

   

 

 

   

 

 

     

Total

     100.0     100.0     100.0    
  

 

 

   

 

 

   

 

 

     

 

Fiscal 2013 Compared to Fiscal 2014. Total revenue increased $9.6 million, or 22%, in fiscal 2014 compared to fiscal 2013, primarily due to an increase in subscription and support revenue of $5.0 million, or 33%, and growth in professional services and other revenue of $7.1 million, or 51%. The increase in subscription and support revenue was driven primarily by growth in the number of customers adopting our cloud-based solution and an increase in revenue from software support as a result of on-premises software licenses that increased our cumulative installed base of customers that pay for recurring software support fees. The increase in professional services and other revenue was primarily due to an increase in sales of consulting services reflecting the overall growth in our business. The decline in license revenue of $2.5 million, or 18%, in fiscal 2014 compared to fiscal 2013, was due to $8.0 million of license revenue we recognized from AT&T in fiscal 2013, which was not ongoing in fiscal 2014 and which we considered to be abnormally large given the Company’s operating results at the time. AT&T accounted for 36% of our total revenue, 54% of our license revenue, 10% of our subscription and support revenue and 47% of our professional services and other revenue in fiscal 2013 compared to 15% of our total revenue, 7% of our subscription and support revenue and 30% of our professional services and other revenue in fiscal 2014. No other customer accounted for more than 10% of our total revenue in fiscal 2013 or 2014. Excluding revenue from AT&T, our total revenue increased $17.5 million, or 64%, in fiscal 2014 compared to fiscal 2013. Excluding our license revenue from AT&T, our license revenue increased

 

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$5.0 million, or 78%, in fiscal 2014 compared to fiscal 2013, driven by growth in our on-premises deployments. Excluding our subscription and support revenue from AT&T, our subscription and support revenue increased $5.1 million, or 37%, in fiscal 2014 compared to fiscal 2013. Excluding our professional services and other revenue from AT&T, our professional services and other revenue increased $7.4 million, or 100%, in fiscal 2014 compared to fiscal 2013. In fiscal 2014, we also experienced an increase in the proportion of our total revenue that we derive from customers located outside the United States, rising from 16% in fiscal 2013 to 33% in fiscal 2014.

 

Fiscal 2012 Compared to Fiscal 2013. Total revenue increased $15.5 million, or 56%, in fiscal 2013 compared to fiscal 2012, primarily due to growth in subscription and support revenue of $7.9 million, or 109%, the increase in license revenue of $4.5 million, or 47%, and to a lesser extent the increase in professional services and other revenue of $3.1 million, or 29%. The increase in subscription and support revenue was driven primarily by growth in the number of customers adopting our cloud-based solution. The increase in professional services and other revenue was primarily due to an increase in sales of consulting services reflecting our growing customer base. The increase in license revenue was due to revenue that we recognized from AT&T. AT&T accounted for 38% of our total revenue, 35% of our license revenue, 20% of our subscription and support revenue and 53% of our professional services and other revenue in fiscal 2012 compared to 36% of our total revenue, 54% of our license revenue, 10% of our subscription and support revenue and 47% of our professional services and other revenue in fiscal 2013. No other customer accounted for more than 10% of our total revenue in fiscal 2012 or 2013. Excluding revenue from AT&T, our total revenue increased $10.4 million, or 61%, in fiscal 2013 compared to fiscal 2012. Excluding our license and subscription and support revenue from AT&T, our license revenue increased $0.3 million, or 5%, in fiscal 2013 compared to fiscal 2012 and our subscription and support revenue increased $7.8 million, or 133%, driven by growth in the number of customers accessing our software in the cloud. Excluding the professional services and other revenue from AT&T, professional services and other revenue increased $2.3 million, or 46%, in fiscal 2013 compared to fiscal 2012, primarily due to an increase in sales of consulting services reflecting our growing customer base.

 

Cost of Revenue and Gross Margin

 

     Fiscal Year Ended
July 31,
    2012 to 2013
% Change
    2013 to 2014
% Change
 
     2012     2013     2014      
     (dollar amounts in thousands)              

Cost of revenue

          

License

   $ 157      $ 108      $ 366        (31.2 )%      238.9

Subscription and support

     3,484        9,286        11,911        166.5     28.3

Professional services and other

     8,352        12,435        15,431        48.9     24.1
  

 

 

   

 

 

   

 

 

     

Total cost of revenue

   $ 11,993      $ 21,829      $ 27,708        82.0     26.9
  

 

 

   

 

 

   

 

 

     

Gross margin

          

License

     98.3     99.2     96.8    

Subscription and support

     52.3     39.1     41.1    

Professional services and other

     23.0     11.1     26.7    
  

 

 

   

 

 

   

 

 

     

Total gross margin

     56.6     49.4     47.4    
  

 

 

   

 

 

   

 

 

     

 

Fiscal 2013 Compared to Fiscal 2014. Total cost of revenue increased $5.9 million, or 27%, in fiscal 2014 compared to fiscal 2013, primarily due to an increase in cost of subscription and support revenue of $2.6 million, or 28%, and an increase in cost of professional services and other revenue of $3.0 million, or 24%. The increase in cost of subscription and support revenue primarily reflected $1.4 million in increased salaries and benefits costs and stock-based compensation due to increased headcount in our customer support organization to support our growing customer base and $0.7 million of third-party hosting costs as we increased our data center capacity to migrate customers to our current digital platform and to support our customer growth, $0.3 million related to the

 

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amortization of acquired intangible assets and $0.6 million related to facilities and other overhead costs partially offset by a decrease of $0.5 million in third-party consulting services. The increase in cost of professional services and other revenue primarily reflected $3.1 million in increased salaries and benefits costs and stock-based compensation due to increased headcount in our professional services organization to support our growing customer base and to support customers migrating to our current digital platform, $0.5 million related to facilities and other overhead costs, partially offset by a decrease of $0.9 million of deferred costs of revenue recognized in accordance with the Company’s revenue recognition policy. Cost of license revenue was nominal in both periods.

 

Total gross margin decreased in fiscal 2014 compared to fiscal 2013 due to the impact of revenue mix between our license, subscription and support and professional services and other revenue. This decline in total gross margin reflected growth in the number of customers accessing our software in the cloud, which has lower gross margins and the costs associated with third-party hosting facilities. In addition, this decline also reflected lower gross margin realized on our professional services and other revenue as we continued to expand our customer support and professional services organizations to support our growing customer base.

 

Fiscal 2012 Compared to Fiscal 2013. Total cost of revenue increased $9.8 million, or 82%, in fiscal 2013 compared to fiscal 2012, due to an increase in cost of subscription and support revenue of $5.8 million, or 167%, and an increase in cost of professional services and other revenue of $4.1 million, or 49%. The increase in cost of subscription and support revenue primarily reflected $2.2 million in increased salaries and benefits costs and stock-based compensation due to increased headcount in our customer support organization to support our growing customer base and $2.5 million of third-party hosting costs as we increased our data center capacity to migrate customers to our current digital platform and to support our customer growth. The increase in cost of professional services and other revenue primarily reflected $3.6 million in increased salaries and benefits costs and stock-based compensation due to increased headcount in our professional services organization to support our growing customer base and to support customers migrating to our current digital platform, and $1.5 million of deferred costs of revenue recognized in accordance with the Company’s revenue recognition policy. Cost of license revenue was nominal in both periods.

 

Total gross margin decreased in fiscal 2013 compared to fiscal 2012 primarily due to our significant investments made to migrate customers to our current digital platform, and expansion of our customer support and professional services organizations to support our growing customer base, as well as the impact of revenue mix among our license, subscription and support and professional services and other revenue.

 

Operating Expenses

 

     Fiscal Year Ended
July 31,
    2012 to 2013
% Change
    2013 to 2014
% Change
 
     2012     2013     2014      
     (dollar amounts in thousands)              

Operating expenses

          

Research and development

   $ 10,922      $ 16,848      $ 22,273        54.3     32.2

Sales and marketing

     9,801        23,812        47,029        143.0     97.5

General and administrative

     4,033        5,885        14,415        45.9     144.9
  

 

 

   

 

 

   

 

 

     

Total operating expenses

   $ 24,756      $ 46,545      $ 83,717        88.0     79.9
  

 

 

   

 

 

   

 

 

     

Percentage of revenue

          

Research and development

     39.6     39.0     42.3    

Sales and marketing

     35.5     55.2     89.2