S-1 1 d563790ds1.htm S-1 S-1
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As filed with the Securities and Exchange Commission on October 1, 2013

Registration No. 333-            

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM S-1

REGISTRATION STATEMENT

 

UNDER

THE SECURITIES ACT OF 1933

 

 

 

BARRACUDA NETWORKS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   3577   83-0380411
(State or other jurisdiction of
incorporation or organization)
 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

 

 

 

3175 S. Winchester Blvd

Campbell, California 95008

(408) 342-5400

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

 

 

 

William D. “BJ” Jenkins, Jr.

Chief Executive Officer

Barracuda Networks, Inc.

3175 S. Winchester Blvd.

Campbell, California 95008

(408) 342-5400

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

 

 

 

Copies to:

 

Jeffrey D. Saper

Allison B. Spinner

Wilson Sonsini Goodrich & Rosati, P.C.

650 Page Mill Road

Palo Alto, California 94304

(650) 493-9300

 

Diane C. Honda

Vice President and General Counsel

Barracuda Networks, Inc.

3175 S. Winchester Blvd.

Campbell, California 95008

(408) 342-5400

 

Gordon K. Davidson

Jeffrey R. Vetter

William L. Hughes

Fenwick & West LLP

801 California Street

Mountain View, California 94041

(650) 988-8500

 

 

 

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

  $100,000,000   $12,880.00

 

 

 

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

 

 

PROSPECTUS (Subject to Completion)

Issued October 1, 2013

 

                Shares

 

LOGO

 

COMMON STOCK

 

 

 

Barracuda Networks, Inc. is offering                 shares of its common stock and the selling stockholders are offering                 shares. We will not receive any proceeds from the sale of shares by the selling stockholders. 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 intend to apply to list our common stock on the                 under the symbol “CUDA”.

 

 

 

We are an “emerging growth company” under the federal securities laws and are subject to reduced public company reporting requirements. Investing in our common stock involves risks. See the section titled “Risk Factors” beginning on page 13.

 

 

 

PRICE $             A SHARE

 

 

 

      

Price to

Public

    

Underwriting

Discounts
and

Commissions(1)

    

Proceeds to

Barracuda
Networks

    

Proceeds to

Selling

Stockholders

Per Share

     $              $                     $                  $            

Total

     $                      $                             $                          $                    

 

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

 

We, and the selling stockholders, have granted the underwriters the right to purchase up to                  additional shares of common stock to cover over-allotments.

 

The Securities and Exchange Commission and any state securities regulators have not 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                     , 2013.

 

 

 

MORGAN STANLEY    J.P. MORGAN    BofA MERRILL LYNCH

WILLIAM BLAIR

   LAZARD CAPITAL MARKETS    PACIFIC CREST SECURITIES        

 

                    , 2013


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TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1   

Risk Factors

     13   

Special Note Regarding Forward-Looking Statements

     41   

Market and Industry Data

     43   

Use of Proceeds

     44   

Dividend Policy

     44   

Capitalization

     45   

Dilution

     47   

Selected Consolidated Financial Data

     49   

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

     55   

Business

     88   
     Page  

Management

     108   

Executive Compensation

     116   

Certain Relationships and Related Party Transactions

     126   

Principal and Selling Stockholders

     131   

Description of Capital Stock

     133   

Shares Eligible for Future Sale

     138   

Material U.S. Federal Income Tax Consequences to Non-U.S. Holders

     141   

Underwriting

     145   

Legal Matters

     153   

Experts

     153   

Additional Information

     153   

Index to Consolidated Financial Statements

     F-1   
 

 

 

 

Neither we, the selling stockholders, nor the underwriters have authorized anyone to provide 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 and the selling stockholders 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.

 

Through and including                     , 2013 (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, the selling stockholders, 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 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 “Barracuda Networks,” “Barracuda,” “the company,” “we,” “us” and “our” in this prospectus refer to Barracuda Networks, Inc., and its subsidiaries. Our fiscal year end is February 28/29, and our fiscal quarters end on May 31, August 31, November 30 and February 28/29. Our fiscal years ended February 28, 2010, February 28, 2011, February 29, 2012 and February 28, 2013 are referred to herein as fiscal 2010, 2011, 2012 and 2013, respectively.

 

BARRACUDA NETWORKS, INC.

 

Overview

 

Barracuda designs and delivers powerful yet easy-to-use security and storage solutions. We offer cloud-connected solutions that help our customers address security threats, improve network performance and protect and store their data. Our solutions are designed to simplify IT operations for our customers, allowing them to enhance their return on technology investment. Our business model is built on the core values of speed and agility, which we apply to all aspects of our approach, including our technology innovations, the delivery and deployment of our solutions and responses to customer inquiries. This model has enabled us to be highly scalable in reaching a large number of potential customers. Since inception, we have sold our solutions to more than 150,000 customers located in more than 100 countries.

 

Our security and storage solutions are connected to our cloud services which enable continuous software updates, offsite redundancy and distributed capacity, and are offered on a subscription basis. Our solutions are delivered as cloud-connected appliances and virtual appliances, as well as cloud-only solutions. Our security solutions are designed to protect and optimize the performance of the most critical points within our customers’ IT infrastructures, including email servers, web applications, data centers and core networks. Our storage solutions are designed to backup and archive business-critical data and make such data accessible for purposes such as compliance, disaster recovery and business intelligence. Our storage solutions also allow users to securely and quickly access, share, synchronize and sign files from Internet-connected devices. Our solutions can be managed centrally in any size or type of deployment through integrated, easy-to-use web interfaces that support configuration, monitoring and reporting.

 

We design our solutions specifically for IT professionals in resource-constrained environments who seek to benefit from current and emerging trends in information technology such as the rapid growth in cloud computing, adoption of virtualization, proliferation of mobile devices and the associated explosion of data. Our customers work in all types of organizations, from mid-market businesses, governments and educational institutions, to departments or divisions within Fortune 2000 enterprises.

 

We nurture a culture that delivers value through simplicity to optimize our customers’ experiences. From the design of our solutions to our sales processes, customer support, manufacturing and delivery, we strive to make our solutions easy to purchase, install, maintain and update. We believe that Barracuda has become a highly visible and recognizable brand as a trusted IT partner. We design our solutions to be easy to use and to deploy without the need for special expertise or external support from IT specialists, and also to provide powerful capabilities that can be optimized to meet the requirements of resource-constrained environments. We employ

 

 

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a high-velocity sales model that incorporates a 30-day right to return, real-time order fulfillment and a simple, low-cost entry point to make our customers’ purchase decisions and deployments seamless, easy and efficient. Through our recurring subscription services, we provide our customers with up-to-date features, functionality and real-time security protection, eliminating the need for costly upgrades or additional software purchases. We answer our phones live 24x7x365, and endeavor to treat every customer call with the same high priority. Central to our culture is a focus on the long-term customer experience, including an ongoing dialogue with our customers to enhance our features and solutions. Our development and fulfillment processes rapidly deliver new services and functionality to our customers, enabling them to improve their time to value and return on technology investment through low total cost of ownership, easy integration and accelerated deployment of our security and storage solutions.

 

For fiscal 2011, 2012 and 2013, and for the six months ended August 31, 2013, our gross billings were $191.3 million, $233.2 million, $264.2 million and $150.5 million, respectively. For fiscal 2011, 2012 and 2013, and for the six months ended August 31, 2013, our total revenue was $142.1 million, $160.9 million, $198.9 million and $114.1 million, respectively. We believe that the subscription nature of our solutions provides us with enhanced financial visibility. Subscription revenue for fiscal 2011, 2012 and 2013 and for the six months ended August 31, 2013 represented approximately 63%, 73%, 70% and 69% of our total revenue, respectively. For fiscal 2011, 2012 and 2013, and for the six months ended August 31, 2013, net income (loss) to Barracuda was $3.0 million, $0.6 million, $(7.4) million and $(4.6) million, respectively. For fiscal 2011, 2012 and 2013, and for the six months ended August 31, 2013, our free cash flow, adjusted for acquisition costs and other non-recurring charges, was $34.4 million, $35.4 million, $41.1 million and $11.0 million, respectively.

 

Industry Background

 

Modern IT Trends Offer Attractive Benefits to All Organizations

 

Organizations are looking to take advantage of important technology trends, particularly the rapid growth of cloud computing, proliferation of mobile devices, widespread use of web applications like Facebook, LinkedIn, Twitter and YouTube and increased adoption of virtualization and software defined networking, or SDN. These advanced technology trends can be exploited by organizations to gain significant competitive advantages and to support core business operations, enable dramatic efficiency gains and open up new go-to-market channels and revenue opportunities.

 

The Confluence of IT Trends Creates a Set of Obstacles that IT Professionals Must Address

 

IT trends are significantly changing the way that IT infrastructures are designed, deployed and secured, creating a complex and rapidly evolving set of challenges that need to be addressed by IT professionals.

 

   

Escalating Security Threat Environment. Organizations face security threats from a variety of attackers that can result in organizational disruption, as well as the theft of sensitive information, and can cause financial and reputational damage. Organizations of all sizes are being forced to reexamine their security risks and technology investments as security threats evolve and increase in number, complexity, variety and severity.

 

   

Productivity and Security Challenges Posed by Web Applications. Organizations can benefit greatly from popular web applications, such as Facebook, LinkedIn, Twitter and YouTube, which enable new channels to communicate and collaborate with customers and business partners, as well as a means to market their products and recruit employees. In order to take advantage of these benefits, organizations need to safely enable the use of these applications within a secure infrastructure, such that only the right individuals are using the right set of applications for their business functions.

 

   

Explosion of Data and Increased Storage Consumption. The volume of digital information created and replicated worldwide is growing, and organizations are increasingly dependent on the availability

 

 

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of this information at all times. As a result, organizations cannot afford to lose access to business critical data and need a cost effective and scalable way to ensure that their data is being stored safely and can be recovered rapidly.

 

   

Constrained IT Budgets. Macroeconomic conditions have kept IT budgets under significant pressure and, despite recent innovations in the industry, security and storage infrastructures increasingly require greater investments to implement, run and manage. As a result, there is a need for security and storage environments to become vastly more efficient against the backdrop of constrained IT budgets.

 

Organizations Need a New Approach to IT in Resource-Constrained Environments

 

Rapidly changing dynamics in today’s IT landscape are forcing organizations of all sizes to evolve their IT strategies. Fortune 500 companies are better positioned to address these challenges as they typically have core IT departments that can comprise a significant number of highly skilled and specialized computer scientists and engineers, as well as IT budgets that can be in the billions of dollars. We believe that there are millions of underserved organizations without these resources. These organizations include small and mid-market businesses, governments, educational institutions and departments or divisions within Fortune 2000 enterprises. IT professionals within these organizations seek powerful yet easy-to-use solutions to address the challenges posed by these trends.

 

We believe most traditional software and hardware vendors have designed their products and business operations to cater primarily to the largest companies. These solutions typically fail to meet the needs of resource-constrained organizations in several key ways:

 

   

Complex to Deploy and Use. Traditional IT solutions often are difficult to install, require significant configuration and necessitate specialized services and technical support to get the systems up and running.

 

   

Marketing Optimized for Large Organizations. Traditional IT solution vendors tend to focus marketing efforts primarily on high-touch, senior level interactions with a smaller number of large customers. As a result, IT professionals within resource-constrained organizations are frequently challenged to work effectively with these vendors to identify the products they require to solve their problems.

 

   

Lengthy, High-Touch Sales Cycle. The complexity of traditional IT solutions and the requirement for customers to tailor traditional IT solutions to their needs lead to longer sales cycles, prolonging the period of time before customers can solve their problems.

 

   

Lengthy Manufacturing and Fulfillment. Solutions from traditional IT vendors often have long delivery and installation times. In addition, vendors periodically experience delivery delays due to the inability of their supply chain to meet quality and delivery requirements consistently.

 

   

Lack of Investment Protection. To meet increasing performance and solution requirements, customers often are forced to perform “forklift” system upgrades or purchase new software licenses.

 

   

Inadequate Customer Support. Traditional IT solution vendors often rely heavily on self-service telephone support and outsourced customer support staff located in remote geographies. This approach can lead to an inadequate and frustrating customer support experience and lengthy time to resolution.

 

Our Market Opportunity

 

We operate in a number of established, multi-billion dollar segments across the security and storage markets that we estimate were approximately $30 billion in 2012, based on market data from established third-party market research firms. We define our security market as the web access management, secure email gateway,

 

 

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secure web gateway, intrusion prevention systems equipment, secure socket layer virtual private network, or VPN, equipment, VPN/firewall equipment and application delivery controllers segments. According to Gartner, estimated spending on these security segments was $14.4 billion worldwide in 2012. We define our storage market as the archival disk-based storage, archiving software, purpose-built backup appliances and data protection software and hardware segments. According to IDC, estimated spending on these storage segments was $15.9 billion worldwide in 2012. The market for the above security and storage segments for companies with less than 5,000 employees was $14.8 billion in 2012, according to a study we commissioned from Compass Intelligence. Compass Intelligence further estimates there were 20.8 million companies worldwide with less than 5,000 employees in 2012.

 

Our Business Model

 

Since our founding, we have designed our solutions, established our culture and built our business model to cater specifically to the needs of IT professionals in resource-constrained environments. We maintain control of the value chain across our solutions, marketing efforts, sales processes, manufacturing, delivery and customer support. This integrated model enables us to tailor the customer experience to deliver powerful yet easy-to-use security and storage solutions and high-value, recurring subscriptions to IT professionals in the way that works best for their organizations.

 

LOGO

 

Key elements of our business model include:

 

   

Powerful, Easy-to-Use Cloud-Connected Solutions. Our solutions are purpose-built to be easy to use and to deploy without the need for special expertise or external support from IT specialists. We believe that whether a solution is an entry-level or company-wide deployment, it should provide  powerful functionality and be easy to use. 

 

   

Trusted Brand and Innovative Marketing. We believe partners and customers alike have come to rely on Barracuda as a  trusted IT partner.  The principal focus of our marketing programs is to reach IT professionals within resource-constrained organizations and elevate their awareness of our comprehensive portfolio of security and storage solutions.

 

 

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High-Velocity Sales. We believe our  “product often sells itself”  based on its breadth of functionality, ease of use and simple pricing. With our global partner network of more than 5,000 distributors and value added resellers and our solutions and sales specialists, we offer straightforward, competitive pricing and a 30-day right to return, making our solutions easier to purchase.

 

   

Efficient Manufacturing and Fulfillment. We manage our operations through customized, streamlined processes, using our backend logistics software system that enables efficient manufacturing and physical and digital distribution of our solutions. This gives us the  speed and agility  to facilitate quick and precise responses to customer needs.

 

   

High-Value, Recurring Subscriptions. Our recurring subscription services provide our customers with  up-to-date features, functionality and real-time security protection as well as eliminate the need for future “forklift” system upgrades or additional software purchases.

 

   

Proactive, Live, “Insourced” Customer Support. We provide our customers with high-quality, proactive customer support, including remote support, preventative diagnostics and a direct line to Barracuda support technicians available 24x7x365—with  no phone trees —to answer customer calls and quickly and efficiently respond to their needs.

 

By offering a portfolio of solutions that includes cloud-connected appliances and virtual appliances, as well as cloud-only solutions, we are able to engineer functionality to align with, and take advantage of, the benefits of each form factor. This alignment increases overall value for our customers through more integrated solutions, and for our business through lower infrastructure and fewer materials costs. Our high-velocity sales model enables faster adoption of our solutions by customers and benefits our business by enabling us to improve our return on investment in sales and marketing. Our efficient manufacturing and fulfillment enables fast delivery of our solutions to customers and benefits our business through our ability to maintain low inventory levels and minimal overhead expenses. Our customer support proactively resolves customer issues and, we believe, results in higher renewal rates and new cross-sell opportunities for us. Our subscription model provides our customers with continuous and transparent access to the latest functionality enhancements and a highly visible, recurring revenue stream for our business.

 

Our Competitive Strengths

 

We believe we have a number of competitive advantages that will enable us to maintain and extend our leadership position including:

 

   

Vertically-Integrated Approach. Our vertically-integrated approach, in which we control the value chain across our solutions, enables us to tailor the customer experience to deliver powerful yet easy-to-use security and storage solutions to organizations in the way that works best for IT professionals in resource-constrained environments.

 

   

Hybrid, Cloud-Connected Solution Design. By offering a portfolio of solutions and multiple deployment options, we are able to engineer functionality optimally to align with the benefits of each form factor, thereby increasing overall value for our customers.

 

   

Large, Engaged Customer Base. Our broad customer base and solution portfolio provide us with a platform from which we can cross-sell solutions to our existing customers.

 

   

Leadership and Dedicated Focus. Since our founding, we have demonstrated our ability to execute our innovative business model successfully and establish a leadership position across multiple markets.

 

   

Innovative Technology and Intellectual Property. We continue to invest in research and development to ensure our solutions are powerful yet easy to use. Additionally, as of August 31, 2013, we had 43 issued patents and 63 patent applications pending in the United States.

 

 

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Strong Brand. We have built our brand with IT professionals in mind, and our brand is at the core of our business model. We believe Barracuda is widely recognized as a trusted IT partner who combines leading technology solutions with highly responsive customer service in order to simplify IT for IT professionals.

 

Our Strategy

 

Our goal is to maintain and extend our leadership position as a global provider of solutions that simplify complex IT problems for IT professionals in resource-constrained organizations. Key elements of our growth strategy include:

 

   

Increase Sales to New Customers. We plan to continue to engage with IT professionals through our differentiated business model in order to expand our customer base.

 

   

Increase Our Solution and Deployment Footprint within Our Existing Customer Base. We plan to pursue cross-sell opportunities with our diverse, worldwide customer base, especially as these customers look to consolidate IT suppliers to reduce overall IT spending.

 

   

Apply Our Business Model to New Technologies and Markets. We intend to focus on developing and acquiring technologies that fit within our business model and can address the needs of IT professionals.

 

   

Expand and Optimize Our Worldwide Channel and Partner Network. We intend to continue driving operating leverage by expanding our distributor and value added reseller network, especially in international regions where we can benefit from the local expertise of our partners.

 

Risks Affecting Us

 

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 must increase sales of our solutions to new customers and sell additional solutions to our existing customers;

 

   

we rely significantly on revenue from subscriptions, which may decline;

 

   

we experienced net losses on a GAAP basis in recent periods and may not achieve or maintain profitability in the future;

 

   

we must successfully continue to develop, manufacture and market solutions that respond promptly to meet our customers’ needs;

 

   

we may not gain broad market acceptance for new solutions;

 

   

we must generate significant volumes of sales leads;

 

   

our quarterly and annual operating results may vary and be unpredictable;

 

   

if we fail to cost-effectively promote or protect our brand, our business may be harmed;

 

   

we face intense competition; and

 

   

if we fail to comply with governmental laws and regulations, our business could be harmed.

 

Corporate Information

 

We were incorporated in 2003 in the State of California under the name Barracuda Networks, Inc. and in 2004 reincorporated in the State of Delaware. Our principal executive offices are located at 3175 S. Winchester

 

 

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Blvd., Campbell, California 95008, and our telephone number is (408) 342-5400. Our website is www.barracuda.com. Information contained on, or that can be accessed through, our website is not incorporated by reference into this prospectus, and you should not consider information on our website to be part of this prospectus.

 

Our design logos and the marks “Barracuda,” “Barracuda Networks,” “Copy” and “SignNow” are the property of Barracuda Networks, Inc. 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.

 

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. We will remain an emerging growth company until the earlier of the last day of the fiscal year following the fifth anniversary of the completion of this offering, the last day of the fiscal year in which we have total annual gross revenue of at least $1.0 billion, the date on which we are deemed to be a large accelerated filer (this means the market value of our common stock that is held by non-affiliates exceeds $700 million as of the end of the second quarter of that fiscal year), or the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period.

 

 

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THE OFFERING

 

Common stock offered by us

                    shares

Common stock offered by the selling stockholders

                    shares

Total common stock offered

                    shares

Over-allotment option

                    shares

Common stock to be outstanding after this offering

                    shares

Use of proceeds

  

The principal purposes of this offering are to increase our capitalization and financial flexibility, create a public market for our common stock, thereby enabling access to public equity markets by our stockholders and employees, facilitate an orderly distribution of shares for the selling stockholders and increase our visibility in the marketplace.

 

We intend to use the net proceeds we receive from this offering primarily for capital expenditures and general corporate purposes, including working capital, sales and marketing activities, product development and general and administrative matters. We also may use a portion of the net proceeds from this offering to make complementary acquisitions or investments. However, we do not have agreements or commitments for any specific acquisitions or investments at this time. See the section titled “Use of Proceeds.”

Proposed              symbol

   “CUDA”

 

The number of shares of our common stock to be outstanding after this offering is based on 137,637,591 shares of our common stock outstanding as of August 31, 2013, and excludes:

 

   

15,345,507 shares of common stock issuable upon the exercise of options outstanding as of August 31, 2013, with a weighted-average exercise price of $3.79 per share;

 

   

3,247,677 shares of common stock issuable upon the vesting of restricted stock units, or RSUs, outstanding as of August 31, 2013; and

 

   

2,403,521 shares of common stock reserved for future issuance under our 2012 Equity Incentive Plan and shares that become available under our 2012 Equity Incentive Plan, pursuant to provisions thereof that automatically increase the share reserves under the plans each year, as more fully described in the section titled “Executive Compensation—Employee Benefit Plans.”

 

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

 

   

the effectiveness of our amended and restated certificate of incorporation upon the completion of this offering;

 

   

the automatic conversion of all shares of our redeemable convertible preferred stock outstanding as of August 31, 2013 into an aggregate of 52,878,666 shares of common stock immediately prior to the completion of this offering;

 

   

no exercise of outstanding options or vesting of outstanding RSUs subsequent to August 31, 2013; and

 

   

no exercise of the underwriters’ over-allotment option.

 

 

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SUMMARY CONSOLIDATED FINANCIAL DATA

 

We have derived the summary consolidated statements of operations data for our fiscal years ended February 28, 2011, February 29, 2012 and February 28, 2013 from our audited consolidated financial statements included elsewhere in this prospectus. We have derived the summary consolidated statements of operations data for the six months ended August 31, 2012 and 2013 and the summary consolidated balance sheet data as of August 31, 2013 from our unaudited consolidated financial statements included elsewhere in this prospectus. Our unaudited consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements and, in the opinion of management, include all adjustments, which consist only of normal recurring adjustments, necessary for the fair presentation of those unaudited consolidated financial statements. Our historical results are not necessarily indicative of the results that may be expected in the future, and the results for the six months ended August 31, 2013 are not necessarily indicative of operating results to be expected for the fiscal year ending February 28, 2014 or any other period. You should read the following summary consolidated financial data together with the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements, related notes and other financial information included elsewhere in this prospectus.

 

    Year Ended February 28/29,     Six Months Ended
August 31,
 
    2011     2012     2013     2012     2013  
    (in thousands, except per share data)  

Consolidated Statements of Operations Data:

       

Revenue:

       

Appliance

  $ 52,477      $ 43,258      $ 59,528      $  27,775      $ 35,409   

Subscription

    89,655        117,662        139,403        67,258        78,658   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    142,132        160,920        198,931        95,033        114,067   

Cost of revenue(1)

    31,972        34,966        45,088        21,286        26,481   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    110,160        125,954        153,843        73,747        87,586   

Operating expenses:

         

Research and development(1)

    23,979        27,824        35,167        16,090        22,480   

Sales and marketing(1)

    69,963        84,885        102,329        49,302        57,228   

General and administrative(1)

    13,021        14,428        28,777        12,882        14,505   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    106,963        127,137        166,273        78,274        94,213   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    3,197        (1,183     (12,430     (4,527     (6,627

Other income (expense), net

    282        476        (839     (888     (450
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes and non-controlling interest

    3,479        (707     (13,269     (5,415     (7,077

Provision (benefit) for income taxes

    1,136        (453     (5,084     (1,293     (2,136
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net income (loss)

    2,343        (254     (8,185     (4,122     (4,941

Net loss attributable to non-controlling interest

    620        859        794        462        362   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Barracuda Networks, Inc.

  $ 2,963      $ 605      $ (7,391   $ (3,660   $ (4,579
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to common stockholders

  $ 2,281      $ 466      $ (9,203   $ (3,660   $ (4,579
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share attributable to common stockholders:

         

Basic

  $ 0.02      $ 0.00      $ (0.10   $ (0.04   $ (0.05
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  $ 0.02      $ 0.00      $ (0.10   $ (0.04   $ (0.05
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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    Year Ended February 28/29,     Six Months Ended
August 31,
 
    2011     2012     2013     2012     2013  
    (in thousands, except per share data)  

Weighted-average shares used to compute net income (loss) per share attributable to common stockholders:

         

Basic

    100,890        101,488        96,094        104,460        84,424   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

    134,943        136,066        96,094        104,460        84,424   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net income (loss) per share attributable to common stockholders:

         

Basic and diluted

      $ (0.05     $ (0.03
     

 

 

     

 

 

 

Pro forma weighted-average shares outstanding used to compute net income (loss) per share attributable to common stockholders:

         

Basic and diluted

        135,461          137,303   
     

 

 

     

 

 

 

 

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

 

     Year Ended February 28/29,      Six Months
Ended August 31,
 
       2011          2012          2013          2012          2013    
     (in thousands)  

Cost of revenue

   $ 84       $ 51       $ 146       $ 65       $  88   

Research and development

     848         766         2,059         883         1,264   

Sales and marketing

     627         527         1,182         499         700   

General and administrative

     417         527         5,400         3,187         3,076   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $ 1,976       $ 1,871       $ 8,787       $ 4,634       $  5,128   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     August 31, 2013  
     Actual     Pro
Forma(1)
    Pro Forma
as  Adjusted(2)
 
     (in thousands)  

Consolidated Balance Sheet Data:

      

Cash, cash equivalents and marketable securities

   $ 30,192      $ 30,192      $                

Working capital (deficit)

     (66,479     (66,479  

Total assets

     236,168        236,168     

Deferred revenue, current and non-current

     286,792        286,792     

Note payable, current and non-current

     4,983        4,983     

Redeemable convertible preferred stock

     167,554            

Common stock, including additional paid-in capital

     30,792        198,346     

Total stockholders’ deficit

     (257,671     (90,117  

 

  (1)   The pro forma column gives effect to the automatic conversion of all outstanding shares of our redeemable convertible preferred stock into 52,878,666 shares of common stock and the effectiveness of our amended and restated certificate of incorporation 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 August 31, 2013.

 

  (2)   The pro forma as adjusted column gives effect to the pro forma adjustments and the sale of shares of common stock by us in this offering, based on an assumed initial public offering price of $             per share, the midpoint of the estimated price range reflected on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

 

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Key Metrics

 

We monitor the following key metrics to help us evaluate growth trends, establish budgets and assess operational efficiencies. In addition to our results determined in accordance with U.S. generally accepted accounting principles, or GAAP, we believe the following non-GAAP and operational measures are useful in evaluating our operating performance.

 

    Year Ended February 28/29,     Six Months Ended
August 31,
 
    2011     2012     2013     2012     2013  
    (in thousands, except percentages and active subscribers)  

Gross billings

  $ 191,306      $ 233,211      $ 264,225      $ 129,653      $ 150,488   

Year-over-year percentage increase

      22     13       16

Year-over-year percentage increase on a constant currency basis(1)

      22     17       17

Adjusted EBITDA

  $ 46,200      $ 55,251      $ 49,095      $ 25,792      $ 23,425   

Adjusted EBITDA as a percentage of total revenue

    33     34     25     27     21

Free cash flow

  $ 34,422      $ 35,416      $ 41,085      $ 16,091      $ 11,023   

Free cash flow as a percentage of total revenue

    24     22     21     17     10

Active subscribers at period end

    134,807        156,976        179,952        167,674        190,700   

 

  (1)   In order to determine how our business performed exclusive of the effect of foreign currency fluctuations, we compare the percentage change in our gross billings from one period to another using a constant currency. To present this gross billings information, the current and comparative prior period results for entities that operate in other than U.S. dollars are converted into U.S. dollars at constant exchange rates. For example, the rates in effect at February 28, 2013, which was the last day of our prior fiscal year, were used to convert current and comparable prior period gross billings rather than the actual exchange rates in effect during the respective period.

 

Gross billings. We define gross billings as total revenue plus the change in deferred revenue and other adjustments, which primarily reflect returns and reserves with respect to the 30-day right to return we provide to our customers, as well as rebates for certain channel partner activities, during a particular period. We use gross billings as a performance measurement and a leading indicator of our future revenue, based on our business model of invoicing our customers at the time of sale of our solutions and recognizing revenue ratably over subsequent periods. Accordingly, we believe gross billings provide valuable insight into the sales of our solutions and the performance of our business. The gross billings we record in any period reflect sales to new customers plus renewals and additional sales to existing customers adjusted for returns, rebates and other offsets, which we do not expect to be recognized as revenue in future periods. In many cases, these returns, rebates and other offsets occur in periods different from the period of sale, and are unrelated to the marketing efforts leading to the initial sale, and therefore by adjusting for such offsets, we believe our computation of gross billings better reflects the effectiveness of our sales and marketing efforts.

 

Adjusted EBITDA. We define adjusted EBITDA as net income (loss) plus non-cash and non-operating charges, which includes acquisition and other non-recurring charges. Because of our business model, where revenue from gross billings is deferred and recognized ratably over subsequent periods, substantially all of our gross billings increase deferred revenue. Therefore, we believe that adjusting net income (loss) for increases in deferred revenue and increases in the associated deferred costs provides another indication of profitability from our operations. We use adjusted EBITDA to measure our performance, prepare our budgets and establish metrics for variable compensation. Because adjusted EBITDA excludes certain non-cash and non-operating charges, this measure enables us to eliminate the impact of items we do not consider indicative of our core operating performance and to better measure our performance on a consistent basis from period to period.

 

Free cash flow. We define free cash flow as cash provided by operating activities, less purchases of property and equipment plus acquisition and other non-recurring charges. We consider free cash flow to be a useful

 

 

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liquidity measure that considers the investment in cloud and corporate infrastructure required to support our business and the impact of acquisition related expenses and other non-recurring charges. We use free cash flow to assess our business performance and evaluate the amount of cash generated by our business after adjusting for purchases of property and equipment and acquisition and other non-recurring charges.

 

Active subscribers. We define an active subscriber as a discrete appliance, virtual appliance or cloud-only service that has at least one valid subscription that has not been terminated. We monitor the total number of active subscribers as a measure of the growth in our installed base, the success of our sales and marketing activities and the value that our solutions bring to our customers.

 

See “Selected Consolidated Financial Data—Key Metrics” for more information and reconciliations of gross billings to revenue, adjusted EBITDA to net income (loss) and free cash flow to cash flow provided by (used in) operating activities. Each of these metrics has been reconciled to the most directly comparable financial measure calculated and presented 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. The risks and uncertainties described below are not the only ones we face. 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 Our Industry

 

If we are unable to increase sales of our solutions to new customers and sell additional distinct solutions from our portfolio of solutions to our existing customers, our future revenue and operating results will be harmed.

 

Our future success depends on our ability to increase sales of our solutions to new customers as well as to increase sales of additional solutions to our existing customers. The rate at which new and existing customers purchase solutions depends on a number of factors, including those outside of our control, such as customers’ perceived need for security and storage solutions and general economic conditions. If our efforts to sell our solutions to new customers and additional solutions to our existing customers are not successful, our business and operating results may suffer.

 

Furthermore, customers that purchase our subscriptions have no contractual obligation to renew their contracts after the initial contract period, which typically ranges from one to five years, and we may not maintain our historical subscription renewal rates. The substantial majority of our subscriptions are for one-year periods. If renewal subscriptions decline, our revenue or revenue growth may decline and our business may suffer.

 

A substantial majority of our billings in any particular period are derived from sales to customers with whom we began to engage during that same period and therefore our sales may be variable and difficult to predict. Given this unpredictability, we may be unable to accurately forecast our sales in any given period. A failure to accurately predict the level of demand for our solutions may adversely impact our future revenue and operating results, and we are unlikely to forecast such effects with any certainty in advance.

 

We rely significantly on revenue from subscriptions, which may decline, and, because we recognize revenue from subscriptions over the term of the relevant subscription period, downturns or upturns in sales are not immediately reflected in full in our operating results.

 

Our subscription revenue accounted for approximately 70% and 69% of our total revenue for fiscal 2013 and the six months ended August 31, 2013, respectively. Customers that purchase our subscriptions have no contractual obligation to renew their contracts after the initial contract period, which typically ranges from one to five years, and we may not maintain our historical subscription renewal rates. The substantial majority of our subscriptions are for one-year periods. New or renewal subscriptions may decline or fluctuate as a result of a number of factors, including our customers’ level of satisfaction with our solutions and our customer support, the frequency and severity of subscription outages, our solution functionality and performance, the timeliness and success of product enhancements and introductions by us and those of our competitors, the prices of our solutions, the prices of solutions offered by our competitors or reductions in our customers’ spending levels. If new or renewal subscriptions decline, our revenue or revenue growth may decline, and our business may suffer. In addition, we recognize subscription revenue ratably over the term of the relevant subscription period, which typically ranges from one to five years. As a result, much of the revenue we report each quarter is the recognition of billings from subscriptions entered into during previous quarters. Consequently, a decline in new or renewal subscriptions in any one quarter will not be fully reflected in revenue in that quarter, but will negatively affect

 

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our revenue in future quarters. Accordingly, the effect of significant downturns in new or renewed sales of our solutions would not be reflected in full in our results of operations until future periods.

 

We have experienced net losses on a GAAP basis in recent periods and may not achieve or maintain profitability in the future. If we cannot achieve or maintain profitability, our financial performance will be harmed.

 

We have not been profitable on a quarterly or annual basis in recent periods. We experienced net losses on a GAAP basis for fiscal 2013 and the six months ended August 31, 2012 and August 31, 2013, respectively. While we have experienced revenue growth over these same periods, we may not be able to sustain or increase our growth or achieve profitability in the future or on a consistent basis. Over the past year, we have spent substantial amounts of time and money to develop new security and storage solutions and enhanced versions of our existing security and storage solutions to position us for future growth. Additionally, we have incurred substantial expenses and expended significant resources upfront to market, promote and sell our solutions. In fiscal 2013, we incurred substantial costs in connection with our CEO transition and other non-recurring charges. We also expect to continue to invest for future growth. In addition, as a public company, we will incur significant accounting, legal and other expenses that we did not incur as a private company.

 

As a result of our increased expenditures, we will have to generate and sustain increased revenue to achieve future profitability. Achieving profitability will require us to increase revenues, manage our cost structure and avoid significant liabilities. Revenue growth may slow, revenue may decline, or we may incur significant losses in the future for a number of possible reasons, including general macroeconomic conditions, increasing competition, a decrease in the growth of the markets in which we operate, or if we fail for any reason to continue to capitalize on growth opportunities. Additionally, we may encounter unforeseen operating expenses, difficulties, complications, delays and other unknown factors that may result in losses in future periods. If these losses exceed our expectations or our revenue growth expectations are not met in future periods, our financial performance will be harmed and our stock price could be volatile or decline.

 

If we cannot successfully execute on our strategy and continue to develop, manufacture and market solutions that respond promptly to the security and storage needs of our customers’ needs, our business and operating results may suffer.

 

The security and storage markets are characterized by constant change and innovation, and we expect them to continue to evolve rapidly. Moreover, many of our customers operate in markets characterized by rapidly changing technologies and business models, which require them to develop and manage increasingly complex enterprise networks, incorporating a variety of hardware, software applications, operating systems and networking protocols. Our historical success has been based on our ability to identify common customer needs and design solutions to address complex IT problems in email security and web security, and more recently in backup. To the extent we are not able to continue to identify IT challenges and execute our business model to timely and effectively design and market solutions to address these challenges, our business, operating results and financial condition will be adversely affected.

 

Although the market expects rapid introduction of new solutions or enhancements to respond to new threats and address evolving customer needs, the development of these solutions is difficult, and the timetable for commercial release and availability is uncertain as there are periods of delay between releases and the availability of new solutions. We may experience delays in the development and availability of new solutions and fail to timely meet customer needs. If we do not respond to the rapidly changing and rigorous needs of our customers by developing and making available on a timely basis new solutions or enhancements that can respond adequately to new security threats and address evolving customer needs, our competitive position and business prospects will be harmed.

 

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Additionally, the process of developing new technology is complex and uncertain, and if we fail to accurately predict customers’ changing needs and emerging technological trends or if we fail to achieve the benefits expected from our investments, our business could be harmed. We believe that we must continue to dedicate a significant amount of resources to our research and development efforts to maintain our competitive position and we must commit significant resources to developing new solutions before knowing whether our investments will result in solutions the market will accept. Our new solutions or solution enhancements could fail to attain sufficient market acceptance for many reasons, including:

 

   

delays in releasing our new solutions or enhancements to the market;

 

   

failure to accurately predict market demand or customer demands;

 

   

inability to protect against new types of attacks or techniques used by hackers;

 

   

defects, errors or failures in their design or performance;

 

   

negative publicity about their performance or effectiveness;

 

   

introduction or anticipated introduction of competing solutions by our competitors;

 

   

poor business conditions for our customers, causing them to delay IT purchases;

 

   

the perceived value of our solutions or enhancements relative to their cost;

 

   

easing of regulatory requirements around security or storage; and

 

   

reluctance of customers to purchase solutions incorporating open source software.

 

There can be no assurance that we will successfully identify new opportunities, develop and bring new solutions to market on a timely basis or achieve market acceptance of our solutions, or that solutions and technologies developed by others will not render our solutions or technologies obsolete or noncompetitive, all of which could adversely affect our business and operating results. If our new solutions or enhancements do not achieve adequate acceptance in the market, or if our new solutions do not result in increased subscriptions, our competitive position will be impaired, our revenue will be diminished and the negative impact on our operating results may be particularly acute because of the upfront research, development, marketing, sales and other expenses we incurred in connection with the new solution or enhancement.

 

We have recently introduced, and will continue to introduce, new security and storage solutions, such as the Barracuda Firewall, and we may not gain broad market acceptance for these new solutions.

 

Over the past year, we have released several new security and storage solutions and enhanced versions of our existing security and storage solutions, such as the Barracuda Firewall, to incorporate additional features, improve functionality or deliver other enhancements in order to meet our customers’ rapidly evolving demands. The return on our investments in these development efforts may be lower, or may develop more slowly, than we expect. Further, given their recent introduction, we cannot assure you that these solutions will gain broad market acceptance and that they will prove to be profitable in the longer term. Additionally, we intend to continue introducing new security and storage solutions to respond to the needs of our customers. If we fail to achieve high levels of market acceptance for these solutions or if market acceptance is delayed, we may fail to justify the amount of our investment in developing and bringing them to market, and our business, operating results and financial performance could be adversely affected.

 

Our business is substantially dependent on sales leads from Internet search engines and if we are unable to generate significant volumes of such leads, traffic to our websites and our revenue may decrease.

 

We generate a substantial portion of our sales leads through visits to our websites by potential customers interested in our solutions. Many of these potential customers find our websites by searching for security and storage solutions through Internet search engines, particularly Google. A critical factor in attracting potential customers to our websites is how prominently our websites are displayed in response to search inquiries. If we

 

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are listed less prominently or fail to appear in search result listings for any reason, visits to our websites by customers and potential customers could decline significantly and we may not be able to replace this traffic. Furthermore, if the costs of search engine marketing services, such as Google AdWords, increase we may be required to increase our sales and marketing expenses, which may not be offset by additional revenue, and our business and operating results could be adversely affected.

 

Our quarterly and annual operating results and key metrics have varied in the past and may continue to vary and be unpredictable, which may cause our stock price to fluctuate.

 

Our quarterly and annual operating results and key metrics have varied from period to period in the past, and we expect that they may continue to fluctuate as a result of a number of factors, many of which are outside of our control, including:

 

   

the timing and success of introductions of our new solutions;

 

   

changes in the growth rate of the security and storage markets;

 

   

changes in renewal rates for our subscriptions and our ability to cross-sell additional solutions in a period;

 

   

the timing of orders from our customers;

 

   

the timing of our marketing expenditures;

 

   

the mix of solutions sold;

 

   

fluctuations in demand for our products and services, particularly seasonal variations in customer spending patterns in more than one of our addressable markets;

 

   

our ability to control costs, including operating expenses, the costs of hardware and software components, and other manufacturing costs;

 

   

the budgeting cycles and purchasing priorities of our customers;

 

   

the timing of payments of sales commissions, bonuses or performance earnouts;

 

   

the timing and potential provision of valuation allowances against our deferred tax assets;

 

   

the level of perceived threats to network security, which may fluctuate from period to period;

 

   

government regulations and customer requirements surrounding data storage and protection;

 

   

fines, penalties or changes or increases in liabilities for regulatory actions, litigation or warranty claims, including our current voluntary disclosures to the U.S. Commerce Department, Bureau of Industry and Security, or BIS, and the U.S. Treasury Department, Office of Foreign Assets Control, or OFAC, as described in greater detail below;

 

   

deferral of orders from customers in anticipation of new solutions or solution enhancements announced by us or our competitors;

 

   

any significant changes in the competitive environment, including the entry of new competitors and increased price competition;

 

   

disruption in our supply chain and the availability of the components of our appliances;

 

   

levels of solution returns, particularly in connection with our 30-day right to return;

 

   

the timing of revenue recognition for our sales, which may be affected by the term of subscriptions;

 

   

increases or decreases caused by fluctuations in foreign currency exchange rates, since a significant portion of our revenues are received, and our expenses are incurred and paid, in currencies other than U.S. dollars;

 

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general economic conditions, both domestically and in our foreign markets, which impact purchasing patterns of customers; and

 

   

future accounting pronouncements or changes in our accounting policies.

 

Any one of the factors above, or the cumulative effect of some of the factors referred to above, may result in significant fluctuations in our quarterly or annual operating results, including fluctuations in our key financial metrics. This variability and unpredictability could result in our failing to meet our revenue, billings or operating results expectations or those of securities analysts or investors for any period. In addition, a significant percentage of our operating expenses are fixed in nature and based on forecasted revenue trends. Accordingly, in the event of revenue shortfalls, we are generally unable to mitigate the negative impact on operating results in the short term. If we fail to meet or exceed such expectations for these or any other reasons, our business and stock price could be materially adversely affected and we could face costly lawsuits, including securities class action suits.

 

We believe that our brand is integral to our success and if we fail to cost-effectively promote or protect our brand, our business and competitive position may be harmed.

 

We believe that cost-effectively promoting and maintaining awareness and integrity of our company and our brand are vital to achieving widespread acceptance of our existing and future solutions and are important elements in attracting new customers and retaining our existing customers, particularly as we seek to expand internationally. We believe that the importance of brand recognition will increase as competition in our market further intensifies. We have invested and expect to continue to invest substantial resources to promote and maintain our brand and generate sales leads, both domestically and internationally, but there is no guarantee that our brand development strategies will enhance the recognition of our brand or lead to increased sales. For example, we use signs and billboards in key locations such as airports where target customers often travel and vehicles wrapped in highly-visible branding. We also engage in activities such as promotional events and attending trade shows. Some of our existing and potential competitors have well-established brands with equal or greater recognition than we have. If our efforts to cost-effectively promote and maintain our brand are not successful, our operating results and our ability to attract and retain customers may be adversely affected. In addition, even if our brand recognition and loyalty increases, this may not result in increased use of our solutions or higher revenue. Moreover, if we fail to generate a sufficient volume of leads from these various activities, they may not be offset by revenues and our business and operating results could be adversely affected.

 

In addition, independent industry analysts often provide reviews of our solutions, as well as those of our competitors, and perception of our solutions in the marketplace may be significantly influenced by these reviews. We have no control over what these industry analysts report, and because industry analysts may influence current and potential customers, our brand could be harmed if they do not provide a positive review of our solutions or view us as a market leader.

 

We face intense competition in the security and storage markets and other markets in which we compete, which are characterized by constant change and innovation, and we may lack sufficient financial or other resources to maintain or improve our competitive position.

 

The markets for security and storage solutions are intensely competitive and are characterized by constant change and innovation, and we expect competition to increase in the future from larger, well-established competitors and new market entrants. Changes in the application, threat and technology landscape result in evolving customer requirements. Our main competitors in these markets fall into two categories:

 

   

Independent network security, storage and application delivery vendors such as Blue Coat Systems, Inc., Check Point Software Technologies, Ltd., CommVault Systems, Inc., EMC Corporation, F5 Networks, Inc., Fortinet, Inc., Imperva, Inc., Juniper Networks, Inc., Palo Alto Networks, Inc. and Symantec Corporation that offer competing solutions.

 

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Diversified IT suppliers such as Cisco Systems, Inc., Dell Inc., Hewlett-Packard Company, the McAfee division of Intel Corporation, or Intel, and International Business Machines that have acquired large security specialist vendors in recent years, that have software- or hardware-based storage solutions or that have the technical and financial resources to bring competitive solutions to the market.

 

In addition, we compete with companies that offer point solutions that compete with some of the features present in our platform. As our market grows, we believe it will attract more highly specialized vendors as well as larger vendors that may continue to acquire or bundle their solutions more effectively.

 

Many of our existing competitors have, and some of our potential competitors could have, substantial competitive advantages such as:

 

   

substantially greater financial, technical and other resources;

 

   

greater name recognition, stronger reputations and longer operating histories;

 

   

larger sales and marketing budgets;

 

   

broader distribution and established relationships with distribution partners and customers;

 

   

lower labor and development costs;

 

   

greater customer support resources;

 

   

larger and more mature intellectual property portfolios; and

 

   

greater resources to make acquisitions.

 

In addition, our larger competitors have substantially broader solution offerings and leverage their relationships based on other solutions or incorporate functionality into existing solutions to gain business in a manner that discourages customers and potential customers from purchasing our solutions, including through selling at low or negative margins, product bundling or closed technology platforms. Potential customers may also prefer to purchase from their existing suppliers rather than a new supplier regardless of solution performance, price or features. These larger competitors often have broader product lines and market focus and will therefore not be as susceptible to downturns in our markets, thereby reducing their overall risk profile as compared to ours. Many of our smaller competitors that specialize in providing protection from a single type of network security threat are often able to deliver these specialized network security solutions to the market more quickly than we can, which could reduce the addressable market for our new solutions or enhancements to existing solutions. Conditions in our market could change rapidly and significantly as a result of technological advancements, partnering by our competitors or continuing market consolidation. New start-up companies that innovate and large competitors that are making significant investments in research and development may invent similar or superior solutions and technologies that compete with our solutions and technology. Our current and potential competitors may also establish cooperative relationships among themselves or with third parties that may further enhance their ability to compete.

 

Some of our competitors have made acquisitions of businesses that may allow them to offer more directly competitive and comprehensive solutions than they had previously offered, such as Intel’s acquisition of McAfee. As a result of such acquisitions, our current or potential competitors might be able to adapt more quickly to new technologies and customer needs, devote greater resources to the promotion or sale of their solutions and services, initiate or withstand substantial price competition, take advantage of acquisition or other opportunities more readily, or develop and expand their solution offerings more quickly than we do.

 

Organizations may be more willing to incrementally add solutions to their existing IT infrastructure from competitors than to replace it with our solutions. These competitive pressures in our market or our failure to compete effectively may result in price reductions, fewer orders, reduced revenue and gross margins and loss of market share. Any failure to meet and address these factors could seriously harm our business and operating results.

 

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Our business is dependent on overall demand for security and storage solutions and therefore reduced security and storage solution spending or overall adverse economic conditions may negatively impact our business and operating results.

 

Our business depends on the overall demand for security and storage solutions. In addition, the purchase of our solutions is often discretionary. Weak global economic conditions, or a reduction in security and storage solution spending even if economic conditions improve, could adversely impact our business, financial condition and operating results in a number of ways, including longer sales cycles, lower prices for our solutions, higher default rates among our customers and channel partners, reduced subscription renewals and lower our sales levels. Market and financial uncertainty and instability in the United States and Europe could intensify or spread further, particularly if ongoing stabilization efforts prove insufficient. Deterioration of economic conditions, as well as economic uncertainty in the United States and Europe, may harm our business and operating results in the future.

 

We have made significant investments in recent periods to support our growth, including investments in our information technology, infrastructure and management team, and these investments may achieve delayed or lower than expected benefits, which could harm our operating results. Furthermore, if we do not effectively manage any future growth, or are unable to improve our systems and processes, our operating results will be adversely affected.

 

We continue to increase the breadth and scope of our offerings and, correspondingly, the breadth and scope of our operations. To support this growth, and to manage any future growth effectively, we must continue to improve and expand our information technology and financial infrastructure, our operating and administrative systems and our ability to manage headcount, capital and processes in an efficient manner. We have incurred, and will continue to incur, expenses as we invest in international operations and infrastructure such as the expansion of our sales and marketing presence in Asia Pacific and Japan, the addition of higher touch sales and marketing field resources to liaise with our channel partners as we continue to grow our sales both domestically and internationally and investments in software systems and additional data center resources to keep pace with the growth in the cloud and cloud-based solutions markets. In fiscal 2013, we made significant incremental investments in product development, corporate infrastructure and broadened distribution, including hiring a new chief executive officer and a number of other key executives across our organization, and we intend to continue to invest in development of our solutions, our infrastructure and sales and marketing. We are likely to recognize the costs associated with these investments earlier than some of the anticipated benefits, and the return on these investments may be lower, or may develop more slowly, than we expect. If we do not achieve the benefits anticipated from these investments, or if the achievement of these benefits is delayed, our operating results may be adversely affected.

 

We may be subject to fines or other penalties for potential past violations of U.S. export control and economic sanctions laws.

 

In late 2011, following a voluntary internal review of our compliance with U.S. export control and sanctions laws, our management team became aware that certain of our physical appliances had been sold indirectly into embargoed countries via our distributors and resellers, potentially in violation of U.S. export control and economic sanctions laws. These laws restrict or prohibit the sale of certain products, including our solutions, into certain countries, including Iran, Sudan and Syria. In addition, certain of our solutions incorporate encryption components and may be exported from the U.S. only with the required approvals; in the past, we may have exported products prior to receiving these required authorizations. We believe that these potential violations were inadvertent and occurred because we and certain of our resellers did not have sufficient compliance procedures in place to prevent the transactions at issue. As a result, we were unable to preclude certain of our channel partners and resellers from selling our solutions into countries subject to a U.S. embargo until late 2011.

 

Commencing in late 2011, we took a series of corrective actions intended to remediate the effect of any unauthorized past actions, including actions to permanently disable appliances located in sanctioned countries

 

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and termination of certain distributors and resellers. In addition, we believe that we have implemented systematic and process changes to our sales and distribution processes to block and prohibit sale or use of our solutions in sanctioned countries or to denied parties.

 

After completion of a comprehensive internal investigation conducted by outside counsel, we submitted voluntary disclosures regarding these matters to BIS and to OFAC. These disclosures summarized potential violations of export controls and economic sanctions laws, including reexports by third parties and provision of services to end users in embargoed countries including Iran, Sudan and Syria. The voluntary disclosures also summarized the remedial actions we have taken, including those described above, as well as the hiring of an export compliance manager and a general counsel with export controls experience, and the enhancement of employee training programs, periodic notices to our resellers and company-wide policies and procedures designed to help us comply with these laws.

 

The reviews of our voluntary disclosures by BIS and OFAC are still pending and in the early stages, and their reviews of our voluntary disclosures may continue for a long period of time. BIS and OFAC may conclude that our actions resulted in violations of U.S. export control and economic sanctions laws and warrant the imposition of penalties that could include fines, termination of our ability to export our products and/or referral for criminal prosecution. Any such penalties may be material to our financial results in the period in which they are imposed and could significantly affect our quarterly operating results for that quarter. The penalties may be imposed against us and/or our management. Also, disclosure of our conduct and any fines or other action relating to this conduct could harm our reputation and indirectly have a material adverse effect on our business, operating results and financial condition. We cannot predict when BIS and OFAC will complete their reviews or make determinations regarding the imposition of possible penalties. We also cannot assure you that additional violations will not be discovered or that our policies and procedures will be effective to prevent future violations.

 

Failure to comply with governmental laws and regulations could harm our business.

 

Our business is subject to regulation by various federal, state, local and foreign governmental agencies, including agencies responsible for monitoring and enforcing employment and labor laws, workplace safety, product safety, environmental laws, consumer protection laws, anti-bribery laws, import/export controls, federal securities laws and tax laws and regulations. In certain foreign jurisdictions, these regulatory requirements may be more stringent than those in the United States. Noncompliance with applicable regulations or requirements could subject us to investigations, sanctions, mandatory product recalls, enforcement actions, disgorgement of profits, fines, damages, civil and criminal penalties or injunctions. If any governmental sanctions are imposed, or if we do not prevail in any possible civil or criminal litigation, our business, operating results, and financial condition could be materially adversely affected. In addition, responding to any action will likely result in a significant diversion of management’s attention and resources and an increase in professional fees. Enforcement actions and sanctions could harm our business, operating results and financial condition.

 

We generate a significant amount of revenue from sales outside of North America, and we are therefore subject to a number of risks associated with international sales and operations.

 

Sales outside of North America represented approximately 26% and 27% of our total revenue for fiscal 2013 and the six months ended August 31, 2013, respectively. As a result, we must continue to hire and train experienced personnel to staff and manage our foreign operations. To the extent that we experience difficulties in recruiting, training, managing and retaining an international staff, and specifically staff related to sales management and sales personnel, we may experience difficulties in sales productivity in foreign markets. If we are not able to maintain successful channel partner and distributor relationships internationally or recruit additional companies to enter into strategic channel partner and distributor relationships, our future success in these international markets could be limited.

 

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Additionally, our international sales and operations are subject to a number of risks, including the following:

 

   

greater difficulty in enforcing contracts and accounts receivable collection and longer collection periods;

 

   

increased expenses incurred in establishing and maintaining office space and equipment for our international operations;

 

   

greater costs and expenses associated with international sales and operations;

 

   

management communication and integration problems resulting from cultural and geographic dispersion;

 

   

risks associated with trade restrictions and foreign legal requirements, including the importation, certification and localization of our solutions required in foreign countries;

 

   

greater risk of unexpected changes in regulatory practices, tariffs and tax laws and treaties;

 

   

the uncertainty of protection for intellectual property rights in some countries;

 

   

greater risk of a failure of foreign employees to comply with both U.S. and foreign laws, including export and antitrust regulations, the U.S. Foreign Corrupt Practices Act and any trade regulations ensuring fair trade practices;

 

   

heightened risk 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, or irregularities in, financial statements;

 

   

the potential for political unrest, terrorism, hostilities or war; and

 

   

multiple and possibly overlapping tax structures.

 

In addition, the expansion of our existing international operations and entry into additional international markets have required and will continue to require significant management attention and financial resources. These factors and other factors could harm our ability to gain future international revenues and, consequently, materially impact our business, operating results and financial condition.

 

We may acquire other businesses which could require significant management attention, disrupt our business, dilute stockholder value and adversely affect our operating results.

 

As part of our business strategy, we have in the past made, and may in the future make, acquisitions or investments in complementary companies, solutions and technologies that we believe fit within our business model and can address the needs of IT professionals. With respect to our previous acquisitions, we cannot ensure that we will be able to successfully integrate the technology and resources to increase subscriptions and grow revenue derived from these acquisitions. In the future, we may not be able to acquire and integrate other companies, solutions or technologies in a successful manner. We may not be able to find suitable acquisition candidates, and we may not be able to complete such acquisitions on favorable terms, if at all. Furthermore, we may not be able to find suitable acquisition candidates that enhance our subscription offerings. If we do complete acquisitions, we may not ultimately strengthen our competitive position or achieve our goals, including increases in subscriptions, and any acquisitions we complete could be viewed negatively by our customers, investors and industry analysts.

 

Future acquisitions may reduce our cash available for operations and other uses and could result in an increase in amortization expense related to identifiable assets acquired. We may have to pay cash, incur debt or issue equity securities to pay for any such acquisition, each of which could adversely affect our financial condition or the value of our common stock. The sale of equity or issuance of debt to finance any such acquisitions could result in dilution to our stockholders. The incurrence of indebtedness would result in increased fixed obligations and could also include covenants or other restrictions that would impede our ability to manage

 

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our operations. In addition, our future operating results may be impacted by performance earnouts or contingent bonuses. Furthermore, acquisitions may require large one-time charges and can result in increased debt or contingent liabilities, adverse tax consequences, additional stock-based compensation expense and the recording and subsequent amortization of amounts related to certain purchased intangible assets, any of which items could negatively impact our future results of operations. We may also record goodwill in connection with an acquisition and incur goodwill impairment charges in the future.

 

In addition, if we are unsuccessful at integrating such acquisitions, or the technologies associated with such acquisitions, into our company, the revenue and operating results of the combined company could be adversely affected. Any integration process may result in unforeseen operating difficulties and require significant time and resources, and we may not be able to manage the process successfully. In particular, we may encounter difficulties assimilating or integrating the companies, solutions, technologies, personnel or operations we acquire, particularly if the key personnel are geographically dispersed or choose not to work for us. Acquisitions may also disrupt our core business, divert our resources and require significant management attention that would otherwise be available for development of our business. We may not successfully evaluate or utilize the acquired technology or personnel, or accurately forecast the financial impact of an acquisition transaction, including accounting charges. If we fail to properly evaluate, execute or integrate acquisitions or investments, the anticipated benefits may not be realized, we may be exposed to unknown or unanticipated liabilities, and our business and prospects could be harmed.

 

Defects, errors or vulnerabilities in our solutions, the failure of our solutions to block a virus or prevent a security breach or a false detection of applications, viruses, spyware, vulnerability exploits, data patterns or URL categories could harm our reputation and adversely impact our operating results.

 

Because our solutions are complex, they have contained and may in the future contain design or manufacturing defects or errors that are not detected until after their commercial release and deployment by our customers. For example, from time to time, certain of our customers have reported defects in our solutions related to performance, functionality and compatibility that were not detected before shipping the solution. Additionally, defects may cause our solutions to be vulnerable to security attacks, cause them to fail to help secure networks or temporarily interrupt customers’ networking traffic. Because the techniques used by computer hackers to access or sabotage networks change frequently and generally are not recognized until launched against a target, our solutions may not be able to protect our customers’ networks. Our security solutions may also fail to detect or prevent viruses, worms or similar threats due to a number of reasons such as the evolving nature of such threats and the continual emergence of new threats that we may fail to add to our threat intelligence database or other virus databases in time to protect our customers’ networks. In addition, defects or errors in our subscription updates or our solutions could result in a failure to effectively update customers’ solutions and thereby leave our customers vulnerable to attacks. Our data centers and networks may experience technical failures and downtime, may fail to distribute appropriate updates, or may fail to meet the increased requirements of a growing customer base, any of which could temporarily or permanently expose our customers’ networks, leaving their networks unprotected against the latest security threats. Any defects, errors or vulnerabilities in our solutions could result in:

 

   

expenditure of significant financial and product development resources in efforts to analyze, correct, eliminate or work-around errors or defects or to address and eliminate vulnerabilities;

 

   

loss of existing or potential customers;

 

   

delayed or lost revenue;

 

   

delay or failure to attain market acceptance;

 

   

negative publicity, which will harm our reputation and brand;

 

   

an increase in warranty claims compared with our historical experience, or an increased cost of servicing warranty claims, either of which would adversely affect our operating results; and

 

   

litigation, regulatory inquiries, or investigations that may be costly and harm our reputation and brand.

 

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Furthermore, our security solutions may falsely detect applications, content or threats that do not actually exist based on our classifications of application type, virus, malware, vulnerability exploits, data or URL categories. This risk is increased by the inclusion of “heuristics” analysis in our solutions, which attempts to identify threats not based on any known signatures but based on characteristics or anomalies which indicate that a particular item may be a threat. These false positives, while typical in our industry, may impair the perceived reliability of our solutions and may therefore adversely affect market acceptance of our solutions. Also, our anti-spam and anti-malware solutions may falsely identify emails or programs as unwanted spam or potentially unwanted programs, or alternatively fail to properly identify unwanted emails or programs, particularly as spam emails or malware are often designed to circumvent anti-spam or anti-malware solutions. Parties whose emails or programs are blocked by our solutions may seek redress against us for labeling them as spammers or malware or for interfering with their business. In addition, false identification of emails or programs as unwanted spam or potentially unwanted programs may reduce the adoption of our solutions. If our solutions restrict important files or applications based on falsely identifying them as malware or some other item that should be restricted, this could adversely affect customers’ systems and cause material system failures. Any such false identification of important files or applications could result in damage to our reputation, negative publicity, loss of customers and sales, increased costs to remedy any problem and risk of litigation.

 

If our security measures are breached or unauthorized access to customer data is otherwise obtained or our customers experience data losses, our brand, reputation and business could be harmed and we may incur significant liabilities.

 

Our customers rely on our security and storage solutions to secure and store their data, which may include financial records, credit card information, business information, customer information, health information, other personally identifiable information or other sensitive personal information. A breach of our network security and systems or other events that cause the loss or public disclosure of, or access by third parties to, our customers’ stored files or data could have serious negative consequences for our business, including possible fines, penalties and damages, reduced demand for our solutions, an unwillingness of our customers to use our solutions, harm to our brand and reputation, and time-consuming and expensive litigation. The techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently, often are not recognized until launched against a target, and may originate from less regulated or remote areas around the world. As a result, we may be unable to proactively prevent these techniques, implement adequate preventative or reactionary measures, or enforce the laws and regulations that govern such activities. In addition, because of the large amount of data that we store for our customers, it is possible that hardware failures, human errors or errors in our systems could result in data loss or corruption, or cause the information that we collect to be incomplete or contain inaccuracies that our customers regard as significant. If our customers experience any data loss, or any data corruption or inaccuracies, whether caused by security breaches or otherwise, our brand, reputation and business could be harmed. Moreover, if a high profile security breach occurs with respect to another provider of cloud services, our clients and potential clients may lose trust in the security of the cloud business model generally, which could adversely impact our ability to retain existing clients or attract new ones.

 

If an actual or perceived breach of network security occurs in our internal systems, our services may be perceived as not being secure and clients may curtail or stop using our solutions.

 

As a provider of network security solutions, we are a high profile target and our networks and solutions may have vulnerabilities that may be targeted by hackers and could be targeted by attacks specifically designed to disrupt our business and harm our reputation. We will not succeed unless the marketplace continues to be confident that we provide effective network and security protection. If an actual or perceived breach of network security occurs in our internal systems it could adversely affect the market perception of our solutions. We may not be able to correct any security flaws or vulnerabilities promptly, or at all. In addition, such a security breach could impair our ability to operate our business, including our ability to provide subscription and support services to our customers. If this happens, our business and operating results could be adversely affected.

 

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Because our solutions could be used to collect and store personal information of our customers’ employees or customers, privacy concerns could result in additional cost and liability to us or inhibit sales of our solutions.

 

Personal privacy has become a significant issue in the United States and in many other countries where we offer our solutions. The regulatory framework for privacy issues worldwide is currently complex and evolving, and it is likely to remain uncertain for the foreseeable future. Many federal, state and foreign government bodies and agencies have adopted or are considering adopting laws and regulations regarding the collection, use and disclosure of personal information. In the United States, these include rules and regulations promulgated under the authority of the Federal Trade Commission, the Health Insurance Portability and Accountability Act of 1996 and state breach notification laws. Internationally, virtually every jurisdiction in which we operate has established its own data security and privacy legal framework with which we or our customers must comply, including the Data Protection Directive established in the European Union, or the EU, and the Federal Data Protection Act recently passed in Germany.

 

In addition to government regulation, privacy advocacy and industry groups may propose new and different self-regulatory standards that either legally or contractually apply to us. Because the interpretation and application of privacy and data protection laws are still uncertain, it is possible that these laws may be interpreted and applied in a manner that is in conflict with one another, and is inconsistent our existing data management practices or the features of our solutions. If so, in addition to the possibility of fines, lawsuits and other claims, we could be required to fundamentally change our business activities and practices or modify our software, which could have an adverse effect on our business. Any inability to adequately address privacy concerns, even if unfounded, or comply with applicable privacy or data protection laws, regulations and policies, could result in additional cost and liability to us, damage our reputation, inhibit sales and harm our business.

 

Furthermore, the costs of compliance with, and other burdens imposed by, the laws, regulations, and policies that are applicable to the businesses of our customers may limit the use and adoption of, and reduce the overall demand for, our solutions. Privacy concerns, whether valid or not valid, may inhibit market adoption of our solutions particularly in certain industries and foreign countries.

 

Our business is subject to the risks of warranty claims and product liability claims and given our 30-day right to return policy on many of our solutions, we may experience increased frequency of returns, any of which may adversely affect our operating results and financial performance.

 

Our solutions have contained and may contain undetected defects or errors, especially when first introduced or when new versions are released. Defects or errors could affect the performance of our solutions and could delay the development or release of new solutions or new versions of solutions, adversely affect our reputation and our customers’ willingness to buy solutions from us and adversely affect market acceptance or perception of our offerings. Any such errors or delays in releasing new solutions or new versions of solutions or allegations of unsatisfactory performance could cause us to lose revenue or market share, increase our service costs, cause us to incur substantial costs in redesigning the solutions, cause us to lose significant customers, subject us to liability for damages and divert our resources from other tasks, any one of which could materially and adversely affect our business, operating results and financial condition. Furthermore, we offer customers a 30-day right to return for many of our solutions which is integral to our sales model. If we experience appliance defects, or if we experience increased frequency of returns, our sales cycles, operating results and financial performance may be adversely affected.

 

In addition, the occurrence of hardware or software errors which resulted in increase warranty or support claims could result in increased expenses or require us to maintain greater warranty reserves which would have an adverse effect on our business and financial performance.

 

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Our ability to increase sales of our solutions is highly dependent on the quality of our customer support, and our failure to offer high-quality support would have an adverse effect on our business, reputation and operating results.

 

Our solutions are designed to be deployed by customers in resource-constrained IT environments. Our customers depend on our support services to assist them with questions as they implement our solutions within their IT infrastructure, and after deployment, our customers depend on our support organization to quickly resolve any issues relating to those solutions. A significant level of high-quality support is critical to ensure high rates of renewals and cross-selling of our solutions. If we do not effectively assist our customers in deploying our solutions, succeed in helping them quickly resolve post-deployment issues or provide effective ongoing support, it could adversely affect our ability to sell our solutions to existing customers, decrease our subscription renewal rates and harm our reputation with potential new customers, all of which would have an adverse effect on our business, reputation and operating results.

 

If we are unable to hire, retain, train and motivate qualified personnel and senior management, or if our senior management team is unable to perform effectively, our business could suffer.

 

Our future success depends, in part, on our ability to continue to attract and retain highly skilled personnel and the continued services of our senior management and other key personnel to execute on our business plan and to identify and pursue new opportunities and solution innovations. The loss of the services of our senior management or any of our key personnel, the inability to attract or retain qualified personnel, or delays in hiring required personnel, particularly in engineering and sales and marketing, could significantly delay or prevent the achievement of our development and strategic objectives, and may adversely affect our business, financial condition and operating results. Although we have entered into employment offer letters with our key personnel, these agreements have no specific duration and constitute at-will employment. In addition, many members of our management team have only joined us in the last year as part of our investment in the expansion of our business, including our chief executive officer, William D. Jenkins, Jr. Our productivity and the quality of our solutions may be adversely affected if we do not integrate and train our new employees quickly and effectively. Furthermore, if we are not effective in retaining our key personnel, our business could be adversely impacted and our operating results and financial condition could be harmed.

 

Competition for highly skilled personnel is often intense, especially in the San Francisco Bay Area where we have a substantial presence and need for highly skilled personnel. We may not be successful in attracting, integrating or retaining qualified personnel to fulfill our current or future needs. Also, to the extent we hire personnel from competitors, we may be subject to allegations that they have been improperly solicited, or that they have divulged proprietary or other confidential information, or that their former employers own their inventions or other work product.

 

We may be unsuccessful in managing or expanding our operations, which could adversely affect our operating results.

 

We have office locations throughout the United States and in various international locations, including Austria, India and the United Kingdom. If we are unable to effectively manage a large and geographically dispersed group of employees or to anticipate our future growth and personnel needs, our business may be adversely affected. As we expand our business, we add complexity to our organization and must expand and adapt our operational infrastructure and effectively coordinate throughout our organization. For example, we recently leased additional office space in San Jose, California, and intend to hire new employees and have relocated and will continue to relocate certain employees to this location from our headquarters in Campbell, California. We recently relocated our manufacturing to this new facility. As a result, we have incurred and expect to continue to incur additional expense and the additional location may disrupt our operations and distract our management team. Failure to manage any future growth effectively could result in increased costs, negatively impact our customers’ satisfaction with our solutions, and harm our operating results.

 

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Our customer-centric and collaborative corporate culture has contributed to our success, and if we cannot maintain this culture as we grow, we could lose the innovation, creativity and teamwork fostered by our culture, and our business may be harmed.

 

We believe that a critical contributor to our success has been our corporate culture, which we believe fosters innovation, creativity, a customer-centric focus, collaboration and loyalty. As we grow and change, we may find it difficult to maintain these important aspects of our corporate culture, which could limit our ability to innovate and operate effectively. Any failure to preserve our culture could also negatively affect our ability to retain and recruit personnel, continue to perform at current levels or execute on our business strategy.

 

We rely on third-party distributors and channel partners to fulfill substantially all of our sales orders. If our distributors and reseller channel partners fail to perform, our ability to sell our solutions will be limited, and, if we fail to optimize our distributor and reseller channel partner model going forward, our operating results will be harmed.

 

Substantially all of our sales orders are fulfilled by our channel partners, which include distributors and resellers. We also depend upon our channel partners to manage the customer sales process and to generate sales opportunities. To the extent our channel partners are unsuccessful in fulfilling our sales, managing the sales process or selling our solutions, or we are unable to enter into arrangements with, and retain a sufficient number of high-quality, motivated channel partners in each of the regions in which we sell our offerings, our ability to sell our solutions and operating results will be harmed. In order to support our growth strategy, we recently entered into an agreement with an additional distributor in North America. If we are unable to successfully develop our relationship with the new distributor, or if we experience reseller shifts between distributors or any channel conflict occurs, it could negatively impact our ability to meet our revenue and profitability goals.

 

We provide our channel partners with specific programs to assist them in selling our solutions, but there can be no assurance that these programs will be effective. In addition, our channel partners may be unsuccessful in marketing, selling and supporting our solutions. Our channel partners do not have minimum purchase requirements. They may also market, sell and support solutions that are competitive with ours, and may devote more resources to the marketing, sales and support of such solutions. Our agreements with our channel partners may generally be terminated for any reason by either party with advance written notice and our channel partners may stop selling our solutions at any time. We cannot assure you that we will retain these channel partners, that channel partners will sell our solutions effectively or that we will be able to secure additional or replacement channel partners. The loss of one or more of our significant channel partners or a decline in the number or size of orders from them could harm our operating results. In addition, our channel partner sales structure could subject us to lawsuits, potential liability, and reputational harm if, for example, any of our channel partners misrepresent the functionality of our solutions to customers or violate laws or our corporate policies.

 

We are exposed to fluctuations in currency exchange rates, which could negatively affect our financial condition and operating results.

 

Given our volume of international sales, a substantial portion of our total revenue is subject to foreign currency risk. As an example, during fiscal 2013 and the six months ended August 31, 2013, approximately 30% and 32% of our total revenue was generated from sales to customers located outside of the United States, respectively. Additionally, a strengthening of the U.S. dollar could increase the real cost of our solutions to our customers outside of the United States, which could adversely affect our financial condition and operating results. In addition, an increasing portion of our operating expenses is incurred outside of the United States, is denominated in foreign currencies, and is subject to fluctuations due to changes in foreign currency exchange rates. If we are not able to successfully manage or hedge against the risks associated with currency fluctuations, our financial condition and operating results could be adversely affected.

 

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We rely on a single source or a limited number of sources for some of our components. Insufficient supply and inventory may result in lost sales opportunities or delayed revenue, while excess inventory may harm our gross margins.

 

Our inventory management systems and related supply chain visibility tools may be inadequate to enable us to forecast accurately and effectively manage the supply of our components. Additionally, we carry very little inventory of our appliances or components, and we rely on our suppliers to deliver necessary components in a timely manner. Insufficient supply levels may lead to shortages that result in delayed revenue or loss of sales opportunities altogether as potential customers turn to competitors’ solutions that could be more readily available. Additionally, any increases in the time required to manufacture our solutions could adversely affect our business, brand, sales cycle and reputation. If we are unable to effectively manage our supply and inventory, our operating results could be adversely affected.

 

We currently depend on a single source or a limited number of sources for certain components used in the manufacture of our solutions. We are therefore subject to the risk of shortages in supply of these components and the risk that component suppliers discontinue or modify components used in our solutions. If these suppliers were to discontinue production of a necessary part or component, we would be required to expend resources and time in locating and integrating replacement parts or components from another vendor. In addition, the introduction by component suppliers of new versions of their components, particularly if not anticipated by us, could require us to expend resources to incorporate these new components into our solutions. Our reliance on a single source or a limited number of suppliers involves a number of additional risks, including risks related to:

 

   

supplier capacity constraints;

 

   

price increases;

 

   

timely delivery;

 

   

component quality;

 

   

failure of a key supplier to remain in business and adjust to market conditions;

 

   

delays in, or the inability to execute on, a supplier roadmap for components and technologies; and

 

   

natural disasters.

 

In addition, for certain components, we are subject to potential price increases and limited availability as a result of market demand for these components. In the past, unexpected demand for computer and network products has caused worldwide shortages of certain electronic parts. If similar shortages occur in the future, our business could be adversely affected. We rely on purchase orders rather than long-term contracts with these suppliers, and as a result we might not be able to secure sufficient components, even if they were available, at reasonable prices or of acceptable quality to build appliances in a timely manner and, therefore, might not be able to meet customer demands for our solutions, which would have a material and adverse effect on our business, operating results and financial condition.

 

Assertions by third parties of infringement or other violations by us of their intellectual property rights, or other lawsuits brought against us, could result in significant costs and substantially harm our business and operating results.

 

Patent and other intellectual property disputes are common in the IT markets in which we compete. Some companies in the IT markets in which we compete, including some of our competitors, own large numbers of patents, copyrights, trademarks and trade secrets, which they may use to assert claims of infringement, misappropriation or other violations of intellectual property rights against us. There also is a market for intellectual property rights and a competitor, or other entity, could acquire intellectual property rights and assert similar claims based on the acquired intellectual property. They may also assert such claims against our customers or channel partners. As the number of patents and competitors in our market increase and overlaps

 

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occur, claims of infringement, misappropriation and other violations of intellectual property rights may increase. From time to time, we face allegations that we, our customers or our channel partners have infringed, misappropriated and violated intellectual property rights, including allegations made by our competitors or by non-practicing entities. For example, on August 13, 2013, Parallel Networks, LLC, which we believe is a non-practicing entity, filed a lawsuit against us alleging that our appliances infringe two of their patents as more fully described in the section titled “Business—Legal Proceedings.” Our broad solution portfolio and the number of network and IT markets in which we compete further exacerbate this risk. Any claim of infringement, misappropriation or other violation of intellectual property rights by a third party, even those without merit, could cause us to incur substantial costs defending against the claim and could distract our management from our business.

 

In addition, future assertions of patent rights by third parties, and any resulting litigation, may involve non-practicing entities or other adverse patent owners who have no relevant revenue and against whom our own patents may therefore provide little or no deterrence or protection. We cannot assure you that we are not infringing or otherwise violating any third-party intellectual property rights.

 

An adverse outcome of a dispute may require us to pay substantial damages including treble damages if we are found to have willfully infringed a third party’s patents or copyrights; cease making, using, selling, licensing, importing or otherwise commercializing solutions that are alleged to infringe or misappropriate the intellectual property of others; expend additional development resources to attempt to redesign our solutions or otherwise to develop non-infringing technology, which may not be successful; enter into potentially unfavorable royalty or license agreements in order to obtain the right to use necessary technologies or intellectual property rights or have royalty obligations imposed by a court; and indemnify our customers, partners and other third parties. Furthermore, we have agreed in certain instances to defend our channel partners against third-party claims asserting infringement of certain intellectual property rights, which may include patents, copyrights, trademarks or trade secrets, and to pay judgments entered on such claims. Any damages or royalty obligations we may become subject to, any prohibition against our commercializing our solutions and any third-party indemnity we may need to provide, as a result of an adverse outcome could harm our operating results.

 

Our use of open source technology could impose limitations on our ability to commercialize our solutions.

 

We use open source software in our solutions, and although we monitor our use of open source software to avoid subjecting our solutions to conditions we do not intend, the terms of many open source licenses have not been interpreted by U.S. courts. As a result, there is a risk that these licenses could be construed in a way that could impose unanticipated conditions or restrictions on our ability to commercialize our solutions. In such an event, we could be required to seek licenses from third parties to continue offering our solutions, to make our proprietary code generally available in source code form, to re-engineer our solutions or to discontinue the sale of our solutions if re-engineering could not be accomplished on a timely basis, any of which could adversely affect our business, operating results and financial condition.

 

Failure to protect our proprietary technology and intellectual property rights could substantially harm our business and operating results.

 

The success of our business depends on our ability to protect and enforce our patents, trademarks, copyrights, trade secrets and other intellectual property rights. We attempt to protect our intellectual property under patent, trademark, copyright and trade secret laws, and through a combination of confidentiality procedures, contractual provisions and other methods, all of which offer only limited protection.

 

As of August 31, 2013, we had 43 issued patents in the United States, but this number is relatively small in comparison to some of our competitors and potential competitors. Additionally, as of August 31, 2013, we had 63 pending U.S. patent applications, and may file additional patent applications in the future. The process of obtaining patent protection is expensive and time-consuming, and we may not be able to prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. We may choose not to seek patent

 

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protection for certain innovations and may choose not to pursue patent protection in certain jurisdictions. Furthermore, it is possible that our patent applications may not issue as granted patents, that the scope of our issued patents will be insufficient or not have the coverage originally sought, that our issued patents will not provide us with any competitive advantages, and that our patents and other intellectual property rights may be challenged by others or invalidated through administrative process or litigation. In addition, issuance of a patent does not guarantee that we have an absolute right to practice the patented invention, or that we have the right to exclude others from practicing the claimed invention. As a result, we may not be able to obtain adequate patent protection or to enforce our issued patents effectively.

 

In addition to patented technology, we rely on our unpatented proprietary technology and trade secrets. Despite our efforts to protect our proprietary technology and trade secrets, unauthorized parties may attempt to misappropriate, reverse engineer or otherwise obtain and use them. The contractual provisions that we enter into with employees, consultants, partners, vendors and customers may not prevent unauthorized use or disclosure of our proprietary technology or intellectual property rights and may not provide an adequate remedy in the event of unauthorized use or disclosure of our proprietary technology or intellectual property rights. Moreover, policing unauthorized use of our technologies, solutions and intellectual property is difficult, expensive and time-consuming, particularly in foreign countries where the laws may not be as protective of intellectual property rights as those in the United States and where mechanisms for enforcement of intellectual property rights may be weak. We may be unable to determine the extent of any unauthorized use or infringement of our solutions, technologies or intellectual property rights.

 

From time to time, legal action by us may be necessary to enforce our patents and other intellectual property rights, to protect our trade secrets, to determine the validity and scope of the intellectual property rights of others or to defend against claims of infringement or invalidity. Such litigation could result in substantial costs and diversion of resources and could negatively affect our business, operating results, financial condition and cash flows. If we are unable to protect our intellectual property rights, we may find ourselves at a competitive disadvantage to others who need not incur the additional expense, time and effort required to create the innovative solutions that have enabled us to be successful to date.

 

We rely on the availability of third-party licenses for some of our solutions.

 

Some of our solutions include software or other intellectual property licensed from third parties. It may be necessary in the future to renew licenses relating to various aspects of these solutions or to seek new licenses for existing or new solutions. There can be no assurance that the necessary licenses will be available on acceptable terms, if at all. The inability to obtain certain licenses or other rights or to obtain such licenses or rights on favorable terms, could result in delays in solution releases until equivalent technology can be identified, licensed or developed, if at all, and integrated into our solutions and may have a material adverse effect on our business, operating results and financial condition. In addition, third parties may allege that additional licenses are required for our use of their software or intellectual property, and we may be unable to obtain such licenses on commercially reasonable terms or at all. Moreover, the inclusion in our solutions of software or other intellectual property licensed from third parties on a nonexclusive basis could limit our ability to differentiate our solutions from those of our competitors.

 

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.

 

Ensuring that we have adequate internal financial and accounting controls and procedures in place so that we can produce accurate financial statements on a timely basis is a costly and time-consuming effort. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP. We are in the very

 

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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 of the Sarbanes-Oxley Act. 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, 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, 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 as of the end of our fiscal year 2014. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting.

 

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 report on the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act 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. 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.

 

Additionally, 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, which may adversely affect our operating results and financial condition.

 

There are limitations on the effectiveness of controls, and the failure of our control systems may materially and adversely impact us.

 

We do not expect that disclosure controls or internal controls over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Failure of our control systems to prevent error or fraud could materially and adversely impact us.

 

Significant developments in IT infrastructure deployments, particularly cloud computing and other alternative IT infrastructure technologies, may materially adversely affect the demand for our products.

 

Developments or changes in IT infrastructure, such as the emergence of hosted cloud storage, software as a service and mobile data access are driving significant changes in storage and compute architectures and solution requirements as well as presenting significant challenges in the security market, which may materially and adversely affect our business and prospects in ways we do not currently anticipate. The impact of these trends on overall long-term growth patterns is uncertain, especially in resource-constrained environments. The emergence of cloud computing and other alternative IT infrastructure technologies, in which technology services are provided on a remote-access basis, may have a significant impact on the market for security and storage solutions and may result in rapid changes in customer demands. This could be the case even if such advances do not deliver all of the benefits of our solutions. If alternative models gain traction, any failure by us to develop new or enhanced technologies or processes, or to react to changes or advances in existing technologies, could adversely affect our business and operating results.

 

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If our solutions do not interoperate with our end-customers’ infrastructure, sales of our solutions could be negatively affected, which would harm our business.

 

Our solutions must interoperate with our end-customers’ existing infrastructure, which often have different specifications, utilize multiple protocol standards, deploy products from multiple vendors, and contain multiple generations of products that have been added over time. As a result, when problems occur in a network, it may be difficult to identify the sources of these problems. Any delays in identifying the sources of problems or in providing necessary modifications to our software or hardware could have a negative impact on our reputation and our customers’ satisfaction with our solutions, and our ability to sell solutions could be adversely affected. In addition, customers may require our solutions to comply with certain security or other certifications and standards. If our solutions are late in achieving or fail to achieve compliance with these certifications and standards, or our competitors achieve compliance with these certifications and standards, we may be disqualified from selling our solutions to such end-customers, or at a competitive disadvantage, which would harm our business, operating results and financial condition.

 

If our solutions fail to help our customers achieve and maintain compliance with government regulations and industry standards, our business and operating results could be materially adversely affected.

 

We generate a portion of our revenues from our solutions because they help organizations achieve and maintain compliance with government regulations and industry standards. For example, many of our customers purchase our security and storage solutions to help them comply with the security standards developed and maintained by the Payment Card Industry Security Standards Council, or the PCI Council, which apply to companies that process or store credit card information. Industry organizations like the PCI Council may significantly change their security standards with little or no notice, including changes that could make their standards more or less onerous for businesses. Governments may also adopt new laws or regulations, or make changes to existing laws or regulations, that could impact whether our solutions enable our customers to demonstrate, maintain or audit their compliance. If we are unable to adapt our solutions to changing regulatory standards in a timely manner, or if our solutions fail to expedite our customers’ compliance initiatives, our customers may lose confidence in our solutions and could switch to solutions offered by our competitors. In addition, if regulations and standards related to data security are changed in a manner that makes them less onerous, our customers may view government and industry regulatory compliance as less critical to their businesses, and our customers may be less willing to purchase our solutions. In either case, our business, financial condition and operating results may suffer.

 

Our sales to government entities are subject to a number of challenges and risks.

 

We sell to state and local governmental agency customers, particularly schools, and we may in the future increase sales to government entities. Sales to government entities are subject to a number of challenges and risks. Selling to government entities can be highly competitive, expensive and time consuming, often requiring significant upfront time and expense without any assurance that these efforts will generate a sale. Government certification requirements for solutions like ours may change and in doing so restrict our ability to sell into the federal government sector until we have attained the revised certification. Government demand and payment for our solutions may be impacted by public sector budgetary cycles and funding authorizations, with funding reductions or delays adversely affecting public sector demand for our solutions. Government entities may have statutory, contractual or other legal rights to terminate contracts with our distributors and resellers for convenience or due to a default, and any such termination may adversely impact our future operating results.

 

Our failure to generate the significant capital necessary to expand our operations and invest in new solutions could reduce our ability to compete and could harm our business.

 

We may need to raise additional funds in the future, and we may not be able to obtain additional debt or equity financing on favorable terms, if at all. If we raise additional equity financing, our stockholders may experience significant dilution of their ownership interests and the per share value of our common stock could

 

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decline. Furthermore, if we engage in debt financing, the holders of debt would have priority over the holders of our common stock, and we may be required to accept terms that restrict our ability to incur additional indebtedness. We may also be required to take other actions that would otherwise be in the interests of the debt holders and force us to maintain specified liquidity or other ratios, any of which could harm our business, operating results and financial condition. If we need additional capital and cannot raise it on acceptable terms, we may not be able to, among other things:

 

   

develop or enhance our solutions;

 

   

continue to expand our sales and marketing and research and development organizations;

 

   

acquire or invest in complementary businesses, solutions or technologies;

 

   

expand operations in the United States or internationally;

 

   

hire, train and retain employees; or

 

   

respond to competitive pressures or unanticipated working capital requirements.

 

Our failure to do any of these things could adversely affect our business, financial condition and operating results.

 

The terms of our existing credit facility 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.

 

Our existing credit facility 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 to take actions that may be in our best interests. Our credit facility requires us to satisfy specified financial covenants. 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 credit facility could result in an event of default under the credit facility. Upon the occurrence of an event of default, SVB could elect to declare all amounts outstanding under the credit facility 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 all of our assets, including our intellectual property, as collateral under the credit facility. If SVB accelerates the repayment of borrowings, if any, we may not have sufficient funds to repay our existing debt.

 

We are exposed to the credit risk of some of our distributors, resellers and customers and to credit exposure in weakened markets, which could result in material losses.

 

Most of our sales are on an open credit basis. Although we have programs in place that are designed to monitor and mitigate these risks, and our broad customer base and channel partner network mitigate these risks, we cannot assure you these programs will be effective in reducing our credit risks, especially as we expand our business internationally. If we are unable to adequately control these risks, our business, operating results and financial condition could be adversely affected.

 

If our estimates or judgments relating to our critical accounting policies are based on assumptions that change or prove to be incorrect, our operating results could fall below expectations of securities analysts and investors, resulting in a decline in our stock price.

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as discussed in greater detail in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the results of which form the basis for making

 

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judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our operating results may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our operating results to fall below the expectations of securities analysts and investors, resulting in a decline in our stock price. Significant assumptions and estimates used in preparing our consolidated financial statements include those related to revenue recognition, stock-based compensation, valuation of inventory, warranty liabilities and accounting for income taxes.

 

Unanticipated changes in effective tax rates or adverse outcomes resulting from examination of our income or other tax returns could adversely affect our operating results and financial condition.

 

We are subject to income taxes in the United States and various foreign jurisdictions, and our domestic and international tax liabilities will be subject to the allocation of expenses in differing jurisdictions. Our future effective tax rates could be subject to volatility or adversely affected by a number of factors, including:

 

   

changes in the valuation of our deferred tax assets and liabilities;

 

   

expected timing and amount of the release of tax valuation allowances;

 

   

expiration of, or detrimental changes in, research and development tax credit laws;

 

   

tax effects of stock-based compensation;

 

   

costs related to intercompany restructurings;

 

   

changes in tax laws, regulations, accounting principles or interpretations thereof; or

 

   

future earnings being lower than anticipated in countries where we have lower statutory tax rates and higher than anticipated earnings in countries where we have higher statutory tax rates.

 

In addition, we may be subject to audits of our income and sales taxes by the Internal Revenue Service and other foreign and state tax authorities. Outcomes from these audits could have an adverse effect on our operating results and financial condition.

 

Changes in financial accounting standards or practices may cause adverse, unexpected financial reporting fluctuations and affect our reported results of operations.

 

Changes in financial accounting standards or practices can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective. New accounting pronouncements and varying interpretations of accounting pronouncements have occurred and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our business and financial results.

 

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

 

A significant natural disaster, such as an earthquake, fire, flood or significant power outage could have a material adverse impact on our business, operating results and financial condition. Both our corporate headquarters and the location where our solutions are manufactured are located in the San Francisco Bay Area, a region known for seismic activity. In addition, natural disasters could affect our supply chain, manufacturing vendors, logistics providers’ or data center hosting providers’ ability to provide materials and perform services on a timely basis. In the event our or our service providers’ IT systems or manufacturing or logistics abilities are hindered by any of the events discussed above, shipments could be delayed, and our solutions could become unavailable resulting in missed financial targets, such as revenue and shipment targets, for a particular quarter. In addition, acts of terrorism and other geo-political unrest could cause disruptions in our business or the business of our supply chain, manufacturers, logistics providers, partners or customers or the economy as a whole. Any disruption in the business of our supply chain, manufacturers, logistics providers, data center hosting partners or

 

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customers that impacts sales at the end of a fiscal quarter could have a significant adverse impact on our quarterly results. All of the aforementioned risks may be further increased if the disaster recovery plans for us and our suppliers prove to be inadequate. To the extent that any of the above should result in delays or cancellations of customer orders, or the delay in the manufacture, deployment or shipment of our solutions, our business, financial condition and operating results would be adversely affected.

 

If we fail to comply with environmental requirements, our business, financial condition, operating results and reputation could be adversely affected.

 

We are subject to various environmental laws and regulations including laws governing the hazardous material content of our solutions and laws relating to the collection of and recycling of electrical and electronic equipment. Examples of these laws and regulations include the EU Restrictions of Hazardous Substances Directive, or RoHS, and the EU Waste Electrical and Electronic Equipment Directive, or WEEE, as well as the implementing legislation of the EU member states. Similar laws and regulations have been passed or are pending in China, South Korea, Norway and Japan and may be enacted in other regions, including in the United States, and we are, or may in the future be, subject to these laws and regulations.

 

The EU RoHS and the similar laws of other jurisdictions ban the use of certain hazardous materials such as lead, mercury and cadmium in the manufacture of electrical equipment, including our solutions. Currently, we and other manufacturers of our hardware appliances and major component part suppliers comply with the EU RoHS requirements. However, if there are changes to this or other laws (or their interpretation) or if new similar laws are passed in other jurisdictions, we may be required to re-engineer our solutions to use components compatible with these regulations. This re-engineering and component substitution could result in additional costs to us or disrupt our operations or logistics.

 

The WEEE Directive requires electronic goods producers to be responsible for the collection, recycling and treatment of such solutions. Changes in interpretation of the directive may cause us to incur costs or have additional regulatory requirements to meet in the future in order to comply with this directive, or with any similar laws adopted in other jurisdictions.

 

Our failure to comply with past, present and future similar laws could result in reduced sales of our solutions, inventory write-offs, reputational damage, penalties and other sanctions, any of which could harm our business and financial condition. We also expect that our solutions will be affected by new environmental laws and regulations on an ongoing basis. To date, our expenditures for environmental compliance have not had a material impact on our results of operations or cash flows, and although we cannot predict the future impact of such laws or regulations, they will likely result in additional costs and may increase penalties associated with violations or require us to change the content of our solutions or how they are manufactured, which could have a material adverse effect on our business, operating results and financial condition.

 

New regulations related to conflict minerals may cause us to incur additional expenses and could limit the supply and increase the costs of certain metals used in the manufacturing of our appliances.

 

As a public company, we will be subject to new requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, that will require us to diligence, disclose and report whether or not our appliances contain conflict minerals. The implementation of these new requirements could adversely affect the sourcing, availability and pricing of the materials used in the manufacture of components used in our solutions. In addition, we will incur additional costs to comply with the disclosure requirements, including costs related to conducting diligence procedures to determine the sources of conflict minerals that may be used or necessary to the production of our appliances and, if applicable, potential changes to appliances, processes or sources of supply as a consequence of such verification activities. It is also possible that we may face reputational harm if we determine that certain of our appliances contain minerals not determined to be conflict free or if we are unable to alter our appliances, processes or sources of supply to avoid such materials.

 

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Risks Related to this Offering, the Securities Markets and Ownership of Our Common Stock

 

An active trading market for our common stock may never develop or be sustained.

 

We cannot assure you that an active trading market for our common stock will develop on that exchange or elsewhere or, if developed, that any market will be sustained. Accordingly, we cannot assure you of the likelihood that an active trading market for our common stock will develop or be maintained, the liquidity of any trading market, your ability to sell your shares of common stock when desired or the prices that you may obtain for your shares.

 

Our share price may be volatile, and you may be unable to sell your shares at or above the offering price.

 

Prior to this offering, there has been no public market for shares of our common stock. Technology stocks have historically experienced high levels of volatility. The trading price of our common stock is likely to be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control and may not be related to our operating performance. These fluctuations could cause you to lose all or part of your investment in our common stock. Factors that may cause the market price of our common stock to fluctuate include:

 

   

price and volume fluctuations in the overall stock market from time to time;

 

   

significant volatility in the market price and trading volume of technology companies in general, and of companies in our industry;

 

   

actual or anticipated changes in our results of operations or fluctuations in our operating results;

 

   

whether our operating results meet the expectations of securities analysts or investors;

 

   

actual or anticipated changes in the expectations of investors or securities analysts;

 

   

actual or anticipated developments in our competitors’ businesses or the competitive landscape generally;

 

   

developments or disputes concerning our intellectual property or other proprietary rights;

 

   

litigation or investigations involving us, our industry or both;

 

   

regulatory developments in the United States, foreign countries or both;

 

   

general economic conditions and trends;

 

   

major catastrophic events;

 

   

the expiration of market stand-offs or contractual lock-up agreements;

 

   

sales of large blocks of our stock; or

 

   

major changes in our board of directors or management or departures of key personnel.

 

In addition, if the market for technology stocks or the stock market in general experience a loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, operating results or financial condition. The trading price of our common stock might also decline in reaction to events that affect other companies in our industry even if these events do not directly affect us.

 

In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company. If our stock price is volatile, we may become the target of securities litigation. Securities litigation could result in substantial costs and divert our management’s attention and resources from our business, and this could have a material adverse effect on our business, operating results and financial condition.

 

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Sales of outstanding shares of our common stock into the market in the future could cause the market price of our common stock to drop significantly.

 

If our existing stockholders sell, or indicate an intent to sell, substantial amounts of our common stock in the public market after the contractual lock-up and other legal restrictions on resale lapse, the trading price of our common stock could decline. After this offering, approximately                 shares of common stock will be outstanding. Of these shares, the             shares of our common stock to be sold in this offering will be freely tradable, unless such shares are held by “affiliates,” as that term is defined in Rule 144 of the Securities Act of 1933, as amended, or the Securities Act.

 

Our directors, officers and holders of substantially all of our capital stock and securities convertible into capital stock are subject to a 180-day market stand-off or contractual lock-up agreements that prevents them from selling their shares prior to the expiration of the 180-day period. Morgan Stanley & Co. LLC. may, in its sole discretion, permit shares subject to the lock-up to be sold prior to its expiration. See the section titled “Shares Eligible for Future Sale—Lock-Up Agreements” for additional information.

 

After the market stand-offs and lock-up agreements pertaining to this offering expire, up to an additional                 shares will be eligible for sale in the public market,             of which are, based on the number of shares outstanding as of August 31, 2013 and after giving effect to the exercise of options and the sale of shares by the selling stockholders in connection with the completion of this offering, held by directors, executive officers and other affiliates and will be subject to volume limitations under Rule 144 under the Securities Act and various vesting agreements.

 

In addition, following the completion of this offering, we intend to file a registration statement to register all shares subject to options outstanding or reserved for future issuance under our equity compensation plans. If these additional shares are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline. See the section titled “Shares Eligible for Future Sale” for additional information.

 

If you purchase shares of our common stock in this offering, you will experience substantial and immediate dilution.

 

If you purchase shares of our common stock in this offering, you will experience substantial and immediate dilution of $         per share, based on an assumed initial public offering price of $         per share, which is the midpoint of the range as reflected on the cover page of this prospectus, because the price that you pay will be substantially greater than the net tangible book value per share of the common stock that you acquire. This dilution is due in large part to the fact that our founders and earlier investors paid substantially less than the initial public offering price when they purchased their shares of our capital stock. In addition, investors who purchase shares in this offering will contribute approximately     % of the total amount of equity capital raised by us through the date of this offering, but will only own approximately     % of our outstanding shares. In addition, we have issued options to acquire our common stock at prices significantly below the expected initial public offering price and we have unvested RSUs outstanding. To the extent outstanding options are ultimately exercised and RSUs vest, there will be further dilution to investors in this offering.

 

If securities analysts do not publish research or reports about our business, or if they downgrade our stock, the price of our stock could decline.

 

The trading market for our common stock could be influenced by any research and reports that securities or industry analysts publish about us or our business. We do not currently have, and may never obtain, research coverage by securities analysts. If no securities analysts commence coverage of our company, the trading price for our stock would be negatively impacted. In the event securities analysts cover our company and one or more of these analysts downgrade our stock or publish inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price and trading volume to decline.

 

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The concentration of ownership among our existing directors, executive officers and principal stockholders will provide them, collectively, with substantial control over us after this offering, which could limit your ability to influence the outcome of key transactions, including a change of control.

 

Our directors, executive officers and each of our stockholders who own greater than 5% of our outstanding common stock and their affiliates, in the aggregate, will own approximately     % of the outstanding shares of our common stock after this offering, based on the number of shares outstanding as of August 31, 2013 and after giving effect to the sale of shares by the selling stockholders in connection with this offering. As a result, these stockholders, if acting together, will be able to influence or control matters requiring approval by our stockholders, including the election of directors and the approval of mergers, acquisitions or other extraordinary transactions. They may also have interests that differ from yours and may vote in a way with which you disagree and which may be adverse to your interests. This concentration of ownership may have the effect of delaying, preventing or deterring a change of control of our company, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company and might ultimately affect the market price of our common stock.

 

We have broad discretion in the use of the net proceeds from our initial public offering and may not use them effectively.

 

We cannot specify with any certainty the particular uses of the net proceeds that we will receive from our initial public offering. Our management will have broad discretion in the application of the net proceeds, including working capital, possible acquisitions, and other general corporate purposes, and we may spend or invest these proceeds in a way with which our stockholders disagree. The failure by our management to apply these funds effectively could harm our business and financial condition, which could cause our stock price to decline. Pending their use, we may invest the net proceeds from our initial public offering in a manner that does not produce income or that loses value.

 

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, as amended, or the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Act, the listing requirements of the             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,” as defined in the JOBS Act. 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

 

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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.

 

However, for as long as we remain an “emerging growth company,” we may take advantage of certain exemptions from various reporting requirements that are applicable to 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, 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 shareholder 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 would cease to be an “emerging growth company” upon the earliest of: (i) the end of the fiscal year following the fifth anniversary of this offering, (ii) the first fiscal year after our annual gross revenues are $1.0 billion or more, (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt securities or (iv) as of the end of any fiscal year in which the market value of our common stock held by non-affiliates exceeded $700 million as of the end of the second quarter of that fiscal year.

 

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.

 

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 JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to 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, 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 shareholder 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 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

 

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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.

 

As an “emerging growth company” we have also chosen to take advantage of certain provisions of the JOBS Act that allow us to provide you with less information in this prospectus than would otherwise be required if we are not an “emerging growth company.” As a result, this prospectus includes less information about us than would otherwise be required if we were not an “emerging growth company” within the meaning of the JOBS Act, which may make it more difficult for you to evaluate an investment in our company.

 

We do not intend to pay dividends for 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 existing credit facility 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. Investors seeking cash dividends should not purchase our common stock.

 

We will incur increased costs as a result of being a public company.

 

As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, rules implemented by the SEC and the             require changes in corporate governance practices of public companies. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly. We will also incur additional costs associated with our public company reporting requirements. We expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified people to serve on our board of directors or as executive officers.

 

Provisions in our certificate of incorporation and bylaws and under Delaware law might discourage, delay or prevent a change of control of our company or changes in our management and, therefore, depress the trading price of our common stock.

 

Upon the completion of this offering, our amended and restated certificate of incorporation and amended and restated bylaws will contain provisions that could depress the trading price of our common stock by acting to discourage, delay or prevent a change of control of our company or changes in our management that the stockholders of our company may deem advantageous. These provisions:

 

   

establish a classified board of directors so that not all members of our board of directors are elected at one time;

 

   

authorize the issuance of “blank check” preferred stock that our board of directors could issue to increase the number of outstanding shares to discourage a takeover attempt;

 

   

prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;

 

   

prohibit stockholders from calling a special meeting of our stockholders;

 

   

provide that the board of directors is expressly authorized to make, alter or repeal our bylaws;

 

   

establish advance notice requirements for nominations for elections to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings; and

 

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provide that a state or federal court located within the State of Delaware will be the exclusive forum for any derivative action brought on our behalf, any action asserting a breach of fiduciary duty, any action asserting a claim against us arising under the Delaware General Corporation Law and certain other claims.

 

Additionally, we will be subject to 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 and which may discourage, delay or prevent a change of control of our company.

 

The provisions of our amended and restated certificate of incorporation and amended and restated bylaws 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. The provisions of our certificate of incorporation and bylaws or Delaware law may also have the effect of delaying or deterring a change in control, which could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.

 

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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 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 acceptance of recently introduced security and storage solutions;

 

   

beliefs and objectives for future operations;

 

   

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

 

   

our ability to attract and retain customers;

 

   

our ability to cross-sell 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 existing solutions;

 

   

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

 

   

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

 

   

our ability to continue to expand internationally;

 

   

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

 

   

sufficiency of cash to meet cash needs for at least the next 12 months;

 

   

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.

 

These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in the section titled “Risk Factors” and elsewhere in this prospectus. Moreover, we operate in very competitive and rapidly changing environments, and new risks emerge from time to time. It is not possible 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 our forward-looking statements.

 

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You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances described in the forward-looking statements will be achieved or occur. Moreover, neither we, nor any other person, assume responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation to publicly update 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 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.

 

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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 from various sources, including reports from Compass Intelligence, or Compass, Gartner, Inc., or Gartner, International Data Corporation, or IDC, and International Data Group, or IDG, on assumptions we have made based on such data and other similar sources and on our knowledge of the markets for our solutions. While we are not aware of any misstatements regarding any third-party information presented in this prospectus, estimates of third parties, particularly as they relate to projections, involve numerous assumptions, are subject to risks and uncertainties, and are subject to change based on various 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 third parties and by us.

 

The Gartner Reports described herein (the “Gartner Reports”), represent data, research opinion or viewpoints published as part of a syndicated subscription service, by Gartner, and are not representations of fact. Each Gartner Report speaks as of its original publication date (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, Competitive Landscape: Next-Generation Firewall Appliance Market, Worldwide, 2013, dated April 3, 2013, by Eric Ahlm.

 

  (2)   Gartner, Forecast: Enterprise Network Equipment by Market Segment, Worldwide, 2010-2017, 3Q13, by Christian Canales, Naresh Singh, Joe Skorupa and Severine Real.

 

  (3)   Gartner, Forecast: Information Security, Worldwide, 2011-2017, 2Q13 Update, by Ruggero Contu, Christian Canales and Lawrence Pingree.

 

 

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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, the midpoint of the 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. 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 the number of shares offered by us, as reflected on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions. We will not receive any proceeds from the sale of common stock by the selling stockholders.

 

The principal purposes of this offering are to increase our capitalization and financial flexibility, create a public market for our stock, thereby enabling access to the public equity markets by our stockholders and employees, facilitate an orderly distribution of shares for the selling stockholders and increase our visibility in the marketplace. We intend to use the net proceeds received from this offering primarily for capital expenditures and general corporate purposes, including working capital, sales and marketing activities, product development and general and administrative matters. At this time, we cannot quantify the amounts we intend to expend on any of these activities. However, with respect to capital expenditures, we expect to continue to invest in data center infrastructure to enable us to expand our cloud-based services and to invest to improve and expand our corporate headquarters and other domestic and worldwide facilities as well as continue to invest in our IT infrastructure. With respect to sales and marketing activities, we intend to continue to invest in our brand development and customer-focused marketing initiatives, including advertising and event marketing. We also may use a portion of the net proceeds from this offering to make complementary acquisitions or investments. However, we do not have agreements or commitments for any specific acquisitions or investments at this time.

 

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, as well as equity investments in marketable securities.

 

DIVIDEND POLICY

 

In October 2012, in connection with our recapitalization, we declared $130.0 million of cash dividends. See the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—The Recapitalization” for additional information. 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, if at all. 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 existing credit facility. 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, cash equivalents and marketable securities and capitalization as of August 31, 2013 on:

 

   

an actual basis;

 

   

a pro forma basis, giving effect to the automatic conversion of all outstanding shares of our redeemable convertible preferred stock into 52,878,666 shares of common stock and the effectiveness of our amended and restated certificate of incorporation 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 August 31, 2013; and

 

   

a pro forma as adjusted basis, giving effect to the pro forma adjustments and the sale of                 shares of common stock by us in this offering, based on an assumed initial public offering price of $         per share, the midpoint of the estimated 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 “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.

 

     August 31, 2013  
     Actual     Pro Forma     Pro Forma  as
Adjusted(1)
 
     (in thousands, except share and per share
data)
 

Cash, cash equivalents and marketable securities

   $ 30,192      $ 30,192      $                  
  

 

 

   

 

 

   

 

 

 

Note payable, current and non-current

   $ 4,983      $ 4,983      $     

Redeemable convertible preferred stock, $0.001 par value; 52,878,666 shares authorized, issued and outstanding, actual; no shares authorized, issued and outstanding, pro forma and pro forma as adjusted

     167,554            

Stockholders’ deficit:

      

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

                

Common stock, $0.001 par value; 160,000,000 shares authorized, 84,758,925 shares issued and outstanding, actual;                  shares authorized, 137,637,591 shares issued and outstanding, pro forma;                  shares authorized,                  shares issued and outstanding, pro forma as adjusted

     85        138     

Additional paid-in capital

     30,707        198,208     

Accumulated other comprehensive loss

     (1,351     (1,351  

Accumulated deficit

     (284,265     (284,265  
  

 

 

   

 

 

   

 

 

 

Total stockholders’ deficit, controlling interest

     (254,824     (87,270  

Total stockholders’ deficit, non-controlling interest

     (2,847     (2,847  
  

 

 

   

 

 

   

 

 

 

Total stockholders’ deficit

     (257,671     (90,117  
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ (85,134   $ (85,134   $     
  

 

 

   

 

 

   

 

 

 

 

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  (1)   The pro forma as adjusted information set forth 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 or decrease in the assumed initial public offering price of $         per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease each of cash and cash equivalents, additional paid-in capital, total stockholders’ deficit and total capitalization by approximately $         million, 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. Similarly, each increase or decrease of one million shares in the number of shares offered by us would increase or decrease, as applicable, cash and cash equivalents, additional paid-in capital, total stockholders’ deficit and total capitalization by approximately $         million, assuming an initial public offering price of $         per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions. The pro forma as adjusted 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.

 

The number of shares of our common stock set forth in the table above is based on 137,637,591 shares of our common stock outstanding as of August 31, 2013, and excludes:

 

   

15,345,507 shares of common stock issuable upon the exercise of options outstanding as of August 31, 2013, with a weighted-average exercise price of $3.79 per share;

 

   

3,247,677 shares of common stock issuable upon the vesting of RSUs outstanding as of August 31, 2013; and

 

   

2,403,521 shares of common stock reserved for future issuance under our 2012 Equity Incentive Plan and shares that become available under our 2012 Equity Incentive Plan, pursuant to provisions thereof that automatically increase the share reserves under the plans each year, as more fully described in the section titled “Executive Compensation—Employee Benefit 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 offering and the pro forma as adjusted net tangible book value per share of common stock immediately after the completion of this offering.

 

As of August 31, 2013, our pro forma net tangible book value was approximately $         million, or $         per share of common stock. Our pro forma 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 August 31, 2013, assuming the conversion of all outstanding shares of our redeemable convertible preferred stock into shares of our common stock.

 

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, the estimated midpoint of the estimated 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 net tangible book value as of August 31, 2013 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

      $            

Decrease in book value per share attributable to conversion of redeemable convertible preferred stock

   $               

Pro forma net tangible book value per share as of August 31, 2013, before giving effect to this offering

     

Increase 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 purchasing shares 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, the midpoint of the 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 purchasing shares 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.

 

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.

 

The following table summarizes, on a pro forma as adjusted basis as of August 31, 2013 after giving effect to (i) the automatic conversion of all of our redeemable convertible preferred stock into common stock, and (ii) the completion of this offering at an assumed initial public offering price of $         per share, the estimated midpoint of the estimated price range reflected on the cover page of this prospectus, the difference between

 

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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:

 

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

Existing stockholders

               $                             $                

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, the midpoint of the price range reflected on the cover page of this prospectus, would increase (decrease) 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 the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

To the extent that our outstanding options are exercised or RSUs vest, 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 set forth in the table above is based on 137,637,591 shares of our common stock outstanding as of August 31, 2013, and excludes:

 

   

15,345,507 shares of common stock issuable upon the exercise of options outstanding as of August 31, 2013, with a weighted-average exercise price of $3.79 per share;

 

   

3,247,677 shares of common stock issuable upon the vesting of RSUs outstanding as of August 31, 2013; and

 

   

2,403,521 shares of common stock reserved for future issuance under our 2012 Equity Incentive Plan and shares that become available under our 2012 Equity Incentive Plan, pursuant to provisions thereof that automatically increase the share reserves under the plans each year, as more fully described in the section titled “Executive Compensation—Employee Benefit Plans.”

 

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SELECTED CONSOLIDATED FINANCIAL DATA

 

We have derived the selected consolidated statements of operations data for our fiscal years ended February 28, 2011, February 29, 2012 and February 28, 2013 and the selected consolidated balance sheet data as of February 29, 2012 and February 28, 2013 from our audited consolidated financial statements included elsewhere in this prospectus. We have derived the selected consolidated statements of operations data for the fiscal years ended February 28, 2009 and 2010 and the selected consolidated balance sheet data as of February 28, 2009, 2010 and 2011 from our audited consolidated financial statements not included in this prospectus. We have derived the selected consolidated statements of operations data for the six months ended August 31, 2012 and 2013 and the selected consolidated balance sheet data as of August 31, 2013 from our unaudited consolidated financial statements included elsewhere in this prospectus. Our unaudited consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements and, in the opinion of management, include all adjustments, which consist only of normal recurring adjustments, necessary for the fair presentation of those unaudited consolidated financial statements. Our historical results are not necessarily indicative of the results that may be expected in the future, and the results for the six months ended August 31, 2013 are not necessarily indicative of operating results to be expected for the fiscal year ending February 28, 2014 or any other period. You should read the following selected consolidated financial data together with the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements, related notes and other financial information included elsewhere in this prospectus.

 

    Year Ended February 28/29,     Six Months Ended
August 31,
 
    2009     2010     2011     2012     2013         2012             2013      
    (in thousands, except per share data)  

Consolidated Statements of Operations Data:(1)

             

Revenue:

             

Appliance

  $ 46,584      $ 55,965      $ 52,477      $ 43,258      $ 59,528      $ 27,775      $ 35,409   

Subscription

    54,657        67,725        89,655        117,662        139,403        67,258        78,658   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    101,241        123,690        142,132        160,920        198,931        95,033        114,067   

Cost of revenue(2)

    19,826        25,315        31,972        34,966        45,088        21,286        26,481   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    81,415        98,375        110,160        125,954        153,843        73,747        87,586   

Operating expenses:

             

Research and development(2)

    13,022        19,691        23,979        27,824        35,167        16,090        22,480   

Sales and marketing(2)

    45,221        57,598        69,963        84,885        102,329        49,302        57,228   

General and administrative(2)

    15,748        12,104        13,021        14,428        28,777        12,882        14,505   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    73,991        89,393        106,963        127,137        166,273        78,274        94,213   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    7,424        8,982        3,197        (1,183     (12,430     (4,527     (6,627

Other income (expense), net

    1,211        1,067        282        476        (839     (888     (450
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes and non-controlling interest

    8,635        10,049        3,479        (707     (13,269     (5,415     (7,077

Provision (benefit) for income taxes

    3,197        5,486        1,136        (453     (5,084     (1,293     (2,136
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net income (loss)

    5,438        4,563        2,343        (254     (8,185     (4,122     (4,941

Net loss attributable to non-controlling interest

           1,165        620        859        794        462        362   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Barracuda Networks, Inc.

  $ 5,438      $ 5,728      $ 2,963      $ 605      $ (7,391   $ (3,660   $ (4,579
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to common stockholders:

  $ 4,161      $ 4,393      $ 2,281      $ 466      $ (9,203   $ (3,660   $ (4,579
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share attributable to common stockholders:

             

Basic

  $ 0.04      $ 0.04      $ 0.02      $ 0.00      $ (0.10   $ (0.04   $ (0.05
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  $ 0.04      $ 0.04      $ 0.02      $ 0.00      $ (0.10   $ (0.04   $ (0.05
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares used to compute net income (loss) per share attributable to common stockholders:

             

Basic

    98,226        99,176        100,890        101,488        96,094        104,460        84,424   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

    131,039        133,064        134,943        136,066        96,094        104,460        84,424   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net income (loss) per share attributable to common stockholders:

             

Basic and diluted

          $ (0.05     $ (0.03
         

 

 

     

 

 

 

Pro forma weighted-average shares outstanding used to compute net income (loss) per share attributable to common stockholders:

             

Basic and diluted

            135,461          137,303   
         

 

 

     

 

 

 

 

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  (1)   Certain amounts in fiscal 2009 and fiscal 2010 have been reclassified to conform to the current year presentation.
  (2)   Includes stock-based compensation expense as follows:

 

     Year Ended February 28/29,      Six Months
Ended
August  31,
 
     2009      2010      2011      2012      2013      2012      2013  
     (in thousands)  

Cost of revenue

   $ 49       $ 64       $ 84       $ 51       $ 146       $ 65       $ 88   

Research and development

     420         597         848         766         2,059         883         1,264   

Sales and marketing

     321         514         627         527         1,182         499         700   

General and administrative

     306         327         417         527         5,400         3,187         3,076   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $ 1,096       $ 1,502       $ 1,976       $ 1,871       $ 8,787       $ 4,634       $ 5,128   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

    February 28/29,     August  31,
2013
 
    2009     2010     2011     2012     2013    
    (in thousands)  

Consolidated Balance Sheet Data:

           

Cash, cash equivalents and marketable securities

  $ 70,678      $ 66,626      $ 100,187      $ 128,783      $ 31,645      $ 30,192   

Working capital (deficit)

    29,237        22,901        52,912        61,180        (67,797     (66,479

Total assets

    128,378        173,591        218,655        283,899        212,248        236,168   

Deferred revenue, current and non-current

    99,975        122,882        160,699        217,209        261,243        286,792   

Note payable, current and non-current

           1,431               5,295        5,094        4,983   

Redeemable convertible preferred stock

    40,010        40,010        40,010        40,010        167,554        167,554   

Common stock and additional paid-in capital

    3,177        10,522        13,377        13,479        23,108        30,792   

Total stockholders’ deficit

    (25,688     (10,682     (4,984     (7,583     (259,620     (257,671

 

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Key Metrics

 

We monitor the following key metrics to help us evaluate growth trends, establish budgets and assess operational efficiencies. In addition to our results determined in accordance with GAAP, we believe the following non-GAAP and operational measures are useful in evaluating our operating performance.

 

     Year Ended February 28/29,     Six Months Ended
August 31,
 
     2011     2012     2013     2012     2013  
     (in thousands, except active subscribers and percentages)  

Gross billings

   $ 191,306      $ 233,211      $ 264,225      $ 129,653      $ 150,488   

Year-over-year percentage increase

       22     13       16

Year-over-year percentage increase on a constant currency basis(1)

       22     17       17

Adjusted EBITDA

   $ 46,200      $ 55,251      $ 49,095      $ 25,792      $ 23,425   

Adjusted EBITDA as a percentage of total revenue

     33     34     25     27     21

Free cash flow

   $ 34,422      $ 35,416      $ 41,085      $ 16,091      $ 11,023   

Free cash flow as a percentage of total revenue

     24     22     21     17     10

Active subscribers as of period end

     134,807        156,976        179,952        167,674        190,700   

 

  (1)   In order to determine how our business performed exclusive of the effect of foreign currency fluctuations, we compare the percentage change in our gross billings from one period to another using a constant currency. To present this gross billings information, the current and comparative prior period results for entities that operate in other than U.S. dollars are converted into U.S. dollars at constant exchange rates. For example, the rates in effect at February 28, 2013, which was the last day of our prior fiscal year, were used to convert current and comparable prior period gross billings rather than the actual exchange rates in effect during the respective period.

 

Gross billings. We define gross billings as total revenue plus the change in deferred revenue and other adjustments which primarily reflect returns and reserves with respect to the 30-day right to return we provide to our customers, as well as rebates for certain channel partner activities, during a particular period. We use gross billings as a performance measurement and a leading indicator of our future revenue, based on our business model of invoicing our customers at the time of sale of our solutions and recognizing revenue ratably over subsequent periods. Accordingly, we believe gross billings provide valuable insight into the sales of our solutions and the performance of our business. The gross billings we record in any period reflect sales to new customers plus renewals and additional sales to existing customers adjusted for returns, rebates and other offsets, which we do not expect to be recognized as revenue in future periods. In many cases, these returns, rebates and other offsets occur in periods different from the period of sale, and are unrelated to the marketing efforts leading to the initial sale, and therefore by adjusting for such offsets, we believe our computation of gross billings better reflects the effectiveness of our sales and marketing efforts.

 

Adjusted EBITDA. We define adjusted EBITDA as net income (loss) plus non-cash and non-operating charges, which includes acquisition and other non-recurring charges. Because of our business model, where revenue from gross billings is deferred and recognized ratably over subsequent periods, substantially all of our gross billings increase deferred revenue. Therefore, we believe that adjusting net income (loss) for increases in deferred revenue and increases in the associated deferred costs provides another indication of profitability from our operations. We use adjusted EBITDA to measure our performance, prepare our budgets and establish metrics for variable compensation. Because adjusted EBITDA excludes certain non-cash and non-operating charges, this measure enables us to eliminate the impact of items we do not consider indicative of our core operating performance and to better measure our performance on a consistent basis from period to period.

 

Free cash flow. We define free cash flow as cash provided by operating activities, less purchases of property and equipment plus acquisition and other non-recurring charges. We consider free cash flow to be a useful liquidity measure that considers the investment in cloud and corporate infrastructure required to support our

 

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business and the impact of acquisition related expenses and other non-recurring charges. We use free cash flow to assess our business performance and evaluate the amount of cash generated by our business after adjusting for purchases of property and equipment and acquisition and other non-recurring charges.

 

Active subscribers. We define an active subscriber as a discrete appliance, virtual appliance or cloud-only service that has activated at least one valid subscription that has not been terminated. We monitor the total number of active subscribers as a measure of the growth in our installed base, the success of our sales and marketing activities and the value that our solutions bring to our customers.

 

Acquisition and Other Non-Recurring Charges

 

In calculating adjusted EBITDA and free cash flow, we also adjust for acquisition and other charges that we do not expect to recur in our continuing operating results. We believe that adjusting for these charges allows us to better compare adjusted EBITDA and free cash flow from period to period in order to assess the ongoing operating results of our business. We refer to costs related to our CEO transition, export compliance, acquisitions and option holder bonuses as our “acquisition and other non-recurring charges” throughout this prospectus. These costs consist of the following:

 

CEO transition. CEO transition costs include severance payments made to our former chief executive officer and related legal expenses, as well as recruitment and other fees related to the hiring of our new chief executive officer. These costs also include costs and bonuses related to the office of the CEO and bonuses for certain executives paid in connection with the transition. These costs are classified primarily as general and administrative expenses in our consolidated statements of operations.

 

Export compliance. Export compliance costs include legal expenses incurred in connection with an internal investigation of our export controls compliance procedures and the submission of our voluntary self-disclosures to the U.S. government in this regard. These costs are classified as general and administrative expenses in our consolidated statements of operations.

 

Acquisition costs. Acquisition costs include legal expenses incurred in acquiring the remaining outstanding equity of phion AG as well as contingent consideration payments made under the terms of certain acquisition agreements. The phion AG related legal costs are classified as general and administrative expenses and the contingent consideration payments are primarily classified as research and development expenses in our consolidated statements of operations.

 

Option holder bonuses. Option holder bonus costs include bonus payments made in lieu of dividends to employees who held fully vested options to acquire our common stock at the time of our October 2012 recapitalization. These costs impacted our research and development, sales and marketing and general and administrative expenses in our consolidated statements of operations.

 

The following tables present the details of our acquisition and other non-recurring charges and their impact on adjusted EBITDA and free cash flow.

 

    Year Ended
February  28/29,
    Six Months Ended
August 31,
 
        2011             2012             2013             2012             2013      
    (in thousands)  

Impact of acquisition and other non-recurring charges on adjusted EBITDA:

         

CEO transition

  $      $      $ 6,058      $ 1,412      $   

Export compliance

                  1,411        884        211   

Option holder bonuses

                  1,420                 

Acquisition costs

                  904        504        656   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total acquisition and other non-recurring charges

  $      $      $ 9,793      $ 2,800      $ 867   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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    Year Ended
February 28/29,
    Six Months Ended
August 31,
 
        2011             2012             2013             2012             2013      
    (in thousands)  

Impact of acquisition and other non-recurring charges on free cash flow:

         

CEO transition

  $      $      $ 4,108      $ 1,412      $ 1,946   

Export compliance

                                940   

Option holder bonuses

                  1,420                 

Acquisition costs

                  904        504        583   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total acquisition and other non-recurring charges

  $      $      $ 6,432      $ 1,916      $ 3,469   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Reconciliation of Non-GAAP Financial Measures

 

Our non-GAAP measures have limitations as analytical tools and you should not consider them in isolation or as a substitute for an analysis of our results under GAAP. There are a number of limitations related to the use of these non-GAAP financial measures versus their nearest GAAP equivalents. First, gross billings, adjusted EBITDA and free cash flow are not substitutes for total revenue, net income and cash provided by operating activities, respectively. Second, 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. Finally, adjusted EBITDA excludes some costs, namely, non-cash stock-based compensation and depreciation and amortization expense, which are recurring. Therefore adjusted EBITDA does not reflect the non-cash impact of stock-based compensation or working capital needs, that will continue for the foreseeable future.

 

The following tables reconcile the most directly comparable GAAP financial measure to each of these non-GAAP financial measures.

 

     Year Ended February 28/29,     Six Months Ended
August 31,
 
     2011     2012     2013     2012     2013  
     (in thousands)  

Gross billings:

          

Total revenue

   $ 142,132      $ 160,920      $ 198,931      $ 95,033      $ 114,067   

Total deferred revenue, end of period

     160,699        217,209        261,243        241,734        286,792   

Less: total deferred revenue, beginning of period

     (122,882     (160,699     (217,209     (217,209     (261,243

Add: deferred revenue adjustments

     11,357        15,781        21,260        10,095        10,872   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total change in deferred revenue and adjustments

     49,174        72,291        65,294        34,620        36,421   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross billings

   $ 191,306      $ 233,211      $ 264,225      $ 129,653      $ 150,488   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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     Year Ended February 28/29,     Six Months Ended
August 31,
 
     2011     2012     2013     2012     2013  
     (in thousands)  

Adjusted EBITDA:

          

Net income (loss) attributable to Barracuda Networks, Inc.

   $ 2,963      $ 605      $ (7,391   $ (3,660   $ (4,579

Total deferred revenue, end of period

     160,699        217,209        261,243        241,734        286,792   

Less: total deferred revenue, beginning of period

     (122,882     (160,699     (217,209     (217,209     (261,243

Less: total deferred costs, end of period

     (18,324     (29,254     (39,470     (35,347     (46,058

Total deferred costs, beginning of period

     13,261        18,324        29,254        29,254        39,470   

Other (income) expense, net

     (282     (476     839        888        450   

Provision (benefit) for income taxes

     1,136        (453     (5,084     (1,293     (2,136

Depreciation and amortization

     7,653        8,124        8,333        3,991        4,734   

Stock-based compensation

     1,976        1,871        8,787        4,634        5,128   

Acquisition and other non-recurring charges

                   9,793        2,800        867   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 46,200      $ 55,251      $ 49,095      $ 25,792      $ 23,425   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Year Ended February 28/29,     Six Months Ended
August 31,
 
   2011     2012     2013         2012             2013      
     (in thousands)  

Free cash flow:

          

Cash provided by operating activities

   $ 36,909      $ 43,926      $ 39,375      $ 15,718      $ 12,083   

Less: purchases of property and equipment

     (2,487     (8,510     (4,722     (1,543     (4,529

Acquisition and other non-recurring charges

                   6,432        1,916        3,469   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Free cash flow

   $ 34,422      $ 35,416      $ 41,085      $ 16,091      $ 11,023   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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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. The last day of our fiscal year is February 28/29. Our fiscal quarters end on May 31, August 31, November 30 and February 28/29. 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 above in the section titled “Risk Factors” and elsewhere in this prospectus.

 

Overview

 

Barracuda designs and delivers powerful yet easy-to-use security and storage solutions. We offer cloud-connected solutions that help our customers address security threats, improve network performance and protect and store their data. Our solutions are designed to simplify IT operations for our customers, allowing them to enhance their return on technology investment. Our business model is built on the core values of speed and agility, which we apply to all aspects of our approach, including our technology innovations, the delivery and deployment of our solutions and responses to customer inquiries.

 

We were founded in 2003 with the vision to design industry-leading solutions to solve mainstream IT problems efficiently and cost effectively, with a high level of customer support. We have built our broad solution portfolio through organic product development as well as through selective technology acquisitions. We launched our first commercial product, the Barracuda Spam & Virus Firewall, in October 2003. Since then, we have invested a substantial amount of resources to rapidly design and develop new purpose-built solutions for our portfolio. We launched our Web Filter in 2005, our Load Balancer in 2006, our Message Archiver in 2007, our first virtual appliances and Barracuda Email Security Service in 2010 and our Copy service, Application Delivery Controller and Barracuda Firewall solutions in 2013. We have also identified, acquired and integrated a number of complementary technologies in order to expand our solution portfolio. We acquired our capabilities for web application security in 2007, secure virtual private network in 2008, backup, disaster recovery and deduplication in 2008, next generation firewall and cloud-based web security in 2009 and eSignature in 2013. We will continue to evaluate complementary acquisitions or investments, although we do not have agreements or commitments for any specific acquisitions or investments at this time.

 

We derive revenue from sales of appliances and subscriptions. Revenue from the sale of our appliances includes hardware and a perpetual license. Subscription revenue is generated primarily from our subscription services such as our Barracuda Energize Updates as well as our cloud solutions—Barracuda Email Security Service, Barracuda Web Security Service and Barracuda Backup. Subscription revenue also includes revenue from fixed term licenses of our virtual appliance software support and maintenance. Our subscription terms range from one to five years, the substantial majority of which are for one-year periods. Subscriptions are billed in advance of the purchased subscription period. Renewal rates from subscriptions, on a dollars basis, have been 89%, 90% and 93% in fiscal 2011, 2012 and 2013, respectively.

 

We have a differentiated operating model that enables rapid adoption of our solutions and enhanced time to value for our customers. We employ a high-velocity sales model that incorporates a 30-day right to return, real-time order fulfillment and a simple, low-cost entry point. Our product and sales specialists work closely with prospective customers to answer questions and guide them to participate in our evaluation program. We fulfill sales of our solutions through our global partner network of over 5,000 distributors and value added resellers. Customers typically receive our solutions and can deploy and begin to realize value within 24 hours. We believe our solutions are highly price competitive, and our pricing includes many of the features and services others charge separately for, greatly simplifying and expediting our customers’ purchasing process. We manage our business with a culture and set of systems and processes that help us achieve a high degree of consistency and visibility, and focuses on sales productivity, marketing effectiveness and customer satisfaction.

 

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Our customer base represents a broad range of industries including automotive, education, electronics, financial services, food service, government, industrial manufacturing, medicine, media, real estate, retail, software and telecommunications. In fiscal 2013 and for the six months ended August 31, 2013, one distribution partner accounted for 13% and 17% of our total revenue, respectively. No customer or distribution partner accounted for greater than 10% of our total revenue in fiscal 2011 or 2012.

 

To support our goal of sustainable, long-term growth, we have made and continue to make significant incremental investments in product development, corporate infrastructure and broadened distribution. For example, in fiscal 2013, we hired a new chief executive officer and a number of other key executives across our organization. We also maintained a level of investment in brand development that we believed would continue to help us expand our reach. We intend to continue to invest in development of our solutions, our infrastructure and sales and marketing to drive long-term growth.

 

The growth of our business and our future success depend on many factors, including our ability to continue to expand our customer base, pursue cross-sale opportunities and grow revenues from our existing customer base, expand our distribution channels, particularly internationally, and continue to develop new solutions to promptly respond to our customers’ needs. While these areas represent significant opportunities for us, they also pose risks and challenges that we must successfully address in order to sustain the growth of our business and improve our operating results as more fully described in the section titled “—Factors Affecting our Performance” below.

 

Additionally, our quarterly and annual operating results and key metrics have varied from period to period in the past, and we expect that they may continue to fluctuate as a result of a number of factors, many of which are outside of our control, including the timing and success of introductions of our new solutions, changes in the growth rate of the security and storage markets, changes in renewal rates for our subscriptions and our ability to cross-sell additional solutions in a period, amongst others. This variability and unpredictability could result in our failing to meet our revenue, billings or operating results expectations or those of securities analysts or investors for any period.

 

Furthermore, our business depends on the overall demand for security and storage solutions. Weak global economic conditions, particularly market and financial uncertainty and instability in the United States and Europe, or a reduction in security and storage solution spending even if economic conditions improve, could adversely impact our business, financial condition and operating results in a number of ways. Additionally, we face significant competition across all of our market segments, and must continue to execute across all functions and add qualified personnel to succeed in these markets.

 

For fiscal 2011, 2012 and 2013, and for the six months ended August 31, 2013, our gross billings were $191.3 million, $233.2 million, $264.2 million and $150.5 million, respectively. For fiscal 2011, 2012 and 2013, and for the six months ended August 31, 2013, our total revenue was $142.1 million, $160.9 million, $198.9 million, and $114.1 million, respectively. We believe that the subscription nature of our solutions provides value to our customers and financial visibility to us. Subscription revenue for fiscal 2011, 2012 and 2013 and for the six months ended August 31, 2013 represented approximately 63%, 73%, 70% and 69% of our total revenue, respectively. For fiscal 2011, 2012 and 2013, and for the six months ended August 31, 2013, our net income (loss) to Barracuda was $3.0 million, $0.6 million, $(7.4) million and $(4.6) million, respectively. For fiscal 2011, 2012 and 2013, and for the six months ended August 31, 2013, our free cash flow, adjusted for acquisition costs and other non-recurring charges, was $34.4 million, $35.4 million, $41.1 million and $11.0 million, respectively.

 

Our Business Model

 

We invoice at the time of sale for the total price of the solutions we deliver, and we typically collect cash in 30 to 60 days. We refer to the total amount of invoices we issue in a period as gross billings. All of the gross billings we record are recognized as revenue ratably under GAAP, once all revenue recognition criteria have

 

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been met. Gross billings are initially recorded as deferred revenue, less reserves. The appliance component of our gross billings is recognized ratably as revenue over the estimated customer relationship period, which is typically three years, commencing upon the activation of the unit by the end customer. The subscription component of our gross billings is recognized ratably as revenue over the contractual period of the subscription. Because we bill in advance for the entire term, substantially all of our new and renewal gross billings increase our deferred revenue balance, which contributes significantly to our cash flow.

 

Key Metrics

 

We monitor the following key metrics to help us evaluate growth trends, establish budgets and assess operational efficiencies. In addition to our results determined in accordance with GAAP, we believe the following non-GAAP and operational measures are useful in evaluating our operating performance.

 

     Year Ended February 28/29,     Six Months Ended August 31,  
     2011     2012     2013           2012                 2013        
     (in thousands, except active subscribers and percentages)  

Gross billings

   $ 191,306      $ 233,211      $ 264,225      $ 129,653      $ 150,488   

Year-over-year percentage increase

       22     13       16

Year-over-year percentage increase on a constant currency basis (1)

       22     17       17

Adjusted EBITDA

   $ 46,200      $ 55,251      $ 49,095      $ 25,792      $ 23,425   

Adjusted EBITDA as a percentage of total revenue

     33     34     25     27     21

Free cash flow

   $ 34,422      $ 35,416      $ 41,085      $ 16,091      $ 11,023   

Free cash flow as a percentage of total revenue

     24     22     21     17     10

Active subscribers at period end

     134,807        156,976        179,952        167,674        190,700   

 

  (1)   In order to determine how our business performed exclusive of the effect of foreign currency fluctuations, we compare the percentage change in our gross billings from one period to another using a constant currency. To present this gross billings information, the current and comparative prior period results for entities that operate in other than U.S. dollars are converted into U.S. dollars at constant exchange rates. For example, the rates in effect at February 28, 2013, which was the last day of our prior fiscal year, were used to convert current and comparable prior period gross billings rather than the actual exchange rates in effect during the respective period.

 

Gross billings. We define gross billings as total revenue plus the change in deferred revenue and other adjustments which primarily reflect returns and reserves with respect to the 30-day right to return we provide to our customers, as well as rebates for certain channel partner activities, during a particular period. We use gross billings as a performance measurement and a leading indicator of our future revenue, based on our business model of invoicing our customers at the time of sale of our solutions and recognizing revenue ratably over subsequent periods. Accordingly, we believe gross billings provide valuable insight into the sales of our solutions and the performance of our business. The gross billings we record in any period reflect sales to new customers plus renewals and additional sales to existing customers adjusted for returns, rebates and other offsets, which we do not expect to be recognized as revenue in future periods. In many cases, these returns, rebates and other offsets occur in periods different from the period of sale, and are unrelated to the marketing efforts leading to the initial sale, and therefore by adjusting for such offsets, we believe our computation of gross billings better reflects the effectiveness of our sales and marketing efforts.

 

Gross billings increased 22% from fiscal 2011 to 2012 and 13% from fiscal 2012 to 2013. In addition, in the six months ended August 31, 2013, gross billings increased 16% over the six months ended August 31, 2012. The increase in gross billings was primarily driven by our continued ability to cross-sell additional solutions to existing customers and the growth in our renewal subscriptions as a result of our high level of customer retention. The increase was also due to continued investment in sales and marketing, which resulted in additional lead generation opportunities and associated new customer billings. When evaluating our gross billings from period to period, we also evaluate our gross billings for the two comparable periods using a fixed exchange rate, thereby excluding the effect of currency fluctuations.

 

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Adjusted EBITDA. We define adjusted EBITDA as net income (loss) plus non-cash and non-operating charges, which includes acquisition and other non-recurring charges. Because of our business model, where revenue from gross billings is recognized ratably over subsequent periods, substantially all of our gross billings increase deferred revenue. Therefore, we believe that adjusting net income (loss) for increases in deferred revenue and increases in the associated deferred costs provides another indication of profitability from our operations. We use adjusted EBITDA to measure our performance, prepare our budgets and establish metrics for variable compensation. Because adjusted EBITDA excludes certain non-cash and non-operating charges, this measure enables us to eliminate the impact of items we do not consider indicative of our core operating performance and to better measure our performance on a consistent basis from period to period.

 

Adjusted EBITDA increased from $46.2 million in fiscal 2011 to $55.3 million fiscal 2012 and decreased to $49.1 million in fiscal 2013. In addition, adjusted EBITDA decreased from $25.8 million for the six months ended August 31, 2012 to $23.4 million for the six months ended August 31, 2013. The fluctuations in adjusted EBITDA from period to period were based primarily upon changes in gross billings and our investments in research and development. Our adjusted EBITDA increased from fiscal 2011 to fiscal 2012 as a result of the growth in gross billings. Our adjusted EBITDA in fiscal 2013 decreased due to increased investment in research and development and sales and marketing. Specifically, in fiscal 2013, research and development headcount increased by 28% compared to fiscal 2012, and sales and marketing headcount increased 25% compared to fiscal 2012.

 

Free cash flow. We define free cash flow as cash provided by operating activities, less purchases of property and equipment plus acquisition and other non-recurring charges. We consider free cash flow to be a useful liquidity measure that considers the investment in cloud and corporate infrastructure required to support our business and the impact of acquisition related expenses and other non-recurring charges. We use free cash flow to assess our business performance and evaluate the amount of cash generated by our business after adjusting for purchases of property and equipment and acquisition and other non-recurring charges.

 

Free cash flow increased from $34.4 million in fiscal 2011 to $35.4 million fiscal 2012 and to $41.1 million in fiscal 2013. In addition, free cash flow decreased from $16.1 million for the six months ended August 31, 2012 to $11.0 million for the six months ended August 31, 2013. The decrease in free cash flow in the six months ended August 31, 2013 was driven primarily by $3.0 million in capital expenditures to further expand our cloud infrastructure, as well as expenses and investments related to the move of our manufacturing to our new San Jose facility and other changes in working capital.

 

Active subscribers. We define an active subscriber as a discrete appliance, virtual appliance or cloud-only service that has activated at least one valid subscription that has not been terminated. We monitor the total number of active subscribers as a measure of the growth in our installed base, the success of our sales and marketing activities and the value that our solutions bring to our customers. As of fiscal 2011, 2012 and 2013 and the six months ended August 31, 2013, we had 134,807, 156,976, 179,952 and 190,700 active subscribers, respectively. The increase in active subscribers over these periods is primarily related to the increase in the renewal rate of our subscriptions, which has increased on a dollar basis from 89% in fiscal 2011 to 93% in fiscal 2013, as well as our ability to attract and retain new customers.

 

Factors Affecting our Performance

 

We believe that our future success will be dependent on many factors, including our ability to increase sales of our solutions to new customers as well as to increase sales of additional solutions to our existing customers and to add incremental capabilities that will solve emerging customer issues. While these areas present significant opportunity, they also present risks that we must manage to ensure successful results. See the section titled “Risk Factors.” Additionally, we face significant competition across all of our market segments and must continue to execute across all functions and add qualified personnel to succeed in these markets. If we are unable to address these challenges, our business could be adversely affected.

 

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Investment in Sales and Marketing. In order to support future sales, we will need to continue to invest significant resources devoted to our sales force and global network of partners and resellers. We have made and plan to continue to make significant investments in expanding our sales teams and distribution programs with our channel partners and increasing our brand awareness. Any investments we make in our sales and marketing will occur in advance of our experiencing any benefits from such investments, and so it may be difficult for us to determine if we are efficiently allocating our resources in this area. We cannot assure that the investments we have made, or intend to make, to strengthen our sales and marketing efforts will result in an increase in revenue or an improvement in our results of operations.

 

Investment in Product Development. Our performance is significantly dependent on the investments we make in our research and development efforts, and in our ability to continue to innovate, improve functionality, adapt to new technologies or changes to existing technologies. Our investments in this area include an increase in our research and development headcount by 28% in fiscal 2013 and the resulting increases in overhead expenses. We intend to continue to invest in new solution development and enhancements to our existing solutions. We cannot be assured that we will realize increased revenues from our development initiatives.

 

Investment in Infrastructure. In order to support our operations, we have made and expect to continue to make substantial investments in our infrastructure in connection with enhancing and expanding our operations domestically and internationally. For example, we intend to continue to invest in our software systems and additional data center resources to keep pace with the growth in the cloud and cloud-based solutions markets. We also expect to make additional investments in our infrastructure as we continue to transition to operation as a public company, which will result in increased general and administrative expenses.

 

Renewal Rates. Our solutions include a required subscription to our Barracuda Energize Updates subscription service. Customers also purchase subscriptions to virtual appliance software, cloud services and enhanced support services. The renewal rate of our subscriptions will affect our gross billings and recognized revenue in future periods. Renewal rates from subscriptions, on a dollars basis, have been 89%, 90% and 93% in fiscal 2011, 2012 and 2013, respectively.

 

We believe the renewal rate is an important metric to measure long-term value of customer agreements and our ability to retain our customers. We calculate our renewal rate by comparing the actual dollar amount of contracts renewed in a period to the dollar amount of the expiring contracts in that period, less the value of the expiring contracts that are upgraded to a higher model of the same product in lieu of a renewal.

 

Cross-sell Opportunity. The continued growth of our business partially depends on our ability to sell additional solutions to our existing customers. We define a solution as a distinct product line that we offer, such as Web Filter or Message Archiver. As our existing customers’ IT buying needs evolve, or as our customers realize the benefits of the solutions that they previously purchased, our portfolio of solutions provides us an opportunity to cross-sell additional solutions. Customers who successfully deploy more than one type of solution provide substantially more customer lifetime value to us, and can derive greater value from our solutions as they benefit from synergies in management, support and functionality. For example, at the end of fiscal 2010, we had approximately 10,350 multi-solution customers, approximately 1,490 of which purchased three or more of our distinct solutions. At the end of fiscal 2013, we had approximately 21,800 multi-solution customers, representing a compound annual growth rate of approximately 28% since fiscal 2010. Of the approximately 21,800 multi-solution customers, approximately 5,520 purchased three or more of our distinct solutions, representing a compound annual growth rate of approximately 55% since fiscal 2010. To support our cross-sell efforts, we intend to continue adding higher touch sales and marketing field resources to liaise with our channel partners as we continue to grow our sales both domestically and internationally.

 

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Components of Results of Operations

 

Revenue

 

We generate revenue from the sales of our appliances and subscriptions.

 

   

Appliance Revenue. Revenue from the sale of our appliances includes hardware and a perpetual license. We recognize appliance revenue over the estimated customer relationship period of three years, commencing with the end-user’s activation of the appliance and related subscription, provided all other criteria for the recognition of appliance revenue are met.

 

   

Subscription Revenue. Subscription revenue is generated primarily from our subscription services such as our Barracuda Energize Updates as well as our cloud solutions—Barracuda Email Security Service, Barracuda Web Security Service and Barracuda Backup. Subscription revenue also includes revenue from fixed term licenses of our virtual appliance software support and maintenance. Our subscription terms range from one to five years, the substantial majority of which are for one-year periods. We recognize revenue from subscriptions and support and maintenance over the contractual service period.

 

Cost of Revenue

 

Cost of revenue consists of costs related to our appliance and subscription revenue. Such costs include hardware, manufacturing, shipping and logistics, customer support, warranty, personnel costs, data center costs and amortization of intangible assets related to acquired technology. We expect our cost of revenue to increase in absolute dollars, although it may fluctuate as a percentage of total revenue from period to period, as we continue to grow.

 

Gross Margin

 

Gross margin, or gross profit as a percentage of total revenue, has been and will continue to be affected by a variety of factors, including manufacturing costs, cost of technical support and the mix of our solutions sold. We expect our gross margins to fluctuate over time depending on the factors described above.

 

Operating Expenses

 

Our operating expenses consist of research and development, sales and marketing and general and administrative expenses. Personnel costs are the most significant component of operating expenses and consist of salaries, benefits, bonuses, stock-based compensation and travel-related expenses. Operating expenses also include allocated overhead costs for facilities, IT and depreciation. We expect operating expenses to increase in absolute dollars, although they may fluctuate as a percentage of total revenue from period to period, as we continue to grow. In particular, we expect our stock-based compensation expense to increase in absolute dollars as a result of our existing stock-based compensation to be recognized as options and RSUs vest and as we issue additional stock-based awards to attract and retain employees.

 

   

Research and development. Research and development expenses consist primarily of salaries, benefits and stock-based compensation for employees and executives on our engineering and technical teams who are responsible for increasing the functionality and enhancing the ease-of-use of our appliance and subscription services, as well as the development of new products. We expense our research and development costs as they are incurred. We expect research and development expenses to increase in absolute dollars as we continue to invest in our future solutions, although our research and development expenses may fluctuate as a percentage of total revenue.

 

   

Sales and marketing. Our sales and marketing expenses consist primarily of advertising, as well as salaries, commissions, benefits and stock-based compensation for our employees and executives engaged in sales, sales support, marketing, business development and customer service functions. Our

 

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advertising expenses include the costs of cooperative marketing programs developed with our channel partners, other marketing programs such as online lead generation, promotional events and web seminars. We market and sell our subscription services worldwide through our sales organization and distribution channels, such as strategic resellers and distributors. We capitalize and amortize the direct and incremental portion of our sales commissions over the period the related revenue is recognized. We expect sales and marketing expenses to continue to increase in absolute dollars as we increase the size of our sales and marketing organizations, although our sales and marketing expenses may fluctuate as a percentage of total revenue.

 

   

General and administrative. Our general and administrative expenses consist primarily of salaries, benefits and stock-based compensation for our finance, legal, regulatory and compliance, human resources and other administrative employees and executives. In addition, general and administrative expenses include outside consulting, legal and accounting services, and facilities and other supporting overhead costs. We expect general and administrative expenses to increase in absolute dollars following the completion of this offering due to accounting, insurance, investor relations and other costs associated with being a public company, although our general and administrative expenses may fluctuate as a percentage of total revenue.

 

Other Income (Expense), Net

 

Other income (expense), net consists primarily of foreign exchange gains and losses, interest expense on our outstanding debt and interest income earned on our cash, cash equivalents and marketable securities. We expect interest income will vary each reporting period depending on our average investment balances during the period, types and mix of investments, and market interest rates.

 

Provision (Benefit) for Income Taxes

 

Our provision for income taxes consists primarily of federal and state income taxes in the United States and income taxes in foreign jurisdictions in which we conduct business. We estimate income taxes in each of the jurisdictions in which we operate. This process involves determining income tax expense together with calculating the deferred income tax expense related to temporary differences resulting from the differing treatment of items for tax and accounting purposes. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. These temporary differences result in deferred tax assets and liabilities, which are included within the consolidated balance sheets. Deferred tax assets are recognized for deductible temporary differences, along with net operating loss and credits carryforwards, if it is more likely than not that the tax benefits will be realized. As of February 28, 2013, we have a $7.0 million valuation allowance provided against our deferred tax assets primarily related to foreign net operating losses and California research credits acquired as part of our business acquisitions.

 

As of February 28, 2013, we had federal and state net operating loss carryforwards of approximately $1.1 million and $7.5 million, respectively, which will begin to expire at various dates beginning in fiscal 2019 and 2014, respectively. Additionally, as of February 28, 2013, we had foreign net operating loss carryforwards of approximately $22.9 million, of which approximately $19.1 million can be carried forward indefinitely, and the remaining amounts expire at various dates beginning in fiscal 2014. The Internal Revenue Code provides limitations on our ability to utilize net operating loss carryforwards and tax credit carryforwards, after an ownership change, as defined in Section 382 of the Internal Revenue Code. California has similar rules that may limit our ability to utilize our state net operating loss carryforwards. If we were to experience an ownership change in the future, this could limit our use of our net operating loss carryforwards.

 

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Results of Operations

 

The following tables summarize our consolidated results of operations for the periods presented and as a percentage of our total revenue for those periods.

 

     Year Ended February 28/29,     Six Months Ended
August 31,
 
     2011      2012     2013     2012     2013  
                        (unaudited)  
     (in thousands)  

Consolidated Statements of Operations Data:

           

Revenue:

           

Appliance

   $ 52,477       $ 43,258      $ 59,528      $ 27,775      $ 35,409   

Subscription

     89,655         117,662        139,403        67,258        78,658   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     142,132         160,920        198,931        95,033        114,067   

Cost of revenue

     31,972         34,966        45,088        21,286        26,481   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     110,160         125,954        153,843        73,747        87,586   

Operating expenses:

           

Research and development

     23,979         27,824        35,167        16,090        22,480   

Sales and marketing

     69,963         84,885        102,329        49,302        57,228   

General and administrative

     13,021         14,428        28,777        12,882        14,505   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     106,963         127,137        166,273        78,274        94,213   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     3,197         (1,183     (12,430     (4,527     (6,627

Other income (expense), net

     282         476        (839     (888     (450
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes and non-controlling interest

     3,479         (707     (13,269     (5,415     (7,077

Provision (benefit) for income taxes

     1,136         (453     (5,084     (1,293     (2,136
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net income (loss)

     2,343         (254     (8,185     (4,122     (4,941

Net loss attributable to non-controlling interest

     620         859        794        462        362   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Barracuda Networks, Inc.

   $ 2,963       $ 605      $ (7,391   $ (3,660   $ (4,579
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

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    Year Ended February 28/29,     Six Months Ended
August 31,
 
        2011             2012             2013             2012             2013      
                      (unaudited)  
    (as a percentage of total revenue)  

Revenue:

         

Appliance

    37     27     30     29     31

Subscription

    63        73        70        71        69   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    100        100        100        100        100   

Cost of revenue

    22        22        23        22        23   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    78        78        77        78        77   

Operating expenses:

         

Research and development

    17        17        18        17        20   

Sales and marketing

    49        53        51        52        50   

General and administrative

    9        9        14        14        13   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    75        79        83        83        83   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    3        (1)        (6)        (5)        (6)   

Other income (expense), net

           1        (1)        (1)          
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes and non-controlling interest

    3               (7)        (6)        (6)   

Provision (benefit) for income taxes

    1               (3)        (2)        (2)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net income (loss)

    2               (4)        (4)        (4)   

Net loss attributable to non-controlling interest

                                  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Barracuda Networks, Inc.

    2         (4)     (4)     (4)
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Comparison of the Six Month Periods Ended August 31, 2012 and 2013

 

Revenue

 

     Six Months Ended August 31,               
     2012     2013     Change  
     Amount      % of
Total
Revenue
    Amount      % of
Total
Revenue
    Amount      %  
     (unaudited)  
     (dollars in thousands)  

Revenue:

               

Appliance

   $ 27,775         29   $ 35,409         31   $ 7,634         27

Subscription

     67,258         71     78,658         69     11,400         17
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

Total revenue

   $ 95,033              100   $ 114,067              100   $ 19,034         20
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

Total revenue increased $19.0 million, or 20%, for the six months ended August 31, 2013 compared to the six months ended August 31, 2012. Subscription revenue increased by $11.4 million, or 17%, primarily due to an increase in active subscribers during the period of 23,026, or 14%, from 167,674 active subscribers as of August 31, 2012 to 190,700 active subscribers as of August 31, 2013. Total appliance revenue increased by $7.6 million, or 27% due to increased demand for our solutions. Appliance revenue was also impacted by the prospective adoption of new accounting standards effective beginning in fiscal 2011 whereby appliance revenue is recognized over the estimated customer relationship period of three years, rather than the contractual subscription period.

 

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Cost of Revenue and Gross Margin

 

     Six Months Ended August 31,               
     2012     2013     Change  
     Amount      Gross
Margin
    Amount      Gross
Margin
    Amount      %  
     (unaudited)  
     (dollars in thousands)  

Cost of revenue

   $ 21,286         $ 26,481         $ 5,195         24
  

 

 

      

 

 

      

 

 

    

Gross profit

   $ 73,747         78   $ 87,586         77   $ 13,839         19
  

 

 

      

 

 

      

 

 

    

 

Cost of revenue increased for the six months ended August 31, 2013 compared to the six months ended August 31, 2012 commensurate with the increase in appliance and subscription revenue for the comparable periods and included $2.2 million in amortization expense. Gross margin was comparable for the six months ended August 31, 2013 compared to the six months ended August 31, 2012.

 

Operating Expenses

 

     Six Months Ended August 31,              
     2012     2013     Change  
     Amount      % of
Total
Revenue
    Amount      % of
Total
Revenue
    Amount     %  
     (unaudited)  
     (dollars in thousands)  
                                        

Operating expenses:

              

Research and development

   $ 16,090                 17   $ 22,480                 20   $ 6,390        40

Sales and marketing

     49,302         52        57,228         50        7,926        16   

General and administrative

     12,882         14        14,505         13        1,623        13   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

Total operating expenses

   $ 78,274         83   $ 94,213         83   $ 15,939        20
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

Includes stock-based compensation of:

              

Research and development

   $ 883         $ 1,264         $ 381     

Sales and marketing

     499           700           201     

General and administrative

     3,187           3,076           (111  
  

 

 

      

 

 

      

 

 

   

Total

   $ 4,569         $ 5,040         $ 471     
  

 

 

      

 

 

      

 

 

   

 

Research and development expense increased $6.4 million, or 40%, for the six months ended August 31, 2013 compared to the six months ended August 31, 2012, primarily due to a $4.0 million increase in personnel related costs resulting from a 26% increase in research and development headcount, as we continued to invest in our solutions to innovate and improve functionality, and a $0.4 million increase in stock-based compensation.

 

Sales and marketing expense increased $7.9 million, or 16%, for the six months ended August 31, 2013 compared to the six months ended August 31, 2012, primarily due to a $4.1 million increase in personnel related costs resulting from incremental investments in sales infrastructure and programs as well as a 4% increase in sales and marketing headcount and a $2.0 million increase in marketing expenses associated with advertising and trade shows, as we increased our sales and marketing efforts to grow our revenue.

 

General and administrative expense increased $1.6 million, or 13%, for the six months ended August 31, 2013 compared to the six months ended August 31, 2012 primarily due to a $1.1 million increase in personnel related costs resulting from a 24% increase in general and administrative headcount, a $0.9 million increase in

 

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other IT-related expense as we improved our infrastructure to support our growth, a $0.9 million increase in bad debt expense, a $0.3 million increase in legal costs and a $0.2 million increase in professional services fees, partially offset by a $2.2 million reduction in acquisition and other non-recurring charges in the six months ended August 31, 2013 as compared to the six months ended August 31, 2012.

 

Other Income (Expense), Net

 

     Six Months Ended
August 31,
        
     2012      2013      Change  
         Amount              Amount          Amount     %  
     (dollars in thousands)  

Other expense, net

   $ 888       $ 450       $ (438     (49 )% 

 

The change in other expense, net during the six months ended August 31, 2013 compared to the six months ended August 31, 2012 was primarily due to a $0.7 million decrease in net foreign exchange losses, partially offset by a $0.2 million increase in interest expense.

 

Provision (Benefit) for Income Taxes

 

     Six Months Ended
August 31,
        
     2012      2013      Change  
         Amount              Amount          Amount      %  
     (dollars in thousands)  

Benefit for income taxes

   $ 1,293       $ 2,136       $ 843         65

 

We recorded an income tax benefit of $2.1 million for the six months ended August 31, 2013. The difference between the income tax benefit that would be derived by applying the statutory rate to our loss before tax and the income tax benefit actually recorded is primarily due to the impact of non-deductible stock-based compensation expenses and other currently non-deductible items, and various discrete items. For the six months ended August 31, 2012, we recorded an income tax benefit of $1.3 million.

 

Comparison of the Fiscal Years Ended February 29, 2012 and February 28, 2013

 

Revenue

 

     Year Ended February 29/28,                
             2012                      2013              Change  
     Amount      Amount      Amount      %  
     (dollars in thousands)  

Revenue:

           

Appliance

   $ 43,258       $ 59,528       $ 16,270         38

Subscription

     117,662         139,403         21,741         18
  

 

 

    

 

 

    

 

 

    

Total revenue

   $ 160,920       $ 198,931       $ 38,011         24