S-1/A 1 d189646ds1a.htm AMENDMENT NO. 6 TO FORM S-1 Amendment No. 6 to Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on November 7, 2011

Registration No. 333-175008

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 6

to

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Imperva, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware   7372   03-0460133
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification No.)

Imperva, Inc.

3400 Bridge Parkway, Suite 200

Redwood Shores, CA 94065

(650) 345-9000

(Address, including zip code, and telephone number,

including area code, of registrant’s principal executive offices)

 

 

Shlomo Kramer

Imperva, Inc.

President & Chief Executive Officer

3400 Bridge Parkway, Suite 200

Redwood Shores, CA 94065

(650) 345-9000

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

 

 

 

  Copies to:  
       
 

Anthony J. McCusker, Esq.

Bradley A. Bugdanowitz, Esq.

Goodwin Procter LLP

135 Commonwealth Drive

Menlo Park, CA 94025

(650) 752-3100

 

Trâm Phi, Esq.

Imperva, Inc.

Vice President & General Counsel

3400 Bridge Parkway, Suite 200

Redwood Shores, CA 94065

 

Jeffrey D. Saper, Esq.

Rezwan D. Pavri, Esq.

Wilson Sonsini Goodrich & Rosati, P.C.

650 Page Mill Road

Palo Alto, CA 94304

(650) 493-9300

 

 

 

Approximate date of commencement of proposed sale to public: as soon as practicable after this Registration Statement is declared 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 of 1933, 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, 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 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 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    Smaller reporting company  ¨
      (Do not check if a smaller reporting company)   

 

 

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 Section 8(a), may determine.

 

 

 


Table of Contents

The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion. Dated November 7, 2011.

Prospectus

5,000,000 Shares

LOGO

Imperva, Inc.

Common Stock

This is an initial public offering of shares of common stock of Imperva, Inc.

Imperva is offering 4,750,000 of the shares to be sold in the offering. The selling stockholders identified in this prospectus are offering an additional 250,000 shares. Imperva will not receive any of the proceeds from the sale of the shares being sold by the selling stockholders.

Prior to this offering, there has been no public market for the common stock. It is currently estimated that the initial public offering price per share will be between $14.00 and $16.00. Imperva has applied to list the common stock on the New York Stock Exchange under the symbol “IMPV.”

See “Risk Factors” on page 10 to read about factors you should consider before buying shares of the common stock.

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

     Per Share      Total  

Initial public offering price

   $                    $                

Underwriting discount

   $                    $                

Proceeds, before expenses, to Imperva

   $                    $                

Proceeds, before expenses, to the selling stockholders

   $                    $                

To the extent that the underwriters sell more than 5,000,000 shares of common stock, the underwriters have the option to purchase up to an additional 750,000 shares from Imperva at the initial public offering price less the underwriting discount.

Certain entities associated with Accel Partners, Greylock Partners, Meritech Capital Partners, U.S. Venture Partners and Venrock and Shlomo Kramer, Imperva’s President and Chief Executive Officer, each of which are existing stockholders of Imperva, have indicated an interest in purchasing up to an aggregate of approximately $15,000,000 of Imperva’s common stock in this offering at the initial public offering price. Because these indications of interest are not binding agreements or commitments to purchase, these existing stockholders may elect not to purchase shares in this offering or the underwriters may elect not to sell any shares in this offering to such stockholders. The underwriters will receive the same discount from any shares of our common stock purchased by such stockholders as they will from any other shares of our common stock sold to the public in this offering.

If certain of Imperva’s existing stockholders elect to purchase an aggregate of approximately $15,000,000 of Imperva’s common stock in this offering as described above, upon completion of this offering, the executive officers, directors and 5% or greater stockholders of Imperva will beneficially own, in the aggregate, approximately 67.7% of the outstanding capital stock of Imperva. If these existing stockholders do not elect to purchase shares in this offering or the underwriters elect not to sell any shares in this offering to such stockholders, then the executive officers, directors and 5% or greater stockholders of Imperva will beneficially own, in the aggregate, approximately 63.2% of the outstanding capital stock of Imperva.

 

 

The underwriters expect to deliver the shares against payment in New York, New York on                     , 2011.

 

J.P. Morgan

Deutsche Bank Securities

RBC Capital Markets

 

Lazard Capital Markets

Pacific Crest Securities

Prospectus dated                     , 2011.


Table of Contents

LOGO

 


Table of Contents

TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1   

Risk Factors

     10   

Special Note Regarding Forward-Looking Statements

     36   

Use of Proceeds

     38   

Dividend Policy

     39   

Capitalization

     40   

Dilution

     42   

Selected Consolidated Financial Data

     44   

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

     46   

Business

     86   

Management

     106   

Compensation

     113   

Certain Relationships and Related Person Transactions

     137   

Principal and Selling Stockholders

     142   

Description of Capital Stock

     147   

Shares Eligible for Future Sale

     152   

Material U.S. Federal Income Tax Considerations

     155   

Underwriting

     159   

Legal Matters

     164   

Experts

     164   

Where You Can Find More Information

     164   

Index to Consolidated Financial Statements

     F-1   

 

 

Dealer Prospectus Delivery Obligation

Through and including                    , 2011 (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.

 

 

We have not authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

 

i


Table of Contents

PROSPECTUS SUMMARY

This summary highlights selected information contained in greater detail elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, especially the information set forth under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes appearing at the end of this prospectus, before making an investment decision. Unless the context otherwise requires, we use the terms “Imperva,” “we,” “us,” the “Company” and “our” in this prospectus to refer to Imperva, Inc. and its subsidiaries.

Overview

Imperva is a pioneer and leader of a new category of data security solutions focused on providing visibility and control over high-value business data across critical systems within the data center. Our SecureSphere Data Security Suite is a broad solution designed to prioritize and mitigate risks to high-value business data, protect against hackers and malicious insiders and address and streamline regulatory compliance. SecureSphere is an integrated, modular suite, which provides database, file and web application security and secures all business data across various systems in data centers, including traditional on-premise data centers as well as private, public and hybrid cloud computing environments. We also offer on-demand, cloud-based security services which we believe provide cost-effective web application security.

We believe that organizations are facing numerous challenges in providing the visibility and control required to protect high-value business data from theft and exploitation. Enterprises must also comply with increasingly complex regulatory standards enacted to protect this business data. As organizations adopt new technologies and architectures, they increase the complexity of, and open access to, the data center; thereby exposing their business data to new vulnerabilities. We believe that these challenges are driving the need for a new protection layer positioned closely around business data and systems in the data center, and that traditional security and compliance products do not address this need.

We were founded in 2002 with the vision of protecting high-value business data within the enterprise. As of September 30, 2011, we had over 1,500 customers in more than 50 countries. In addition, our solutions are used to protect thousands of organizations through cloud-based deployments with our Software-as-a-Service (“SaaS”) customers and our managed security service provider (“MSSP”) and hosting partners. Our customers include four of the top five telecommunications companies, three of the top five commercial banks in the United States, three of the top five financial data service firms, three of the top five computer hardware companies, two of the top five food and drug store companies, over 150 government agencies around the world and more than 100 Fortune 1000 companies. We primarily sell our products and services through our network of over 350 channel partners worldwide, including both distributors and resellers, which provide sales and support leverage to our sales organization. We generated net revenue of $55.0 million in the nine months ended September 30, 2011, an increase of 43.2% over the $38.4 million in net revenue we generated in the same period in 2010. We generated net revenue of $55.4 million in 2010, an increase of 41% over the $39.3 million in net revenue we generated in 2009. We reduced our net loss attributable to our stockholders to $8.8 million in the nine months ended September 30, 2011 from $8.9 million in the same period in 2010, and we reduced our net loss attributable to our stockholders to $12.0 million in 2010 from $12.3 million in 2009.

Industry Background

As a result of the rise in sophisticated attacks by hackers and malicious insiders, the difficulty in complying with regulations governing business data and the growing complexity of, and open access

 

 

1


Table of Contents

to, data centers, we believe that enterprises are struggling to provide visibility and control over business data that they need to protect.

According to an International Data Corporation (“IDC”) report dated February 2011, worldwide spending on IT security products is expected to grow to $38 billion in 2014 from $27 billion in 2010. We believe that only a small fraction of this is spent today on protecting high-value business data in the data center. As a result, we believe data security represents a significant and growing opportunity because the current level of spending to protect high-value business data must dramatically increase in response to the magnitude of the threats to business data.

We believe the challenges that organizations face to control and protect high-value business data are driving the need for a new protection layer positioned closely around business data and systems in the data center.

 

  Ÿ  

High-value business data is increasingly targeted for illicit financial, political and military gain.    Organizations are increasing their collection, storage and use of high-value business data, including financial and credit card data, intellectual property and personally identifiable information. At the same time, the greater use and availability of this high-value business data has driven an increase in the monetary incentives for its theft and abuse. In addition, recent events, such as the data leaks publicized by WikiLeaks, demonstrate that the value of business data goes well beyond its financial value and includes political and military value.

 

  Ÿ  

Enterprises struggle to comply with an increasingly complex regulatory environment.    Governments and industry groups are enacting legislation and compliance standards to ensure that consumers and enterprises are informed of, and protected from, losses due to data breaches. As enterprises implement internal compliance policies and best practices intended to comply with regulatory requirements and secure high-value business data, they face a range of challenges prompted by the lack of visibility into the location and access rights of high-value business data as well as the cost and resource burden created by manual processes to audit data usage.

 

  Ÿ  

Increasing complexity of, and open access to, the data center is elevating the risk of attacks that target business data.    We believe that organizations continue to deploy new technologies and architectures that are increasing the complexity of, and accessibility to, the data center. The widespread use of web applications to facilitate sensitive business transactions, adoption of cloud computing and SaaS models that house sensitive data outside of the organization and the growth in unmanaged mobile computing, broaden the risks associated with business data by creating new points of vulnerability across the data center.

 

  Ÿ  

Increasing sophistication, scale and frequency of attacks drive the need for a dedicated layer of security for business data and applications.    Attackers, motivated by the value of business data and encouraged by the growing complexity of, and open access to, the data center, continue to increase the sophistication, scale and frequency of their attacks to steal high-value business data. For example, according to the Verizon 2011 Data Breach Investigations Report dated April 2011, the number of data breaches in 2010 due to internal and external attacks increased 5.4 times from 2009. Traditional security products have been unable to effectively prevent data breaches because:

 

   

perimeter content and network security solutions cannot address malicious insider threats, are not designed to prevent threats from insiders compromised by malware and are often circumvented by sophisticated application and business logic attacks; and

 

   

internal network security solutions, such as network firewalls and antivirus software, do not provide visibility and control over data usage by internal users and business systems.

 

 

2


Table of Contents

Need For a Broad Data Security Solution

As a result of these factors, we believe that organizations need a new approach to provide visibility and control over high-value business data across the data center. We believe that effectively addressing data security requires a solution that includes the following:

 

  Ÿ  

a broad and fully integrated platform that monitors and protects high-value business data across various systems in the data center;

 

  Ÿ  

automated capabilities to discover and classify high-value business data;

 

  Ÿ  

user rights management capabilities to ensure data access rights align with corporate policy;

 

  Ÿ  

auditing and reporting capabilities that enable a separation of duties;

 

  Ÿ  

sophisticated attack prevention technologies;

 

  Ÿ  

deployment flexibility through physical, virtual and SaaS offerings to address complex heterogeneous data center environments; and

 

  Ÿ  

integrated and centralized management.

Our Solution

Our solution includes our SecureSphere Data Security Suite for enterprise data centers and our cloud-based security services designed for mid-market enterprises and small to medium-sized businesses (“SMB”). Our SecureSphere Data Security Suite is an integrated, modular solution, which includes database, file and web application security and provides organizations with the following benefits:

 

  Ÿ  

Broad and unique solution that protects high-value business data.    Our solution is designed to secure business data across various systems in the data center, from storage within a database or on a file server to consumption through web applications, by monitoring all data usage and business transactions across these systems.

 

  Ÿ  

Automates discovery and classification of high-value business data.    Our solution is designed to provide enterprises visibility and control of business data by automatically identifying and classifying high-value business data, which enables enterprises to focus the scope of their risk mitigation and regulatory compliance efforts and to reduce the resources required for those projects.

 

  Ÿ  

Enables granular user rights management capabilities to reduce unwarranted data access.    Our solution enables organizations to aggregate and review user rights across multiple database platforms and file systems and to ensure that user access rights are aligned with corporate policy and compliance needs.

 

  Ÿ  

Facilitates large-scale, independent auditing and reporting of access to high-value business data.    Our solution provides visibility into data usage, establishes an audit trail that is independent from the database administration team to enable separation of duties and facilitates interactive and customizable reporting to address compliance and risk management needs.

 

  Ÿ  

Provides integrated protection against sophisticated threats.    Our solution leverages proprietary technology to detect and block advanced persistent threats and application-centric attacks.

 

  Ÿ  

Delivers flexible deployment models for complex and heterogeneous data center environments.    Our solution is offered as either a physical or virtual appliance to enable flexible deployment in any traditional or virtualized data center.

 

 

3


Table of Contents
  Ÿ  

Significantly improves operational efficiency.    Our solution provides automated capabilities that significantly reduce the need for manual processes as well as provides a single point for managing, monitoring and reporting on data security across applications, databases and files in the data center.

Our solution also includes cloud-based security services that we provide through our majority owned subsidiary, Incapsula, Inc., that deliver on-demand web application security that we believe is cost-effective and reduces the need for customers to deploy additional hardware or augment IT staff.

Our Strategy

Our goal is to extend our leadership position in the data security market. Key elements of our strategy include:

 

  Ÿ  

Enhance and extend our leadership position through technological and product innovation.    We intend to continue to invest in product upgrades and product line extensions and to create new products and services that address emerging data security and regulatory compliance requirements to maintain our technological advantages. We also plan to invest in advanced threat research to increase our threat intelligence leadership and to continue our investments in data security for cloud computing environments.

 

  Ÿ  

Further penetrate our existing customer base.    Many of our customers initially deploy our solution on a limited portion of their business systems, which provides us with significant opportunities to sell them more of our products. As a leading provider of a broad data security solution, we believe we are well positioned to benefit as our customers expand the scope of their data security and compliance initiatives.

 

  Ÿ  

Invest in our global distribution network to expand our customer base.    We believe that our hybrid sales model, which combines the leverage of a channel sales model with the account control of a direct sales model, has played an important role in our success to date. We intend to continue to invest significant resources to further strengthen our existing relationships with channel partners and to expand our network by adding new channel partners.

 

  Ÿ  

Pursue data security opportunities as businesses adopt cloud computing.    We believe data security is a paramount concern of enterprises as they consider the adoption of cloud computing. We intend to continue to focus on capturing the expected increases in spending on securing business data as enterprises pursue cloud computing initiatives.

 

  Ÿ  

Increase our focus on the mid-market and SMB market.    We believe there is a significant opportunity to provide data security solutions to smaller businesses as they are faced with increasing security threats and compliance mandates. We plan to increase our business with mid-market enterprises and SMBs by expanding our distribution channels and promoting the cloud-based web application firewall service that we provide through Incapsula, which is optimized for mid-market enterprises and SMBs.

 

  Ÿ  

Increase awareness of the importance of data security and drive adoption of our solution.     We plan to continue to increase market awareness of the benefits of our broad data security solution and to invest in our brand so that we can extend our leadership in the data security market.

 

 

4


Table of Contents

Risks Associated with our Business and an Investment in our Common Stock

Our business, financial condition, results of operations and prospects are subject to numerous risks. These risks include, among others, that:

 

  Ÿ  

we have a history of losses and we may not become profitable;

 

  Ÿ  

our quarterly operating results are likely to vary significantly and to be unpredictable;

 

  Ÿ  

the data security market is rapidly evolving and difficult to predict, and we may not anticipate market needs and opportunities, which could cause our business to suffer;

 

  Ÿ  

we face intense competition, especially from larger, better-known companies;

 

  Ÿ  

if our products fail to protect against malicious attacks and our customers experience security breaches, our reputation and business could be harmed; and

 

  Ÿ  

assertions by third parties that we violate their intellectual property rights or our failure to protect our intellectual property rights could substantially harm our business.

If we are unable to adequately address these and other risks we face, our business, financial condition, results of operations and prospects may be materially and adversely affected. In addition, there are numerous risks related to an investment in our common stock.

Following this offering, our executive officers, directors and 5% or greater stockholders will beneficially own, in the aggregate, approximately 63.2% of our outstanding common stock. If certain of our existing stockholders elect to purchase an aggregate of approximately $15,000,000 of our common stock in this offering, upon completion of this offering, our executive officers, directors and 5% or greater stockholders will beneficially own, in the aggregate, approximately 67.7% of our outstanding capital stock. These stockholders will have significant influence in determining the outcome of any corporate transaction or any other matter submitted for approval to our stockholders.

You should carefully read the section entitled “Risk Factors” beginning on page 10 for an explanation of the foregoing risks, as well as other risks, before investing in our common stock.

Company Information

We were incorporated as a Delaware corporation in 2002. Our principal executive office is located at 3400 Bridge Parkway, Suite 200, Redwood Shores, CA 94065. Our telephone number at our principal executive office is (650) 345-9000. Our website address is www.imperva.com. This is a textual reference only. We do not incorporate the information on, or accessible through, our website into this prospectus, and you should not consider any information on, or that can be accessed through, our website as part of this prospectus.

We use various trademarks and trade names in our business, including without limitation “Imperva,” “SecureSphere,” and “Protecting the Data that Drives Business.” This prospectus also contains trademarks and trade names of other businesses that are the property of their respective holders. We have omitted the ® and ™ designations, as applicable, for the trademarks we name in this prospectus.

 

 

5


Table of Contents

THE OFFERING

 

Common stock offered by us

  

4,750,000 shares

Common stock offered by selling stockholders

  

250,000 shares

Common stock to be outstanding after this offering

  

22,101,695 shares

Option to purchase additional shares

   We have granted the underwriters an option, exercisable for 30 days after the date of this prospectus, to purchase up to an additional 750,000 shares of common stock from us.

Use of proceeds

  

We expect our net proceeds from this offering will be approximately $61.8 million (or approximately $72.2 million if the underwriters exercise their option to purchase additional shares in full), based on an assumed initial public offering price of $15.00 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 and estimated offering expenses payable by us. We will not receive any of the proceeds from shares sold by the selling stockholders.

 

We plan to use the net proceeds to us from this offering for working capital and other general corporate purposes. In addition, we will invest $3.5 million of the net proceeds to us from this offering in Incapsula, our majority owned subsidiary. For a more complete description of our intended use of proceeds from this offering, see the section entitled “Use of Proceeds.”

Proposed New York Stock Exchange symbol

  

“IMPV”

Certain entities associated with Accel Partners, Greylock Partners, Meritech Capital Partners, U.S. Venture Partners and Venrock and Shlomo Kramer, our President and Chief Executive Officer, each of which are our existing stockholders, have indicated an interest in purchasing up to an aggregate of approximately $15,000,000 of our common stock in this offering at the initial public offering price. Because these indications of interest are not binding agreements or commitments to purchase, these existing stockholders may elect not to purchase shares in this offering or the underwriters may elect not to sell any shares in this offering to such stockholders. The underwriters will receive the same discount from any shares of our common stock purchased by such stockholders as they will from any other shares of our common stock sold to the public in this offering. Any shares purchased by such stockholders will be subject to lock-up restrictions described in the section entitled “Shares Eligible for Future Sale.”

The number of shares of our common stock to be outstanding after this offering is based on 17,351,695 shares of our common stock outstanding as of September 30, 2011 and excludes:

 

  Ÿ  

2,944,899 shares of common stock issuable upon exercise of stock options outstanding as of September 30, 2011, and having a weighted average exercise price of $3.48 per share;

 

 

6


Table of Contents
  Ÿ  

19,999 shares of common stock issuable upon the exercise of two outstanding warrants to purchase convertible preferred stock, assuming the conversion immediately prior to the closing of this offering, at a weighted average exercise price of $3.00 per share;

 

  Ÿ  

1,929,152 shares of common stock reserved for future issuance under our equity incentive plans; and

 

  Ÿ  

500,000 shares of common stock reserved for future issuance under our 2011 Employee Stock Purchase Plan.

Unless otherwise indicated, the information in this prospectus assumes the following:

 

  Ÿ  

the filing of our restated certificate of incorporation and the adoption of our amended and restated bylaws, which will occur immediately prior to the closing of this offering;

 

  Ÿ  

a 1-for-2 reverse split of our issued and outstanding preferred stock and common stock to be effected prior to the effectiveness of this registration statement;

 

  Ÿ  

conversion of all of our shares of preferred stock into common stock, which we expect to occur immediately prior to the closing of this offering; and

 

  Ÿ  

no exercise by the underwriters of their option to purchase additional shares.

 

 

7


Table of Contents

SUMMARY CONSOLIDATED FINANCIAL DATA

The following table summarizes our consolidated financial data. We have derived the summary consolidated statement of operations data for the years ended December 31, 2008, 2009 and 2010 from our audited consolidated financial statements included elsewhere in this prospectus. The summary consolidated statements of operations data for the nine months ended September 30, 2010 and 2011 and the consolidated balance sheet data as of September 30, 2011 have been derived from our unaudited interim consolidated financial statements included elsewhere in this prospectus. The unaudited interim consolidated financial data have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments, which consist only of normal recurring adjustments, necessary to fairly reflect our consolidated results of operations data for the nine months ended September 30, 2010 and 2011 and our consolidated financial position as of September 30, 2011. Our historical results are not necessarily indicative of the results that may be expected in the future, and the results for the nine months ended September 30, 2011 are not necessarily indicative of operating results to be expected for the full year ending December 31, 2011 or any other period. You should read the following summary consolidated financial data in conjunction with the section entitled “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.

 

    Years Ended December 31,     Nine Months Ended
September 30,
 
    2008     2009     2010     2010     2011  
    (in thousands, except share and per share amounts)  

Consolidated Statement of Operations Data:

         

Net revenue:

         

Products and license

  $ 24,298      $ 25,727      $ 34,479      $ 23,532      $ 32,821   

Services

    7,848        13,614        20,903        14,866        22,166   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenue

    32,146        39,341        55,382        38,398        54,987   

Cost of revenue:

         

Products and license

    3,661        4,795        5,905        4,123        4,433   

Services

    3,455        4,576        6,428        4,639        7,062   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

    7,116        9,371        12,333        8,762        11,495   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    25,030        29,970        43,049        29,636        43,492   

Operating expenses:

         

Research and development

    8,591        10,538        13,214        9,468        12,858   

Sales and marketing

    20,447        26,920        34,168        24,095        30,970   

General and administrative

    3,608        4,669        7,982        5,292        8,186   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    32,646        42,127        55,364        38,855        52,014   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (7,616     (12,157     (12,315     (9,219     (8,522

Other income (expense), net

    190        178        474        357        (238
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

    (7,426     (11,979     (11,841     (8,862     (8,760

Provision for income taxes

    229        360        527        331        471   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (7,655     (12,339     (12,368     (9,193     (9,231

Loss attributable to noncontrolling interest

    —          43        355        256        458   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to Imperva, Inc. stockholders

  $ (7,655   $ (12,296   $ (12,013   $ (8,937   $ (8,773
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share of common stock attributable to Imperva, Inc. stockholders, basic and diluted(1)

  $ (1.98   $ (2.82   $ (2.46   $ (1.84   $ (1.64
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Shares used in computing net loss per share of common stock, basic and diluted(1)

    3,860,033        4,365,359        4,884,665        4,846,160        5,334,581   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share of common stock attributable to Imperva, Inc. stockholders, basic and diluted(1)

      $ (0.77     $ (0.54
     

 

 

     

 

 

 

Shares used in computing pro forma net loss per share of common stock, basic and diluted(1)

        15,646,176          16,096,092   
     

 

 

     

 

 

 

 

 

8


Table of Contents
     As of September 30, 2011  
     Actual     Pro Forma(2)     Pro Forma as
Adjusted(3)
 
           (in thousands)        

Consolidated Balance Sheet Data:

      

Cash, cash equivalents and short-term investments

   $ 13,025      $ 13,025      $ 77,590   

Working capital (deficiency)

     (5,761     (5,538     60,164   

Total assets

     42,465        42,465        103,091   

Deferred revenue, current and long-term

     25,560        25,560        25,560   

Convertible preferred stock warrant liability

     223        —          —     

Convertible preferred stock

     53,442        —          —     

Noncontrolling interest

     (642     (642     (642

Total stockholders’ equity (deficit)

   $ (60,058   $ (6,393   $ 55,370   

 

(1) Please see Note 17 to our audited consolidated financial statements appearing elsewhere in this prospectus for an explanation of the calculations of our basic and diluted net loss per share of common stock and pro forma net loss per share of common stock.
(2) The pro forma column in the consolidated balance sheet data table above reflects (i) the conversion of all outstanding shares of our convertible preferred stock into 10,761,511 shares of common stock immediately prior to the closing of this offering and (ii) the resulting reclassification of the convertible preferred stock warrant liability to additional paid-in capital.
(3) The pro forma as adjusted column in the consolidated balance sheet data table above reflects (i) the conversion of all outstanding shares of our convertible preferred stock into 10,761,511 shares of common stock immediately prior to the closing of this offering, (ii) the resulting reclassification of the convertible preferred stock warrant liability to additional paid-in capital and (iii) the receipt of $61.8 million in net proceeds from the sale of 4,750,000 shares of common stock by us in this offering at an assumed initial public offering price of $15.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. A $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share would increase (decrease) our pro forma as adjusted cash, cash equivalents and short-term investments, working capital (deficiency), total assets and total stockholders’ equity by $4.4 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

 

9


Table of Contents

RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the following risks and all other information contained in this prospectus, including our consolidated financial statements and the related notes thereto, before investing 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, also may become important factors that affect us. If any of the following risks materialize, our business, financial condition and results of operations could be materially harmed. In that case, the trading price of our common stock could decline, and you may lose some or all of your investment.

Risks Related to Our Business

We have a history of losses, we may not become profitable and our revenue growth may not continue.

We have incurred net losses in each fiscal year since our inception, including net losses attributable to our stockholders of $7.7 million in 2008, $12.3 million in 2009, $12.0 million in 2010 and $8.8 million during the nine months ended September 30, 2011. As a result, we had an accumulated deficit of $64.6 million at September 30, 2011. We may not become profitable in the future if we fail to increase revenue and manage our expenses or if we incur unanticipated liabilities. Revenue growth may slow or revenue may decline for a number of possible reasons, including slowing demand for our products or services, increasing competition, a decrease in the growth of, or decline in, our overall market, or our failure to capitalize on growth opportunities or introduce new products and services. Any failure by us to achieve and maintain profitability and continue our revenue growth could cause the price of our common stock to materially decline.

Our limited operating history and the rapidly evolving nature of the markets in which we operate may make it difficult for you to evaluate our business.

We were incorporated in 2002, and since that time have been developing products to meet the rapidly evolving demands of customers in the markets in which we operate. We shipped our initial web application security and data security products in 2002, in 2006, we expanded our database security product to include compliance features and in 2010, we launched our file security offering. In addition, in 2010, we launched our cloud-based services with ThreatRadar and, in 2011, we introduced our cloud-based offerings for mid-market enterprises and small to medium-sized businesses (“SMB”) through Incapsula, Inc., our majority owned subsidiary. This limited operating history, as well as the early stage of our relationships with many of our channel partners, makes financial forecasting and evaluation of our business difficult. Furthermore, because we depend in part on the market’s acceptance of our products it is difficult to evaluate trends that may affect our business. We have limited historic financial data, and we operate in a rapidly evolving market, and, as such, any predictions about our future revenue and expenses may not be as accurate as they would be if we had a longer operating history or operated in a more predictable market.

Our quarterly operating results are likely to vary significantly and to be unpredictable, which could cause the trading price of our stock to decline.

Our operating results have historically varied from period to period, and we expect that they will continue to do so as a result of a number of factors, many of which are outside of our control, including:

 

  Ÿ  

the level of demand for our products and services, and the timing of orders from our channel partners and end-user customers, who we refer to in this prospectus as our customers;

 

  Ÿ  

the timing of shipments of products, which may depend on many factors such as inventory and logistics and our ability to ship new products on schedule and accurately forecast inventory requirements;

 

10


Table of Contents
  Ÿ  

the mix of products sold, the mix of revenue between products and services and the degree to which products and services are bundled and sold together for a package price;

 

  Ÿ  

seasonal buying patterns of our customers;

 

  Ÿ  

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

 

  Ÿ  

changes in customer, distributor or reseller requirements or market needs;

 

  Ÿ  

changes in the growth rate of the data security market;

 

  Ÿ  

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

 

  Ÿ  

the introduction or adoption of new technologies that compete with our products and services;

 

  Ÿ  

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

 

  Ÿ  

decisions by potential customers to purchase data security solutions from larger, more established security vendors or from their primary network equipment vendors;

 

  Ÿ  

the announcement or adoption of new data security compliance regulations or changes to existing compliance regulations;

 

  Ÿ  

price competition;

 

  Ÿ  

insolvency or credit difficulties confronting our customers, affecting their ability to purchase or pay for our products and services;

 

  Ÿ  

insolvency or credit difficulties confronting our key suppliers, which could disrupt our supply chain;

 

  Ÿ  

changes in customer renewal rates for our services;

 

  Ÿ  

general economic conditions, both domestically and in our foreign markets;

 

  Ÿ  

the timing of revenue recognition for our sales, which may be affected by both the mix of sales by our channel partners and the extent to which we bring on new resellers and distributors;

 

  Ÿ  

future accounting pronouncements or changes in our accounting policies; and

 

  Ÿ  

increases or decreases in our expenses caused by fluctuations in foreign currency exchange rates, particularly the Israeli shekel, since a significant portion of our expenses are incurred and paid in the Israeli shekel and other currencies besides the U.S. dollar.

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 operating results. This variability and unpredictability could result in our failure to meet our revenue or other operating result expectations or those of securities analysts or investors for a particular 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 margins in the short term. If we fail to meet or exceed expectations for our business for these or any other reasons, the market price of our shares could fall substantially and we could face costly lawsuits, including securities class action suits.

 

11


Table of Contents

The data security market is rapidly evolving and difficult to predict. If the data security market does not evolve as we anticipate or if customers do not adopt our broad data security solution, our sales will not grow as quickly as anticipated and our stock price could decline.

We are in a new, rapidly evolving category in the security industry that focuses on securing our customers’ high-value business data. As such, it is difficult to predict important market trends, including how large the data security market will be and what products customers will adopt. For example, organizations that use other security products, such as network firewalls, security information and event management (“SIEM”) products or data loss prevention (“DLP”) solutions, may believe that these security solutions sufficiently protect access to sensitive data. Therefore, they may continue spending their IT security budgets on these products and may not adopt our data security solutions in addition to such products.

We offer database, file and web application security in an integrated, modular data security solution. Currently less than half of our customers have purchased more than one of our product families. Even if customers purchase our products, they may not make repeat purchases or purchase other elements of our SecureSphere Data Security Suite.

If the market for data security does not evolve in the way we anticipate, if customers do not recognize the benefit our data security solution offers in addition to existing security products, or if we are unable to sell our entire data security solution to customers, then our revenue may not grow quickly or may decline, and our stock price could decline.

If we do not successfully anticipate market needs and opportunities and enhance our products and develop new products that meet those needs and opportunities on a timely basis, we may not be able to compete effectively and our ability to generate revenues will suffer.

The data security market is characterized by rapid technological advances, changes in customer requirements, including customer requirements driven by changes to legal, regulatory and self-regulatory compliance mandates, frequent new product introductions and enhancements and evolving industry standards in computer hardware and software technology. As a result, we must continually change and improve our products in response to changes in operating systems, application software, computer and communications hardware, networking software, data center architectures, programming tools and computer language technology. Moreover, the technology in our products is especially complex because it needs to effectively identify and respond to methods of attack and theft, while minimizing the impact on database, file system and web application performance. In addition, our products must successfully interoperate with products from other vendors.

We cannot guarantee that we will be able to anticipate future market needs and opportunities or be able to develop product enhancements or new products to meet such needs or opportunities in a timely manner or at all. Even if we are able to anticipate, develop and commercially introduce enhancements and new products, there can be no assurance that enhancements or new products will achieve widespread market acceptance. For example, while the majority of our current revenues are derived from the sales of our SecureSphere appliances, we are now offering cloud-based data security services through Incapsula. The market for cloud-based data security solutions is relatively new and it is uncertain whether Incapsula’s services will gain market acceptance.

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

 

  Ÿ  

delays in releasing our enhancements or new products;

 

  Ÿ  

failure to accurately predict market demand in terms of product functionality and to supply products that meet this demand in a timely fashion;

 

12


Table of Contents
  Ÿ  

inability to interoperate effectively with the database technologies, file systems or web applications of our prospective customers;

 

  Ÿ  

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

 

  Ÿ  

defects, errors or failures;

 

  Ÿ  

negative publicity about their performance or effectiveness;

 

  Ÿ  

introduction or anticipated introduction of competing products by our competitors;

 

  Ÿ  

poor business conditions, causing customers to delay IT purchases;

 

  Ÿ  

easing or changing of regulatory requirements related to security; and

 

  Ÿ  

reluctance of customers to purchase products incorporating open source software.

If we fail to anticipate market requirements or fail to develop and introduce product enhancements or new products to meet those needs in a timely manner, it could cause us to lose customers and such failure could substantially decrease or delay market acceptance and sales of our present and future products, which would significantly harm our business, financial condition and results of operations.

We face intense competition, especially from larger, better-known companies and we may lack sufficient financial or other resources to maintain or improve our competitive position.

The market for data security products is intensely competitive and we expect competition to intensify in the future. Our competitors include companies such as Citrix Systems, Inc., F5 Networks, Inc., International Business Machines Corporation (“IBM”), McAfee, Inc. (a subsidiary of Intel Corporation), Oracle Corporation, Symantec Corporation and other point solution security vendors.

Many of our existing and potential competitors may have substantial competitive advantages such as:

 

  Ÿ  

greater name recognition and longer operating histories;

 

  Ÿ  

larger sales and marketing budgets and resources;

 

  Ÿ  

broader distribution networks and more established relationships with distributors and customers;

 

  Ÿ  

access to larger customer bases;

 

  Ÿ  

greater customer support resources;

 

  Ÿ  

greater resources to make acquisitions;

 

  Ÿ  

greater resources to develop and introduce products that compete with our products;

 

  Ÿ  

lower labor and development costs; and

 

  Ÿ  

substantially greater financial, technical and other resources.

In addition, some of our larger competitors have substantially broader product offerings and leverage their relationships based on other products or incorporate functionality into existing products in a manner that discourages customers from purchasing our products. Customers may elect to accept a bundled product offering from our competitors, even if it has more limited functionality than our product offering, instead of adding the additional appliances required to implement our offering. These larger competitors are also often in a better position to withstand any significant reduction in capital

 

13


Table of Contents

spending, and will therefore not be as susceptible to economic downturns. Also, many of our smaller competitors that specialize in providing protection from a single type of data security threat may deliver these specialized data security products to the market more quickly than we can. Conditions in our markets could change rapidly and significantly as a result of technological advancements or continuing market consolidation.

Our current and potential competitors may also establish cooperative relationships among themselves or with third parties that may further enhance their resources. Current or potential competitors may be acquired by third parties with greater available resources, such as IBM’s acquisition of Guardium, Inc., Oracle’s acquisition of Secerno, Ltd. and McAfee’s acquisition of Sentrigo, Inc. 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 products and services, initiate or withstand substantial price competition, take advantage of other opportunities more readily or develop and expand their product and service offerings more quickly than we do. Larger competitors with more diverse product offerings may reduce the price of products that compete with ours in order to promote the sale of other products or may bundle them with other products, which would lead to increased pricing pressure on our products and could cause the average sales prices for our products to decline. If we are unable to compete effectively for a share of the data security market, our business, results of operations and financial condition could be materially and adversely affected.

New or existing technologies that are perceived to address data security risks or address the risks in different ways could gain wide adoption and supplant our products and services, thereby weakening our sales and our financial results.

The introduction of products and services embodying new technologies could render our existing products and services obsolete or less attractive to customers. Other data security technologies exist or could be developed in the future, and our business could be materially negatively affected if such technologies are widely adopted. We may not be able to successfully anticipate or adapt to changing technology or customer requirements on a timely basis, or at all. If we fail to keep up with technological changes or to convince our customers and potential customers of the value of our solutions even in light of new technologies, our business, results of operations and financial condition could be materially and adversely affected.

If our products fail to protect against malicious attacks and our customers experience security breaches, our reputation and business could be harmed.

Data thieves are increasingly sophisticated, often affiliated with organized crime and operate large scale and complex automated attacks. In addition, their techniques change frequently and generally are not recognized until launched against a target. If we fail to identify and respond to new and increasingly complex methods of attack and to update our products to detect or prevent such threats in time to protect our customers’ high-value business data, our business and reputation will suffer.

In addition, an actual or perceived security breach or theft of the sensitive data of one of our customers, regardless of whether the breach is attributable to the failure of our products or services, could adversely affect the market’s perception of our security products. Despite our best efforts, there is no guarantee that our products will be free of flaws or vulnerabilities, and even if we discover these weaknesses we may not be able to correct them promptly, if at all. Our customers may also misuse our products, which could result in a breach or theft of business data.

 

14


Table of Contents

False detection of security breaches or false identification of malicious sources could adversely affect our business.

Our data security products may falsely detect threats that do not actually exist. For example, our ThreatRadar product relies on information on attack sources aggregated from third-party data providers who monitor global malicious activity originating from anonymous proxies, specific IP addresses, botnets and phishing sites. If the information from these data providers is inaccurate, the potential for false positives increases. These false positives, while typical in the industry, may impair the perceived reliability of our products and may therefore adversely impact market acceptance of our products. If our products and services restrict access to important databases, files or applications based on falsely identifying users or traffic as an attack or otherwise unauthorized, this could adversely affect customers’ businesses. Any such false identification of users or traffic could result in negative publicity, loss of customers and sales, increased costs to remedy any problem and costly litigation.

If our internal network system is compromised by computer hackers or other data thieves, public perception of our products and services will be harmed.

We will not succeed unless the marketplace is confident that we provide effective data security protection. We provide data security products, and therefore we may be a more attractive target for attacks by computer hackers or other data thieves. If we experience an actual or perceived breach of our network or data security in our internal systems, it could adversely affect the market perception of our products and services. In addition, such a security breach could impair our ability to operate our business, including our ability to provide subscription or maintenance and support services to our customers. If this happens, our revenue could decline and our business could suffer.

Defects in our products or services could harm our reputation and business.

Our products and services are very complex and have contained and may contain undetected defects or errors, especially when first introduced or when new versions are released. Defects in our products may impede or block network traffic or cause our products or services to fail to help secure high-value business data. Defects in our products may lead to product returns and require us to implement design changes or software updates.

Any defects or errors in our products, or the perception of such defects or errors, could result in:

 

  Ÿ  

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

 

  Ÿ  

loss of existing or potential customers or channel partners;

 

  Ÿ  

delayed or lost revenue;

 

  Ÿ  

delay or failure to attain market acceptance;

 

  Ÿ  

delay in the development or release of new products or services;

 

  Ÿ  

negative publicity, which will harm our reputation;

 

  Ÿ  

warranty claims against us, which could result in an increase in our provision for doubtful accounts;

 

  Ÿ  

an increase in collection cycles for accounts receivable or the expense and risk of litigation; and

 

  Ÿ  

harm to our results of operations.

Although we have limitation of liability provisions in our standard terms and conditions of sale, they may not fully or effectively protect us from claims as a result of federal, state or local laws or ordinances or unfavorable judicial decisions in the United States or other countries. The sale and

 

15


Table of Contents

support of our products also entail the risk of product liability claims. We maintain insurance to protect against certain claims associated with the use of our products, but our insurance coverage may not adequately cover any claim asserted against us. In addition, even claims that ultimately are unsuccessful could result in our expenditure of funds in litigation and divert management’s time and other resources.

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

We generate a substantial portion of our revenues from our products and services because they help organizations achieve and maintain compliance with government regulations and industry standards, and we expect that will continue for the foreseeable future. For example, many of our customers purchase our web application security products to help them comply with the security standards developed and maintained by the Payment Card Industry (“PCI”) Security Standards Council (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 products and services enable our customers to demonstrate, maintain or audit their compliance. If we are unable to adapt our products and services to changing regulatory standards in a timely manner, or if our products fail to expedite our customers’ compliance initiatives, our customers may lose confidence in our products and could switch to products 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 products and services. In either case, our sales and financial results would suffer.

We rely on third party channel partners to generate substantially all of our revenue, and if we fail to expand and manage our distribution channels, our revenues could decline and our growth prospects could suffer.

We derive substantially all of our revenues from sales of our products and services through channel partners, such as resellers, and we expect that channel sales will represent a substantial portion of our revenues for the foreseeable future. Our ability to expand our distribution channels depends in part on our ability to educate our channel partners about our products and services, which are complex. Our agreements with our channel partners are generally non-exclusive and many of our channel partners have more established relationships with our competitors. If our channel partners choose to place greater emphasis on products and services of their own or those offered by our competitors, our ability to grow our business and sell our products may be adversely affected. If our channel partners do not effectively market and sell our products and services, or if they fail to meet the needs of our customers, then our ability to grow our business and sell our products may be adversely affected. The loss of one or more of our larger channel partners, who may cease marketing our products with limited or no notice, and our possible inability to replace them could adversely affect our sales. Our failure to recruit additional channel partners, or any reduction or delay in their sales of our products and services or conflicts between channel sales and our direct sales and marketing activities could materially and adversely affect our results of operations.

If we are unable to increase market awareness of our company and our products, our revenue may not continue to grow, or may decline.

We have a limited operating history and we believe that we have not yet established sufficient market awareness in the data security market. Market awareness of our capabilities and products is

 

16


Table of Contents

essential to our continued growth and our success in all of our markets, particularly for the large enterprise, service provider and government entities markets. If our marketing programs are not successful in creating market awareness of our company and products, our business, financial condition and results of operations will be adversely affected, and we will not be able to achieve sustained growth.

Reliance on a concentration of shipments at the end of the quarter could cause our revenue to fall below expected levels, resulting in a decline in our stock price.

Historically, we have received a substantial portion of a quarter’s sales orders and generated a substantial portion of a quarter’s revenue during the last two weeks or last days of the quarter. The fact that so many orders arrive at the end of a quarter means that our revenue may move from one quarter to the next if we cannot fulfill all of the orders and satisfy all of the revenue recognition criteria under our accounting policies before the quarter ends.

This pattern is a result of customer buying habits and the efforts of our sales force and channel partners to meet or exceed quarterly quotas. If expected revenue at the end of any quarter is delayed because anticipated purchase orders fail to materialize, our logistics partners’ fail to ship products on time, we fail to manage our inventory properly, we fail to release new products on schedule, or for any other reason, then our revenue for that quarter could fall below our expectations or those of securities analysts and investors, resulting in a decline in our stock price.

Delays or interruptions in the manufacturing and delivery of SecureSphere appliances by our sole source manufacturer may harm our business.

Our hardware appliances are built by a single manufacturer. Our reliance on a sole manufacturer, particularly a foreign manufacturer, involves several risks, including a potential inability to obtain an adequate supply of appliances and limited control over pricing, quality and timely delivery of products. In addition, replacing this manufacturer may be difficult and could result in an inability or delay in obtaining products.

Our manufacturer’s ability to timely manufacture and ship our appliances in large quantities depends on a variety of factors. The manufacturer relies on a limited number of sources for the supply of functional components, such as semiconductors, printed circuit boards and hard disk drives. Functional component supply shortages or delays could prevent or delay the manufacture and shipment of appliances and, in the event of shortages or delays, we may not be able to procure alternative functional components on similar pricing terms, if at all. In addition, contractual restrictions or claims for infringement of intellectual property rights may restrict our manufacturer’s use of certain components. These restrictions or claims may require our manufacturer to utilize alternative components or obtain additional licenses or technologies, and may impede its ability to manufacture and deliver appliances on a timely or cost-effective basis.

In the event of an interruption from this manufacturer, we may not be able to develop alternate or secondary sources in a timely manner. If we are unable to buy our appliances in quantities sufficient to meet our requirements on a timely basis, we will not be able to deliver products to our channel partners and customers, which would seriously affect present and future sales.

We have operations outside of the United States and a significant portion of our customers and suppliers are located outside of the United States, which subjects us to a number of risks associated with conducting international operations.

We market and sell our products throughout the world and have personnel in many parts of the world. In addition, we have sales offices and research and development facilities outside the United

 

17


Table of Contents

States and we conduct, and expect to continue to conduct, a significant amount of our business with companies that are located outside the United States, particularly in Israel, Asia and Europe. We also source our components for our products from various geographical regions and ship products from a foreign production facility. Therefore, we are subject to risks associated with having international sales and worldwide operations, including:

 

  Ÿ  

trade and foreign exchange restrictions;

 

  Ÿ  

foreign currency exchange fluctuations;

 

  Ÿ  

economic or political instability in foreign markets;

 

  Ÿ  

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

 

  Ÿ  

changes in regulatory requirements;

 

  Ÿ  

difficulties and costs of staffing and managing foreign operations;

 

  Ÿ  

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

 

  Ÿ  

costs of compliance with foreign laws and regulations and the risks and costs of non-compliance with such laws and regulations;

 

  Ÿ  

costs of complying with U.S. laws and regulations for foreign operations, including the Foreign Corrupt Practices Act, import and export control laws, tariffs, trade barriers, economic sanctions and other regulatory or contractual limitations on our ability to sell our products in certain foreign markets, and the risks and costs of non-compliance;

 

  Ÿ  

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

 

  Ÿ  

the potential for political unrest, acts of terrorism, hostilities or war;

 

  Ÿ  

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

 

  Ÿ  

multiple and possibly overlapping tax structures.

Our product and service sales may be subject to foreign governmental regulations, which vary substantially from country to country and change from time to time. Failure to comply with these regulations could adversely affect our business. Further, in many foreign countries it is common for others to engage in business practices that are prohibited by our internal policies and procedures or U.S. regulations applicable to us. Although we implemented policies and procedures designed to ensure compliance with these laws and policies, there can be no assurance that all of our employees, contractors, channel partners and agents will comply with these laws and policies. Violations of laws or key control policies by our employees, contractors, channel partners or agents could result in delays in revenue recognition, financial reporting misstatements, fines, penalties or the prohibition of the importation or exportation of our products and services and could have a material adverse effect on our business and results of operations.

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

Our services revenue accounted for 24.4% of our total revenue for fiscal 2008, 34.6% of our total revenue for fiscal 2009, 37.7% of our total revenue for fiscal 2010 and 40.3% of our total revenue for

 

18


Table of Contents

the nine months ended September 30, 2011. Sales of new or renewal services contracts may decline or fluctuate as a result of a number of factors, including customers’ level of satisfaction with our products and services, the prices of our products and services, the prices of products and services offered by our competitors or reductions in our customers’ spending levels. If our sales of new or renewal services contracts decline, our revenue or revenue growth may decline and our business will suffer. In addition, we recognize service revenue ratably over the term of the relevant service period, which is typically one to three years but has been as long as five years. As a result, much of the revenue we report each quarter is the recognition of deferred revenue from services contracts entered into during previous quarters. Consequently, a decline in new or renewal services contracts in any one quarter will not be fully reflected in revenue in that quarter, but will negatively affect our revenue in future quarters. Accordingly, the effect of significant downturns in new or renewed sales of our services would not be reflected in full in our results of operations until future periods.

If we are unable to increase sales to larger customers, our results of operations may suffer.

We continuously seek to increase sales of our products to large enterprises, managed security service providers and government entities. Sales to enterprises, service providers and government entities involve risks that may not be present, or are present to a lesser extent, with sales to small to mid-sized entities. These risks include:

 

  Ÿ  

preexisting relationships with larger, entrenched providers of security solutions who have access to key decision makers within the organization and who also have the ability to bundle competing products with a broader product offering;

 

  Ÿ  

increased purchasing power and leverage held by large customers in negotiating contractual arrangements with us;

 

  Ÿ  

more stringent requirements in our support service contracts, including stricter support response times, and increased penalties for any failure to meet support requirements; and

 

  Ÿ  

longer sales cycles and the associated risk that substantial time and resources may be spent on a potential customer who elects not to purchase our products and services.

In addition, product purchases by enterprises, managed security service providers, cloud hosting providers and government entities are frequently subject to budget constraints, multiple approvals, and unplanned administrative, processing and other delays. Large enterprises, managed security service providers, cloud hosting providers and government entities typically have longer implementation cycles; require greater product functionality and scalability and a broader range of services; demand that vendors take on a larger share of risks; sometimes require acceptance provisions that can lead to a delay in revenue recognition; and expect greater payment flexibility from vendors. All these factors can add risk to doing business with these customers. If our sales expectations for a large customer do not materialize in a particular quarter or at all, then our business, operating results and financial condition could be materially and adversely affected.

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

Our functional and reporting currency is the U.S. dollar and we generate a majority of our revenue in U.S. dollars. However, in 2010, we incurred approximately 27% of our expenses outside of the United States in foreign currencies, primarily Israeli shekels, principally with respect to salaries and related personnel expenses associated with our Israeli operations. Accordingly, changes in exchange rates may have a material adverse effect on our business, operating results and financial condition. The exchange rate between the U.S. dollar and foreign currencies has fluctuated substantially in recent years and may continue to fluctuate substantially in the future. We expect that a majority of our

 

19


Table of Contents

revenues will continue to be generated in U.S. dollars for the foreseeable future and that a significant portion of our expenses, including personnel costs, as well as capital and operating expenditures, will continue to be denominated in Israeli shekels. The results of our operations may be adversely affected by foreign exchange fluctuations.

We use forward foreign exchange contracts to hedge or mitigate the effect of changes in foreign exchange rates on our operating expenses denominated in certain foreign currencies. However, we may not be able to purchase derivative instruments that are adequate to insulate ourselves from foreign currency exchange risks. Additionally, our hedging activities may contribute to increased losses as a result of volatility in foreign currency markets.

If our existing and potential customers migrate to hosted, cloud-based data centers that do not deploy our products, our revenues could suffer.

The majority of our current sales are made through a model in which our channel partners sell our data security solutions to large enterprise customers that operate their own data centers and have the ability to choose the data security solutions and configurations to fit their environment. If our large enterprise customers and potential customers choose to outsource the hosting of their data centers to large, multi-tenancy hosting providers like Rackspace Hosting, Inc. and Amazon.com, Inc., they may not be able to choose what data security solutions are deployed in these hosted environments, and our current sales model may not be effective. Although we work with large hosting services providers, like Rackspace Hosting, Inc. and Savvis, Inc., to integrate our data security solutions into their hosting environments so our solutions may be offered to their hosting customers, we cannot guarantee that all such hosting service providers will adopt our solutions, offer them as a choice to their customers or promote our solutions over those of our competitors. Even if these large hosting services providers integrate our data security solutions into their hosting environments and promote our solutions, they may be able to negotiate larger discounts than individual enterprise customers and, consequently, the average selling price of our products may decrease and our revenue would suffer.

Our business and operations have experienced rapid growth, and if we do not appropriately manage any future growth, or are unable to improve our systems and processes, our operating results will be negatively affected.

We have experienced rapid growth over the last several years. We rely heavily on information technology systems to help manage critical functions such as order processing, revenue recognition, financial forecasts and inventory and supply chain management. To manage any future growth effectively, and in connection with our transition to a publicly-listed company, we must continue to improve and expand our information technology and financial infrastructure, operating and administrative systems and controls, and continue to manage headcount, capital and processes in an efficient manner. We may not be able to successfully implement improvements to these systems and processes in a timely or efficient manner. For instance, over the last several years we have used and relied heavily on Priority, an enterprise resource planning (“ERP”) system, made by Eshibel Technologies Ltd., an Israeli software company. In the first quarter of 2011, we decided to replace Priority with NetSuite, an on-demand ERP system, and commenced a several month process to implement NetSuite. We have a limited operating history using NetSuite and may encounter difficulties using NetSuite to manage critical functions of our business. Such difficulties with our transition to NetSuite could include delays in calculating and reporting our quarterly results.

In addition, we rely heavily on hosted, Software-as-a-Service (“SaaS”) technologies from third parties in order to operate critical functions of our business, including ERP services from NetSuite and customer relationship management (“CRM”) services from salesforce.com, inc. If these services become unavailable due to extended outages, interruptions or because they are no longer available on

 

20


Table of Contents

commercially reasonable terms or prices, our expenses could increase, our ability to manage our finances could be interrupted and our processes for managing sales of our products and services and supporting our customers could be impaired until equivalent services, if available, are identified, obtained and integrated; all of which could harm our business.

Also, our systems and processes may not prevent or detect all errors, omissions or fraud. Our failure to improve our systems and processes, or their failure to operate in the intended manner, may result in our inability to manage the growth of our business and to accurately forecast our revenue, expenses and earnings, or to prevent certain losses. Our productivity and the quality of our products and services may also be adversely affected if we do not integrate and train our new employees quickly and effectively. Any future growth would add complexity to our organization and require effective coordination across our organization. Failure to manage any future growth effectively could result in increased costs, harm our results of operations and lead to investors losing confidence in our internal systems and processes, any of which could result in a decline in our stock price.

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

Patent and other intellectual property disputes are common in the IT security industry. Some companies in the IT security industry, including some of our competitors, own large numbers of patents, copyrights, trademarks and trade secrets, which they may use to assert claims against us. Third parties have asserted and may in the future assert claims of infringement, misappropriation or other violations of intellectual property rights against us. They may also assert such claims against our customers or channel partners whom we typically indemnify against claims that our products infringe, misappropriate or otherwise violate the intellectual property rights of third parties. As the numbers of products and competitors in our market increase and overlaps occur, claims of infringement, misappropriation and other violations of intellectual property rights may increase. 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.

The patent portfolios of our most significant competitors are larger than ours. This disparity between our patent portfolio and the patent portfolios of our most significant competitors may increase the risk that they may sue us for patent infringement and may limit our ability to counterclaim for patent infringement or settle through patent cross-licenses. In addition, future assertions of patent rights by third parties, and any resulting litigation, may involve patent holding companies or other adverse patent owners who have no relevant product 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, licensing or using solutions that are alleged to infringe or misappropriate the intellectual property of others; expend additional development resources to attempt to redesign our products or services 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; and indemnify our partners and other third parties. Royalty or licensing agreements, if required or desirable, may be unavailable on terms acceptable to us, or at all, and may require significant royalty payments and other expenditures. In addition, some licenses may be non-exclusive, and therefore our competitors may have access to the same technology licensed to us. Any of these events could seriously harm our business, financial condition and results of operations.

 

21


Table of Contents

We have in the past been sued for patent infringement, and likely will be involved in additional disputes in the future. We expect that we will be sued for patent infringement in the future, regardless of the merits of any such lawsuits. The cost to defend such lawsuits and any adverse result in such lawsuits could have a material adverse effect on our results of operations and financial condition.

We rely on the availability of licenses to third-party software and other intellectual property.

Many of our products and services include software or other intellectual property licensed from third parties, and we otherwise use software and other intellectual property licensed from third parties in our business. This exposes us to risks over which we may have little or no control. For example, a licensor may have difficulties keeping up with technological changes or may stop supporting the software or other intellectual property that it licenses to us. Also, it will be necessary in the future to renew licenses, expand the scope of existing licenses or seek new licenses, relating to various aspects of these products and services, or otherwise relating to our business, which may result in increased license fees. There can be no assurance that the necessary licenses will be available on acceptable terms, if at all. In addition, a third party may assert that we or our customers are in breach of the terms of a license, which could, among other things, give such third party the right to terminate a license or seek damages from us, or both. The inability to obtain or maintain certain licenses or other rights or to obtain or maintain such licenses or rights on favorable terms, or the need to engage in litigation regarding these matters, could result in delays in releases of products and services, and could otherwise disrupt our business, until equivalent technology can be identified, licensed or developed, if at all, and integrated into our products and services or otherwise in the conduct of our business. Any of these events could have a material adverse effect on our business, operating results and financial condition. Moreover, the inclusion in our products and services of software or other intellectual property licensed from third parties on a nonexclusive basis could limit our ability to differentiate our products from those of our competitors.

Our products contain third-party open source software components, and our failure to comply with the terms of the underlying open source software licenses could restrict our ability to sell our products.

Our products, services and other technologies contain software modules licensed to us by third-party authors under so-called “open source” licenses, including the GNU Public License (“GPL”), the GNU Lesser Public License (“LGPL”), the BSD License, the Apache License and others. From time to time, there have been claims against companies that distribute or use open source software in their products and services, asserting that open source software infringes the claimants’ intellectual property rights. We could be subject to suits by parties claiming infringement of intellectual property rights in what we believe to be licensed open source software. Use and distribution of open source software may entail greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or other contractual protections regarding infringement claims or the quality of the code. Numerous open source licenses require that source code subject to the license be made available to the public and that any modifications or derivative works to open source software continue to be licensed under open source licenses. If we combine our proprietary software with open source software in a certain manner, we could, under certain of the open source licenses, be required to release the source code of our proprietary software to the public. Disclosing the source code of our proprietary software could make it easier for hackers and other third parties to discover vulnerabilities in or to defeat the protections of our data security products, which could result in our data security products failing to protect our customers’ business data. This could harm our business and reputation. Disclosing our proprietary source code also could allow our competitors to create similar products with lower development effort and time and ultimately could result in a loss of product sales for us. Any of these events could have a material adverse effect on our business, operating results and financial condition.

 

22


Table of Contents

Although we monitor our use of open source software to avoid subjecting our products to conditions we do not intend, the terms of many open source licenses have not been interpreted by U.S. courts, and 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 products. In this event, we could be required to seek licenses from third parties to continue offering our products, to make our proprietary code generally available in source code form, to re-engineer our products or to discontinue the sale of our products 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 trade secrets, trademarks, copyrights, patents 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.

We currently have four issued patents in the United States, but this number is relatively small in comparison to our competitors. As of September 30, 2011, we had nine 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 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. 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, products 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 products, 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 and financial condition. 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 products that have enabled us to be successful to date.

 

23


Table of Contents

If we are unable to hire, retain and motivate qualified personnel, our business would suffer.

Our future success depends, in part, on our ability to continue to attract and retain highly skilled personnel. The loss of the services of any of our key personnel, the inability to attract or retain qualified personnel or delays in hiring required personnel, particularly in engineering and sales, may seriously harm our business, financial condition and results of operations. Any of our employees may terminate their employment at any time. Our ability to continue to attract and retain highly skilled personnel will be critical to our future success. Competition for highly skilled personnel is frequently intense, especially in the San Francisco Bay Area and in Tel Aviv, Israel, the locations in which we have a substantial presence and need for highly-skilled personnel. In addition, a large portion of our employee base is substantially vested in significant stock option grants, and the ability to exercise those options and sell their stock in a public market after the closing of this offering may result in a larger than normal turn-over rate. We intend to issue stock options and restricted stock units as key components of our overall compensation and employee attraction and retention efforts. In addition, we are required under U.S. generally accepted accounting principles (“GAAP”) to recognize compensation expense in our operating results for employee share-based compensation under our equity grant programs, which may negatively impact our operating results and may increase the pressure to limit share-based compensation. Also, to the extent we hire personnel from competitors, we may be subject to allegations that they have been improperly solicited or divulged proprietary or other confidential information.

We are dependent on the continued services and performance of our senior management and other key employees, the loss of any of whom could adversely affect our business, operating results and financial condition.

Our future performance depends on the continued services and continuing contributions of our senior management and other key employees to execute on our business plan, and to identify and pursue new opportunities and product innovations. The loss of services of senior management or other key employees, particularly Shlomo Kramer, one of our founders and our President and Chief Executive Officer; Amichai Shulman, one of our founders and our Chief Technology Officer; and Terrence J. Schmid, our Chief Financial Officer and Treasurer, could significantly delay or prevent the achievement of our development and strategic objectives. The loss of the services of our senior management or other key employees for any reason could adversely affect our business, financial condition and results of operations.

Conditions in Israel may limit our ability to develop and sell our products. This could result in a decrease of our revenues.

Our principal research and development facilities are located in Israel. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its neighboring countries, as well as incidents of civil unrest. Political, economic and military conditions in Israel could directly affect our operations. We could be adversely affected by any major hostilities involving Israel, including acts of terrorism or any other hostilities involving or threatening Israel, the interruption or curtailment of trade between Israel and its trading partners, a significant increase in inflation or a significant downturn in the economic or financial condition of Israel. Any on-going or future violence between Israel and the Palestinians, armed conflicts, terrorist activities, tension along the Israeli borders or political instability in the region could disrupt international trading activities in Israel and may materially and negatively affect our business and could harm our results of operations.

Certain countries, as well as certain companies and organizations, continue to participate in a boycott of Israeli firms, firms with large Israeli operations and others doing business with Israel and Israeli companies. We are also precluded from marketing our products to certain of these countries

 

24


Table of Contents

due to United States and Israeli regulatory restrictions. In addition, such boycott, restrictive laws, policies or practices may change over time and we cannot predict which countries, as well as whether certain companies and organizations, will be subject thereto. The boycott, restrictive laws, policies or practices directed towards Israel, Israeli businesses or Israeli citizens could, individually or in the aggregate, have a material adverse affect on our business in the future.

Some of our executive officers and employees in Israel are obligated to perform annual military reserve duty in the Israel Defense Forces, depending on their age and position in the armed forces. Furthermore, they may be called to active reserve duty at any time under emergency circumstances for extended periods of time. Our operations could be disrupted by the absence, for a significant period, of one or more of our executive officers or key employees due to military service, and any significant disruption in our operations could harm our business.

Outages, interruptions or delays in hosting services could impair the delivery of our cloud-based security services and harm our business.

The cloud-based security services that we provide through our majority owned subsidiary, Incapsula, are operated from a network of third party facilities that host the software and systems that operate these security services. We currently serve our customers from third-party hosting facilities located in the United States and Europe. We have a limited operating history for our cloud-based security services in these third party hosting facilities. In addition, we operate the infrastructure that supports our ThreatRadar and Security Operations Center (“SOC”) services. Despite precautions taken within our own internal network and at these third party facilities, the occurrence of a natural disaster or an act of terrorism or other unanticipated problems could result in lengthy interruptions in our services.

In addition, any damage to, or failure of, our internal systems or systems at third party hosting facilities could result in outages or interruptions in our cloud-based services. Outages or interruptions in our cloud-based security services may reduce our revenue, cause us to issue credits or pay penalties, cause customers to terminate their subscriptions and adversely affect our renewal rates and our ability to attract new customers. Our business will also be harmed if our customers and potential customers believe our cloud-based security services are unreliable.

Adverse economic conditions or reduced information technology spending may adversely impact our business.

Our business depends on the overall demand for information technology and on the economic health of our current and prospective customers. In addition, the purchase of our products is often discretionary and may involve a significant commitment of capital and other resources. Weak global economic conditions, or a reduction in information technology spending even if economic conditions improve, could adversely impact our business, financial condition and results of operations in a number of ways, including longer sales cycles, lower prices for our products and services, higher default rates among our distributors, reduced unit sales and lower or no growth.

A failure to prevent excess inventories or inventory shortages could result in decreased revenue and gross margins and harm our business.

We purchase products from our manufacturing partner outside of and in advance of reseller or customer orders, which we hold in inventory and resell. There is a risk we may be unable to sell excess products ordered from our manufacturing partner. Inventory levels in excess of customer demand may result in inventory write-downs, and the sale of excess inventory at discounted prices could significantly impair our brand image and have an adverse effect on our operating results and financial condition. Conversely, if we underestimate demand for our products or if our manufacturing partner fails to supply

 

25


Table of Contents

products we require at the time we need them, we may experience inventory shortages. Inventory shortages might delay shipments to resellers, distributors and customers or cause us to lose sales. These shortages may diminish the loyalty of our channel partners or customers.

The difficulty in forecasting demand also makes it difficult to estimate our future results of operations and financial condition from period to period. A failure to accurately predict the level of demand for our products could adversely affect our net revenues and net income, and we are unlikely to forecast such effects with any certainty in advance.

A portion of our revenue is generated by sales to government entities, which are subject to a number of challenges and risks.

Sales to U.S. and foreign federal, state and local governmental agency customers have accounted for a portion of our revenue in past periods, and we may in the future increase sales to government entities. Sales into government entities are subject to a number of risks. Selling to government entities can be highly competitive, expensive and time consuming, often requiring significant upfront time and expense without any assurance that we will complete a sale. Government demand and payment for our products and services may be impacted by public sector budgetary cycles and funding authorizations, with funding reductions or delays adversely affecting public sector demand for our products. Most of our sales to government entities have been made indirectly through our channel partners. Government entities may have 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 results of operations. Finally, for purchases by the U.S. government, the government may require certain products to be manufactured in the United States and other high cost manufacturing locations, and we may not manufacture all products in locations that meet the requirements of the U.S. government.

We are subject to governmental export and import controls that could subject us to liability or impair our ability to compete in international markets.

We incorporate encryption technology into our products, and certain of our products are subject to U.S. export controls and may be exported outside the United States only with the required export license through an export license exception or other appropriate government authorizations. If we were to fail to comply with U.S. export control regulations, U.S. Customs regulations, U.S. economic sanctions and other laws, we could be subject to substantial civil and criminal penalties, including fines for the Company and incarceration for responsible employees and managers, and the possible loss of export or import privileges. In addition, if our channel partners fail to obtain appropriate import, export or re-export licenses or permits, we may also be adversely affected, through reputational harm and penalties. Complying with export control regulations for a particular sale may be time-consuming and may result in the delay or loss of sales opportunities.

Furthermore, U.S. export control laws and economic sanctions prohibit the shipment of certain products to U.S. embargoed or sanctioned countries, governments and persons. Even though we take precautions to prevent our product from being shipped to U.S. sanctions targets, our products could be shipped to those targets by our channel partners despite such precautions. Any such shipment could have negative consequences including government investigations, penalties and reputational harm. In addition, various countries regulate the import of certain encryption technology, including import permitting and licensing requirements, and have enacted laws that could limit our ability to distribute our products or could limit our customers’ ability to implement our products in those countries. Changes in our products or changes in export and import regulations may create delays in the introduction of our products in international markets, prevent our customers with international operations from deploying our products globally or, in some cases, prevent the export or import of our

 

26


Table of Contents

products to certain countries, governments or persons altogether. Any change in export or import regulations, economic sanctions or related legislation, shift in the enforcement or scope of existing regulations, or change in the countries, governments, persons or technologies targeted by such regulations, could result in decreased use of our products by, or in our decreased ability to export or sell our products to, existing or potential customers with international operations. Any decreased use of our products or limitation on our ability to export or sell our products would likely adversely affect our business, financial condition and results of operations.

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 provided in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the results of which form the basis for making judgments about the carrying values of assets, liabilities equity, revenue and expenses 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, long-lived assets and accounting for income taxes.

If we are unable to establish vendor specific objective evidence of fair value for any undelivered element of a software order from a customer, our revenue relating to the entire software order will be deferred and recognized over future periods, which would prevent us from recognizing revenue on a significant portion of our sales in a particular quarter, which could cause our stock price to decline.

In the course of our selling efforts, we typically enter into arrangements that require us to deliver a combination of products and services. We refer to each individual product or service as an “element” of the overall arrangement. These arrangements typically require us to deliver particular elements in a future period. Arrangements that are considered software arrangements, such as when there is no hardware component to the arrangement as is the case when we sell virtual products, follow different, more restrictive accounting requirements than non-software arrangements. As we discuss further in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates—Revenue Recognition,” if we are unable to determine the vendor specific objective evidence of fair value of any undelivered elements in a software arrangement, then we are required by GAAP to defer revenue from the entire software arrangement rather than just the undelivered elements. If we are required to defer revenue from the entire software arrangement for a significant portion of our sales, our revenue for that quarter could fall below our expectations or those of securities analysts and investors, resulting in a decline in our stock price.

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 products and laws relating to the collection of and recycling of electrical and electronic equipment. Examples of these laws and regulations include the European Union (“EU”) Restrictions of Hazardous Substances Directive (“RoHS”) and the EU Waste Electrical

 

27


Table of Contents

and Electronic Equipment Directive (“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 products. Currently, the manufacturer 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 reengineer our products to use components compatible with these regulations. This reengineering 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 products. 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 products, substantial product inventory write-offs, reputational damage, penalties and other sanctions, which could harm our business and financial condition. We also expect that our products 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 products or how they are manufactured, which could have a material adverse affect on our business, operating results and financial condition.

Our success in acquiring and integrating other businesses, products or technologies could impact our financial position.

In order to remain competitive, we may seek to acquire additional businesses, products or technologies. The environment for acquisitions in the markets in which we operate is very competitive and acquisition candidate purchase prices will likely exceed what we would prefer to pay, but may choose to pay in order to make an acquisition. Achieving the anticipated benefits of future acquisitions will depend in part upon whether we can integrate acquired operations, products and technology in a timely and cost-effective manner. The acquisition and integration process is complex, expensive and time consuming, and may cause an interruption of, or loss of momentum in, product development and sales activities and operations of both companies. We may not find suitable acquisition candidates, and acquisitions we complete may be unsuccessful. If we consummate a transaction, we may be unable to integrate and manage acquired products and businesses effectively. If we are unable to effectively execute acquisitions, our business, financial condition and operating results could be adversely affected.

If our customers are not satisfied with our technical support or professional services, they may choose not to purchase our products and services or to renew maintenance contracts, either of which would adversely impact our business and results of operations.

Our business relies on our customers’ satisfaction with the technical support and professional consulting services we provide to support our products. If we fail to provide technical support services that are responsive, satisfy our customers’ expectations and resolve issues that they encounter with our products and services, then they may elect not to purchase or renew annual maintenance and

 

28


Table of Contents

support contracts and they may choose not to purchase additional products and services from us. Accordingly, our failure to provide satisfactory technical support or professional services could have a material and adverse effect on our business and results of operations.

Changes in our provision for income taxes or adverse outcomes resulting from examination of our income tax returns could adversely affect our results.

We are subject to income taxation in the United States and numerous foreign jurisdictions. Determining our provision for income taxes requires significant management judgment. In addition, our provision for income taxes is subject to volatility and could be adversely affected by many factors, including, among other things, changes to our operating or holding structure, changes in the amounts of earnings in jurisdictions with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities and changes in tax laws. We are subject to ongoing tax examinations in various jurisdictions. Tax authorities may disagree with our intercompany charges, cross-jurisdictional transfer pricing or other matters and assess additional taxes. While we regularly assess the likely outcomes of these examinations to determine the adequacy of our provision for income taxes, there can be no assurance that the outcomes of such examinations will not have a material impact on our operating results and cash flows.

Significant judgment is required to determine the recognition and measurement attributes prescribed in Accounting Standards Codification (“ASC”) 740-25 (formerly referred to as Financial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109”). In addition, ASC 740-25 applies to all income tax positions, including the potential recovery of previously paid taxes, which if settled unfavorably could adversely impact our provision for income taxes or additional paid-in capital. Further, as a result of certain of our ongoing employment and capital investment actions and commitments, our income in certain countries is subject to reduced tax rates and in some cases is wholly exempt from tax. Our failure to meet these commitments could adversely impact our provision for income taxes. In addition, we are subject to the continuous examination of our income tax returns by the U.S. Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. There can be no assurance that the outcomes from these continuous examinations will not have an adverse effect on our results of operations.

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

A significant natural disaster, such as an earthquake, fire or a flood, or a significant power outage could have a material adverse impact on our business, operating results and financial condition. Our corporate headquarters are located in the San Francisco Bay Area, a region known for seismic activity. In addition, natural disasters could affect our manufacturing vendors or logistics providers’ ability to perform services such as manufacturing products on a timely basis and assisting with shipments on a timely basis. In the event our service providers’ information technology systems or manufacturing or logistics abilities are hindered by any of the events discussed above, shipments could be delayed, resulting in missing financial targets, such as revenue and shipment targets, for a particular quarter. Further, if a natural disaster occurs in a region from which we derive a significant portion of our revenue, customers in that region may delay or forego purchases of our products, which may materially and adversely impact our results of operations for a particular period. In addition, acts of terrorism could cause disruptions in our business or the business of our manufacturer, logistics providers, partners, customers or the economy as a whole. Given our typical concentration of sales at each quarter end, any disruption in the business of our manufacturer, logistics providers, partners or customers that impacts sales at the end of our quarter could have a significant adverse impact on our quarterly results. All of the aforementioned risks may be augmented if the disaster recovery plans for

 

29


Table of Contents

us and our suppliers prove to be inadequate. To the extent that any of the above results in delays or cancellations of customer orders, or the delay in the manufacture, deployment or shipment of our products, our business, financial condition and results of operations would be adversely affected.

Risks Related to this Offering and Ownership of our Common Stock

Market volatility may affect our stock price and the value of your investment

Following the completion of this offering, the market price for our common stock is likely to be volatile, in part because our shares have not been previously traded publicly. In addition, the market price of our common stock may fluctuate significantly in response to a number of factors, most of which we cannot predict or control, including:

 

  Ÿ  

announcements of new products, services or technologies, commercial relationships, acquisitions or other events by us or our competitors;

 

  Ÿ  

fluctuations in stock market prices and trading volumes of securities of similar companies;

 

  Ÿ  

general market conditions and overall fluctuations in U.S. equity markets;

 

  Ÿ  

variations in our operating results, or the operating results of our competitors;

 

  Ÿ  

changes in our financial guidance or securities analysts’ estimates of our financial performance;

 

  Ÿ  

changes in accounting principles;

 

  Ÿ  

sales of large blocks of our common stock, including sales by our executive officers, directors and significant stockholders;

 

  Ÿ  

additions or departures of any of our key personnel;

 

  Ÿ  

announcements related to litigation;

 

  Ÿ  

changing legal or regulatory developments in the United States and other countries; and

 

  Ÿ  

discussion of us or our stock price by the financial press and in online investor communities.

In addition, the stock market in general, and the New York Stock Exchange in particular, have experienced substantial price and volume volatility that is often seemingly unrelated to the operating performance of particular companies. These broad market fluctuations may cause the trading price of our common stock to decline. In the past, securities class action litigation has often been brought against a company after a period of volatility in the market price of its common stock. We may become involved in this type of litigation in the future. Any securities litigation claims brought against us could result in substantial expenses and the diversion of our management’s attention from our business.

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

We have submitted an application to have our common stock listed on the New York Stock Exchange under the symbol “IMPV.” However, we cannot assure you that our common stock will be approved for listing on the New York Stock Exchange or, if approved, 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.

 

30


Table of Contents

Our management will have broad discretion over the use of the proceeds we receive in this offering and might not apply the proceeds in ways that increase the value of your investment.

Our management will have broad discretion over the use of our net proceeds from this offering, and you will be relying on the judgment of our management regarding the application of these proceeds. We expect to use the net proceeds from this offering for general corporate purposes, including working capital and capital expenditures, which may in the future include investments in, or acquisitions of, businesses, services or technologies that management deems to likely be complementary. In addition, we will invest $3.5 million of the net proceeds to us from this offering in Incapsula, our majority owned subsidiary. Because of the number and variability of factors that will determine our use of the proceeds from this offering, their ultimate use may vary substantially from their currently intended use. As such, our management could spend the proceeds in ways that do not necessarily improve our operating results or enhance the value of our common stock. For a further description of our intended use of the proceeds of the offering, see the section entitled “Use of Proceeds.”

Our disclosure controls and procedures and our internal control over financial reporting may fail to adequately allow us to report information accurately to investors or to detect and prevent errors or fraud, and any failure of such controls and procedures could damage investor confidence in us, cause the market price of our common stock to decline and materially and adversely impact our business, financial condition and operating results.

We cannot assure you that our disclosure controls and procedures, or our internal control 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 of meeting control system objectives. The design of a control system must also reflect applicable resource constraints, and we must consider the control system benefits relative to their costs. As a result of these inherent limitations, no evaluation of controls can provide absolute assurance that we have identified or will identify or prevent all control issues and instances of errors or fraud, if any, within our company. The failure of our control systems to allow us to accurately report information or detect or prevent errors or fraud could damage investor confidence in us, cause the market price of our common stock to decline, and materially adversely impact our business, financial condition and operating results.

In addition, we will be required, pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting for the first fiscal year beginning after the effective date of this offering. We may not be able to complete our evaluation, testing and any required remediation in a timely fashion. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal controls are effective. If we are unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an unqualified opinion on the effectiveness of our internal controls, we could lose investor confidence in the accuracy and completeness of our financial reports, which would cause the price of our common stock to decline.

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

We expect that our existing cash and cash equivalents, together with our net proceeds from this offering, will be sufficient to meet our anticipated cash needs for at least the next twelve months. After that, we may need to raise additional funds, 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

 

31


Table of Contents

experience significant dilution of their ownership interests and the per share value of our common stock could decline. Furthermore, if we engage in debt financing, the holders of debt would have priority over the holders of common stock and we may be required to accept terms that restrict our ability to incur additional indebtedness, make capital expenditures and take other actions that would otherwise be in the interests of the stockholders and force us to maintain specified liquidity or other ratios, any of which could harm our business, operating results and financial condition. Similarly, if we raise additional funds through collaboration, strategic alliance and licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies or grant licenses on terms that are not favorable to us. If we need additional capital and cannot raise it on acceptable terms, we may not be able to, among other things:

 

  Ÿ  

develop or enhance our products and services;

 

  Ÿ  

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

 

  Ÿ  

acquire complementary technologies, products or businesses;

 

  Ÿ  

expand operations, in the United States or internationally;

 

  Ÿ  

hire, train and retain employees; or

 

  Ÿ  

respond to competitive pressures or unanticipated working capital requirements.

Our failure to do any of these things could seriously harm our business, financial condition and results of operations.

Concentration of ownership among our existing executive officers, directors and their affiliates may prevent new investors from influencing significant corporate decisions.

Upon completion of this offering and, assuming the purchase of an aggregate of approximately $15,000,000 of our common stock in this offering by certain of our existing investors, our executive officers, directors and 5% or greater stockholders will beneficially own, in the aggregate, approximately 67.7% of our outstanding common stock, or, without such purchase, will beneficially own 63.2% of our outstanding common stock. As a result, such persons, acting together, will have the ability to control our management and affairs and substantially all matters submitted to our stockholders for approval, including the election and removal of directors and approval of any significant transaction. These persons will also have the ability to control our management and business affairs. This concentration of ownership may have the effect of delaying, deferring or preventing a change in control, impeding a merger, consolidation, takeover or other business combination involving us, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of our business, even if such a transaction would benefit other stockholders.

Participation in this offering by certain of our existing stockholders would reduce the available public float for our shares.

Certain entities associated with Accel Partners, Greylock Partners, Meritech Capital Partners, U.S. Venture Partners and Venrock and Shlomo Kramer, our President and Chief Executive Officer, each of which are our existing stockholders, have indicated an interest in purchasing up to an aggregate of approximately $15,000,000 of our common stock in this offering at the initial public offering price. Because these indications of interest are not binding agreements or commitments to purchase, these existing stockholders may elect not to purchase shares in this offering or the underwriters may elect not to sell any shares in this offering to such stockholders. Assuming an initial public offering price of $15.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, if such stockholders were to purchase the entire $15,000,000 of our common stock, they would purchase an aggregate of 1,000,000 shares of our common stock in this offering. If such stockholders were to purchase all of these shares, they would beneficially own approximately 64.8% of our outstanding common stock after this offering.

 

32


Table of Contents

If our stockholders are allocated all or a portion of the shares in which they have indicated an interest in this offering and purchase any such shares, such purchase would reduce the available public float for our shares because such stockholders would be restricted from selling the shares by a lock-up agreement they have entered into with our underwriters and by restrictions under applicable securities laws. As a result, any purchase of shares by such stockholders in this offering may reduce the liquidity of our common stock relative to what it would have been had these shares been purchased by investors that were not affiliated with us.

Future sales of shares by existing stockholders could cause our stock price to decline.

Upon completion of this offering, there will be 22,101,695 shares of our common stock outstanding. Of these, 5,000,000 shares are being sold in this offering (or 5,750,000 shares, if the underwriters exercise their option to purchase additional shares in full). Assuming the purchase of 1,000,000 shares in this offering by our existing stockholders, only 4,330,361 shares will be freely tradable immediately after this offering (except for shares purchased by affiliates) and 16,440,973 of the remaining 16,771,334 outstanding shares may be sold upon expiration of lock-up agreements 180 days after the date of this prospectus (subject in some cases to volume limitations). In addition, as of September 30, 2011, we had outstanding options to purchase 2,944,899 shares of common stock that, if exercised, will result in these additional shares becoming available for sale upon expiration of the lock-up agreements. A large portion of these shares and options are held by a small number of persons and investment funds. Sales by these stockholders or optionholders of a substantial number of shares after this offering could significantly reduce the market price of our common stock. Moreover, certain holders of shares of common stock will have rights, subject to some conditions, to require us to file registration statements covering the shares they currently hold, or to include these shares in registration statements that we may file for ourselves or other stockholders.

We also intend to register all common stock that we may issue under our 2003 Stock Plan, as amended, our 2011 Stock Option and Incentive Plan (“2011 Plan”) and our 2011 Employee Stock Purchase Plan (“ESPP”). Effective upon the effectiveness of this registration statement, an aggregate of 1,000,000 shares of our common stock will be reserved for future issuance under the 2011 Plan, plus any shares which are forfeited, cancelled or terminated (other than by exercise) under our 2003 Stock Plan, and an aggregate of 500,000 shares will be reserved for issuance under the ESPP. Once we register these shares, which we plan to do shortly after the completion of this offering, they can be freely sold in the public market upon issuance, subject to the lock-up agreements referred to above. If a large number of these shares are sold in the public market, the sales could reduce the trading price of our common stock. See the section entitled “Shares Eligible for Future Sale” for a more detailed description of sales that may occur in the future.

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. If we do not establish and maintain adequate research coverage or if one or more of the analysts who covers us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price and trading volume to decline.

 

33


Table of Contents

We will incur increased costs and demands upon management as a result of efforts to comply with the laws and regulations affecting public companies which could adversely affect our operating results.

As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company, including costs associated with public company reporting and corporate governance requirements. These requirements include compliance with the Sarbanes-Oxley Act as well as other rules implemented by the SEC and the New York Stock Exchange. The expenses incurred by public companies for reporting and corporate governance purposes are significant. We expect these rules and regulations to substantially increase our legal and financial compliance costs and to make some activities more time-consuming and costly. For example, 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, our board committees or as executive officers. The increased costs associated with operating as a public company will decrease our net income or increase our net loss, and may require us to reduce costs in other areas of our business or increase the prices of our products or services. Additionally, if these requirements divert our management’s attention from other business concerns, they could have a material adverse effect on our business, financial condition and results of operations.

We do not intend to pay dividends on our common stock so any returns will be limited to the value of our stock.

We have never declared or paid any cash dividend on our common stock. We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. Any return to stockholders will therefore be limited to the value of their stock.

Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.

Provisions in our restated certificate of incorporation and amended and restated bylaws may delay or prevent an acquisition of us or a change in our management. These provisions include:

 

  Ÿ  

authorizing “blank check” preferred stock, which could be issued by the board without stockholder approval and may contain voting, liquidation, dividend and other rights superior to our common stock, which would increase the number of outstanding shares and could thwart a takeover attempt;

 

  Ÿ  

a classified board of directors whose members can only be dismissed for cause;

 

  Ÿ  

the prohibition on actions by written consent of our stockholders;

 

  Ÿ  

the limitation on who may call a special meeting of stockholders;

 

  Ÿ  

the establishment of advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon at stockholder meetings; and

 

  Ÿ  

the requirement of at least 75% of the outstanding capital stock to amend any of the foregoing second through fifth provisions.

In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which limits the ability of stockholders owning in excess of 15% of our outstanding voting stock to merge or combine with us. Although we believe

 

34


Table of Contents

these provisions collectively provide for an opportunity to obtain greater value for stockholders by requiring potential acquirers to negotiate with our board of directors, they would apply even if an offer rejected by our board were considered beneficial by some stockholders. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management.

Our ability to use our net operating loss carryforwards may be subject to limitation and may result in increased future tax liability to us.

Generally, a change of more than 50% in the ownership of a corporation’s stock, by value, over a three-year period constitutes an ownership change for U.S. federal income tax purposes. An ownership change may limit a company’s ability to use its net operating loss carryforwards attributable to the period prior to such change. We have not performed a detailed analysis to determine whether an ownership change under Section 382 of the Internal Revenue Code has occurred after each of our previous private placements of preferred stock. In addition, the number of shares of common stock that we issue in connection with this offering may be sufficient, taking into account prior or future shifts in our ownership over a three-year period, to cause us to undergo an ownership change. As a result, if we earn net taxable income, our ability to use our pre-change net operating loss carryforwards to offset U.S. federal taxable income may become subject to limitations, which could potentially result in increased future tax liability to us.

 

35


Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements within the meaning of the federal securities laws, which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. You can generally identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions that concern our expectations, strategy, plans or intentions. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our business, financial condition and results of operations. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section entitled “Risk Factors” and elsewhere in this prospectus. Accordingly, you should not rely upon forward-looking statements as predictions of future events. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those projected in the forward looking statements. Forward-looking statements contained in this prospectus include, but are not limited to, statements about:

 

  Ÿ  

our expectations related to the use of proceeds from this offering;

 

  Ÿ  

expected growth in the markets for data security products;

 

  Ÿ  

our ability to anticipate market needs and opportunities and expand our distribution channels;

 

  Ÿ  

our ability to compete with other companies that are developing or selling products that are competitive with our products;

 

  Ÿ  

our plans to continue to invest in and develop technology and products for our markets;

 

  Ÿ  

our expectations regarding expenditures;

 

  Ÿ  

our ability to acquire and integrate new businesses and technologies;

 

  Ÿ  

the timing of expected introductions of new or enhanced products;

 

  Ÿ  

our ability to attract and retain key personnel; and

 

  Ÿ  

other factors discussed elsewhere in this prospectus.

We caution you that the foregoing list may not contain all of the forward-looking statements made in this prospectus. In addition, in light of these risks and uncertainties, the matters referred to in the forward-looking statements contained in this prospectus may not occur.

The forward-looking statements made in this prospectus relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make. We do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

This prospectus also contains statistical data, estimates and forecasts that are based on independent industry publications or other publicly available information, while other information is based on our internal sources. Although we believe that these third-party sources referred to in this

 

36


Table of Contents

prospectus are reliable, neither we nor the underwriters have independently verified the information provided by these third parties. While we are not aware of any misstatements regarding any third party information presented in this prospectus, their estimates, in particular, 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 discussed under the section entitled “Risk Factors.”

 

37


Table of Contents

USE OF PROCEEDS

We estimate that the net proceeds from the sale of shares of our common stock that we are selling in this offering will be approximately $61.8 million, based on an assumed initial public offering price of $15.00 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 and estimated offering expenses payable by us. If the underwriters’ option to purchase additional shares from us is exercised in full, we estimate that we will receive additional net proceeds of $10.5 million. We will not receive any proceeds from the sale of shares of common stock by the selling stockholders.

A $1.00 increase or decrease in the assumed initial public offering price of $15.00 would increase or decrease the net proceeds we received from the offering by approximately $4.4 million, assuming the number of shares offered by us remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The principal purposes of this offering are to obtain additional capital, to create a public market for our common stock and to facilitate our future access to the public equity markets.

We currently intend to use the net proceeds received by us from this offering for working capital and general corporate purposes. In addition, we will invest $3.5 million of the net proceeds to us from this offering in Incapsula, our majority owned subsidiary, and will receive in exchange an additional 4,375,000 shares of Incapsula’s Series A-1 Preferred Stock. For a more complete description of our additional investment in Incapsula, see the section entitled “Certain Relationships and Related Person Transactions—Transactions with our Executive Officers, Directors and Beneficial Owners—Transactions with Incapsula, Inc.”

We may also use a portion of the net proceeds received by us from this offering for acquisitions of complementary businesses, technologies or other assets. We have not entered into any agreements with respect to any acquisitions at this time.

We cannot specify with certainty the particular uses for the net proceeds to be received by us from this offering. Accordingly, our management team will have broad discretion in using the net proceeds to be received by us from this offering.

Pending the use of proceeds from this offering as described above, we plan to invest the net proceeds in short- and intermediate-term, interest-bearing obligations, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of the U.S. government.

 

38


Table of Contents

DIVIDEND POLICY

We have never declared or paid cash dividends on our common stock. We currently intend to retain any future earnings and do not expect to pay any dividends in the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors and will be dependent on a number of factors, including our earnings, capital requirements and overall financial conditions. The loan agreement for our credit facility contains a prohibition on the payment of cash dividends.

 

39


Table of Contents

CAPITALIZATION

The following table sets forth our cash, cash equivalents and short-term investments and capitalization as of September 30, 2011, as follows:

 

  Ÿ  

our actual cash, cash equivalents and short-term investments and capitalization;

 

  Ÿ  

our pro forma cash, cash equivalents and short-term investments and capitalization after giving effect to the conversion of all outstanding shares of our convertible preferred stock into 10,761,511 shares of common stock, which we expect to occur immediately prior to the closing of this offering, and the resulting reclassification of the preferred stock warrant liability to additional paid-in capital; and

 

  Ÿ  

our pro forma as adjusted cash, cash equivalents and short-term investments and capitalization after giving effect to (i) the conversion of all outstanding shares of our convertible preferred stock into 10,761,511 shares of common stock, which we expect to occur immediately prior to the closing of this offering, the resulting reclassification of the preferred stock warrant liability to additional paid-in capital, and (ii) the receipt of the net proceeds from the sale of 4,750,000 shares of common stock offered by us in this offering, at an assumed initial public offering price of $15.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

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

 

     As of September 30, 2011  
     Actual     Pro Forma     Pro Forma as
Adjusted
 
     (in thousands, except share and per share data)  

Cash, cash equivalents and short-term investments

   $ 13,025      $ 13,025      $ 77,590   
  

 

 

   

 

 

   

 

 

 

Convertible preferred stock warrant liability

   $ 223      $ —        $ —     

Convertible preferred stock, $0.0001 par value, per share: 21,566,101 shares authorized, 10,761,511 shares issued and outstanding actual; no shares authorized, issued and outstanding pro forma and pro forma as adjusted

     53,442        —          —     

Stockholders’ equity (deficit):

      

Common stock, $0.0001, per share: 50,000,000 shares authorized, 6,590,184 shares issued and outstanding actual; 17,351,695 shares issued and outstanding pro forma (unaudited); 145,000,000 shares authorized, 22,101,695 shares issued and outstanding pro forma as adjusted

     1        2        2   

Additional paid-in capital

     5,577        59,241        121,004   

Accumulated deficit

     (64,634     (64,634     (64,634

Accumulated other comprehensive income

     (360     (360     (360

Noncontrolling interest

     (642     (642     (642
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity (deficit)

     (60,058     (6,393     55,370   
  

 

 

   

 

 

   

 

 

 

Total capitalization (capital deficiency)

   $ (6,393   $ (6,393   $ 55,370   
  

 

 

   

 

 

   

 

 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this

 

40


Table of Contents

prospectus, would increase (decrease) our pro forma as adjusted cash, cash equivalents and short-term investments, additional paid-in capital, total stockholders’ equity (deficit) and total capitalization by approximately $4.4 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of one million shares in the number of shares of common stock offered by us would increase (decrease) our pro forma as adjusted cash, cash equivalents and short-term investments, additional paid-in capital, total stockholders’ equity (deficit) and total capitalization from this offering by approximately $14.0 million, assuming the assumed initial public offering price remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The number of shares of common stock issued and outstanding actual, pro forma and pro forma as adjusted in the table above excludes the following shares:

 

  Ÿ  

2,944,899 shares of common stock issuable upon exercise of stock options outstanding as of September 30, 2011, and having a weighted average exercise price of $3.48 per share;

 

  Ÿ  

19,999 shares of common stock issuable upon the exercise of two outstanding warrants to purchase convertible preferred stock, assuming the conversion immediately prior to the closing of this offering, at a weighted average exercise price of $3.00 per share;

 

  Ÿ  

1,929,152 shares of common stock reserved for future issuance under our equity incentive plans; and

 

  Ÿ  

500,000 shares of common stock reserved for future issuance under our 2011 Employee Stock Purchase Plan.

 

41


Table of Contents

DILUTION

If you invest in our common stock in this offering, your interest will be diluted immediately to the extent of the difference between the initial offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock after this offering. Our pro forma net tangible book deficit as of September 30, 2011 was $(6.4) million, or $(0.37) per share of common stock. Pro forma net tangible book deficit per share represents the amount of our total tangible assets less our total liabilities, divided by the number of shares of common stock outstanding, as of September 30, 2011, after giving effect to the conversion of all outstanding shares of our convertible preferred stock into 10,761,511 shares of our common stock, which we expect to occur immediately prior to the closing of this offering, and the resulting reclassification of the preferred stock warrant liability to additional paid-in capital.

After giving effect to the sale by us of 4,750,000 shares of common stock in this offering at an assumed initial public offering price of $15.00 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 and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of September 30, 2011 would have been approximately $55.4 million, or approximately $2.51 per share. This amount represents an immediate increase in pro forma net tangible book value of $2.88 per share to our existing stockholders and an immediate dilution in pro forma net tangible book value of approximately $12.49 per share to new investors purchasing shares of common stock in this offering at the assumed initial public offering price.

The following table illustrates this dilution:

 

Assumed initial public offering price per share

     $ 15.00   

Pro forma net tangible book deficit per share as of September 30, 2011

   $ (0.37  

Increase per share attributable to this offering

     2.88     
  

 

 

   

Pro forma net tangible book value per share after this offering

       2.51   
    

 

 

 

Dilution per share to new investors

     $ 12.49   
    

 

 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share would increase (decrease) our adjusted net tangible book value per share after this offering by approximately $0.20 and would increase (decrease) dilution per share to new investors by approximately $0.80, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. In addition, to the extent any outstanding options or warrants are exercised, you will experience further dilution.

 

42


Table of Contents

The following table presents on a pro forma as adjusted basis after giving effect to the conversion of all outstanding shares of convertible preferred stock into common stock, which we expect to occur immediately prior to the closing of this offering, the difference between existing stockholders and new investors purchasing shares of our common stock in this offering, with respect to the number of shares purchased from us, the total consideration paid or to be paid to us, which includes net proceeds received from the issuance of common and convertible preferred stock, cash received from the exercise of stock options and the value of any stock issued for services and the average price per share paid or to be paid to us at an assumed offering price of $15.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

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

Existing stockholders

     17,351,695         78.5   $ 59,251,000         45.4   $ 3.41   

New investors

     4,750,000         21.5        71,250,000         54.6        15.00   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

     22,101,695         100   $ 130,501,272         100   $ 5.90   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share would increase (decrease) the total consideration paid by new investors by $4.8 million and increase (decrease) the percent of total consideration paid by new investors by 1.6%, assuming that the number of shares offered by us, as set forth on the cover of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

Assuming the underwriters’ option to purchase additional shares is exercised in full and if certain of our existing stockholders do not elect to purchase an aggregate of approximately $15,000,000 of our common stock in this offering, sales by us in this offering will reduce the percentage of shares held by existing stockholders to 75.9% and will increase the number of shares held by our new investors to 5,500,000, or 24.1%.

The number of shares of our common stock to be outstanding after this offering is based on 17,351,695 shares of our common stock outstanding as of September 30, 2011 and excludes:

 

  Ÿ  

2,944,899 shares of common stock issuable upon exercise of stock options outstanding as of September 30, 2011, and having a weighted average exercise price of $3.48 per share;

 

  Ÿ  

19,999 shares of common stock issuable upon the exercise of two outstanding warrants to purchase convertible preferred stock, assuming the conversion immediately prior to the closing of this offering, at a weighted average exercise price of $3.00 per share;

 

  Ÿ  

1,929,152 shares of common stock reserved for future issuance under our equity incentive plans; and

 

  Ÿ  

500,000 shares of common stock reserved for future issuance under our 2011 Employee Stock Purchase Plan.

 

43


Table of Contents

SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated statement of operations data for the years ended December 31, 2008, 2009 and 2010 and the consolidated balance sheet data as of December 31, 2009 and 2010 are derived from our audited consolidated financial statements included elsewhere in this prospectus. The selected consolidated statement of operations data for the nine months ended September 30, 2010 and 2011 and the consolidated balance sheet data as of September 30, 2011 are derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The selected consolidated statement of operations data for the years ended December 31, 2006 and 2007 and the consolidated balance sheet data as of December 31, 2006, 2007 and 2008 are unaudited. Our historical results are not necessarily indicative of the results that may be expected in the future, and the results for the nine months ended September 30, 2011 are not necessarily indicative of operating results to be expected for the full year ending December 31, 2011 or any other period. The unaudited consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments, which consist only of normal recurring adjustments, necessary for the fair presentation of those unaudited consolidated financial statements. You should read the selected consolidated financial data below in conjunction with the section entitled “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.

 

    Years Ended December 31,     Nine Months Ended
September 30,
 
    2006     2007     2008     2009     2010     2010     2011  
    (in thousands, except share and per share data)  

Consolidated Statement of Operations Data:

             

Net revenue:

             

Products and license

  $ 8,635      $ 13,995      $ 24,298      $ 25,727      $ 34,479      $ 23,532      $ 32,821   

Services

    1,776        3,713        7,848        13,614        20,903        14,866        22,166   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenue

    10,411        17,708        32,146        39,341        55,382        38,398        54,987   

Cost of revenue:(1)

             

Products and license

    1,877        2,379        3,661        4,795        5,905        4,123        4,433   

Services

    395        1,659        3,455        4,576        6,428        4,639        7,062   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

    2,272        4,038        7,116        9,371        12,333        8,762        11,495   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    8,139        13,670        25,030        29,970        43,049        29,636        43,492   

Operating expenses:

             

Research and development(1)

    3,037        4,899        8,591        10,538        13,214        9,468        12,858   

Sales and marketing(1)

    8,223        14,505        20,447        26,920        34,168        24,095        30,970   

General and administrative(1)

    896        1,811        3,608        4,669        7,982        5,292        8,186   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    12,156        21,215        32,646        42,127        55,364        38,855        52,014   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (4,017     (7,545     (7,616     (12,157     (12,315     (9,219     (8,522

Other income (expense), net

    573        522        190        178        474        357        (238
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

    (3,444     (7,023     (7,426     (11,979     (11,841     (8,862     (8,760

Provision for income taxes

    —          106        229        360        527        331        471   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (3,444     (7,129     (7,655     (12,339     (12,368     (9,193     (9,231

Loss attributable to noncontrolling interest

    —          —          —          43        355        256        458   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to Imperva, Inc. stockholders

  $ (3,444   $ (7,129   $ (7,655   $ (12,296   $ (12,013   $ (8,937   $ (8,773
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share of common stock attributable to Imperva, Inc. stockholders, basic and diluted(2)

  $ (1.03   $ (1.94   $ (1.98   $ (2.82   $ (2.46   $ (1.84   $ (1.64
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Shares used in computing net loss per share of common stock, basic and diluted(2)

    3,328,810        3,678,378        3,860,033        4,365,359        4,884,665        4,846,160        5,334,581   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share of common stock attributable to Imperva, Inc. stockholders, basic and diluted(2)

          $ (0.77     $ (0.54
         

 

 

     

 

 

 

Shares used in computing pro forma net loss per share of common stock, basic and diluted(2)

            15,646,176          16,096,092   
         

 

 

     

 

 

 

 

 

44


Table of Contents
(1) Includes stock-based compensation as follows:

 

     Years Ended December 31,      Nine Months
Ended September 30,
 
     2006      2007      2008      2009      2010      2010      2011  
     (dollars in thousands)  

Cost of revenue

   $ 3       $ 8       $ 22       $ 37       $ 44       $ 28       $ 73   

Research and development

     21         33         41         57         66         37         83   

Sales and marketing

     71         153         163         218         257         191         245   

General and administrative

     24         25         48         109         273         60         753   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $ 119       $ 219       $ 274       $ 421       $ 640       $ 316       $ 1,154   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(2) Please see Note 17 to our audited consolidated financial statements appearing elsewhere in this prospectus for an explanation of the calculations of our basic and diluted net loss per share of common stock and pro forma net loss per share of common stock.

 

     Years Ended December 31,     As of
September 30,

2011
 
     2006     2007     2008     2009     2010    
     (dollars in thousands)  

Consolidated Balance Sheet Data:

            

Cash, cash equivalents and short term investments

   $ 16,557      $ 11,628      $ 24,949      $ 19,050      $ 17,655      $ 13,025   

Working capital (deficiency)

     16,182        10,528        22,892        11,317        6,841        (5,761

Total assets

     19,953        20,343        38,535        37,546        40,977        42,465   

Deferred revenue, current and long-term

     930        5,046        8,060        13,377        21,218        25,560   

Long-term debt, including current portion

     36        38        —          600        —          —     

Convertible preferred stock warrant liability

     55        55        55        55        69        223   

Convertible preferred stock

     33,464        33,464        53,442        53,442        53,442        53,442   

Noncontrolling interest

     —          —          —          (43     (351     (642

Total stockholders’ deficit

     (16,378     (23,027     (30,072     (41,528     (52,419     (60,058

 

45


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our “Selected Consolidated Financial Data” and our consolidated financial statements and related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from the forward-looking statements below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section entitled “Risk Factors” and elsewhere in this prospectus.

Overview

We are a pioneer and leader of a new category of data security solutions focused on providing visibility and control over high-value business data across critical business systems within the data center. Our SecureSphere Data Security Suite is a broad solution designed to prioritize and mitigate risks to high-value business data, protect against hackers and malicious insiders, and address and streamline regulatory compliance. SecureSphere is an integrated, modular suite, which provides database, file and web application security, and secures all business data across various systems in data centers, including traditional on-premise data centers as well as private, public and hybrid cloud computing environments. We also offer cloud-based security services that deliver on-demand and cost effective web application security.

We were founded in 2002 with the vision of protecting high-value business data within the enterprise. Since that time we have been investing in our data security products to meet the rapidly evolving demands of customers. We shipped our initial web application security and data security products in 2002; in 2006, we expanded our database security product to include compliance features; and in 2010, we launched our file security offering. In addition, in 2010, we launched our cloud-based initiatives with ThreatRadar and, in 2011, we introduced our cloud-based offering for mid-market enterprises and small and medium-sized businesses (“SMB”) that we provide through Incapsula, Inc., our majority owned subsidiary.

Our research and development efforts are focused primarily on improving and enhancing our existing data security products and services, as well as developing new products and services and conducting advanced security research. We conduct our research and development activities in Israel, and we believe this provides us with access to some of the best engineering talent in the security industry. As of September 30, 2011, we had 134 employees dedicated to research and development, including our advanced security research group, the Application Defense Center (“ADC”). Our research and development expense was $8.6 million, $10.5 million and $13.2 million for 2008, 2009 and 2010, respectively, and $12.9 million during the nine months ended September 30, 2011.

We derive our revenue from sales and licenses of our products and sales of our services. Products and license revenue is generated primarily from sales of perpetual software licenses installed on hardware appliances or virtual appliances for our SecureSphere Data Security Suite. Services revenue consists of maintenance and support, professional services and training and subscriptions. A majority of our revenue is derived from customers in the Americas region. In 2010, 66% of our total revenue was generated from the Americas, 24% from Europe, Middle East and Africa (“EMEA”) and 10% from Asia Pacific, and for the nine months ended September 30, 2011, 63% of our total revenue was generated from the Americas, 23% from EMEA and 14% from Asia Pacific.

We market and sell our products through a hybrid sales model, which combines a direct touch sales organization and an overlay channel sales team that actively assist our extensive network of

 

46


Table of Contents

channel partners throughout the sales process. We also provide our channel partners with marketing assistance, technical training and support. We primarily sell our products and services through our channel partners, including distributors and resellers, which sell to end-user customers, who we refer to in this prospectus as our customers. We have a network of over 350 channel partners worldwide, including both resellers and distributors. In 2010, our channel partners originated over 60%, and fulfilled almost 90%, of our sales. We work with many of the world’s leading security value-added resellers, and our partners include some of the largest hosting companies for cloud-based deployments.

As of September 30, 2011, we had over 1,500 customers in more than 50 countries. In addition, our solutions are used to protect thousands of organizations through cloud-based deployments with our Software-as-a-Service (“SaaS”) customers and our managed security service provider (“MSSP”) and hosting partners. Our customers include four of the top five telecommunications companies, three of the top five commercial banks in the United States, three of the top five financial data service firms, three of the top five computer hardware companies, two of the top five food and drug store companies, over 150 government agencies around the world and more than 100 Fortune 1000 companies.

Our net revenue has increased in each of the last three years, growing from $32.1 million in 2008 to $55.4 million in 2010. Our net revenue has also grown from $38.4 million during the nine months ended September 30, 2010 to $55.0 million during the nine months ended September 30, 2011. We have incurred net losses attributable to our stockholders of $7.7 million, $12.3 million and $12.0 million in 2008, 2009 and 2010, respectively, and $8.9 million and $8.8 million during the nine months ended September 30, 2010 and September 30, 2011, respectively. As of September 30, 2011, we had an accumulated deficit of $64.6 million.

Opportunities, Challenges and Risks

We believe that the growth of our business and our future success are dependent upon many factors, including our ability to maintain our technology leadership, improve our sales and marketing, address the needs of smaller enterprises and compete effectively in the marketplace for data security solutions. While each of these areas presents significant opportunities for us, they also pose important challenges and risks that we must successfully address in order to sustain the growth of our business and improve our results of operations.

Maintain Technology Leadership.    As a result of the rise in sophisticated attacks by hackers and malicious insiders, the difficulty in complying with regulations governing business data and the growing complexity of, and open access to, data centers, we believe that enterprises are struggling to provide visibility and control over business data that they need to protect. We believe these challenges are driving the need for a new protection layer positioned closely around business data and systems in the data center. We expect that as enterprises recognize the growing risk to high-value business data and the need to comply with increasing regulatory compliance mandates, their spending will increase on solutions designed to control and protect such data. We believe that traditional security and compliance products do not address the evolving needs of enterprises or do not do so adequately, and that this presents us with a large market opportunity. To capitalize on this opportunity, we have introduced and expect that in the future we will need to continue to introduce innovations to our broad data security solutions. We cannot assure you that our products will achieve widespread market acceptance or that we will properly anticipate future customer needs. Moreover, if our products do not satisfy evolving customer requirements, we will not capture the increase in spending that we expect will result from enterprises seeking to secure business data and systems.

Invest in Sales and Marketing.    In order to capitalize on the anticipated increase in spending in the data security market, we will need to continue to invest significant resources to further strengthen our existing relationships with channel partners, extend our global network by adding new channel

 

47


Table of Contents

partners and grow our sales and marketing team. Any investments that 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 you that the investments that we intend to make to strengthen our sales and marketing efforts will enable us to capitalize on the expected increase in spending in the data security market or result in an increase in revenue or an improvement in our results of operations.

Address Needs of Smaller Enterprises.    As market awareness of the benefits of a broad data security solution increases, we believe there is a significant opportunity to provide data security solutions to smaller enterprises as they confront increasing security threats and compliance mandates. To capitalize on this opportunity, we intend to increase our business with mid-market enterprises and SMBs by expanding our cloud-based service offerings and our distribution channel. We have made, and may in the future continue to make, significant investments in our cloud-based security products to address the data security needs of mid-market enterprises and SMBs. If our cloud-based security products, which are relatively new, fail to gain broad acceptance with mid-market enterprises and SMBs, our revenue growth, results of operations and competitive position in our industry could suffer.

Compete Effectively.    We operate in an intensely competitive market that has witnessed significant consolidation in recent years with large companies acquiring many of our competitors. We track our success rate in competitive sales opportunities against certain competitors, some of which generate higher revenues and have greater market capitalizations than we do, and many of which are more established or have greater name recognition within our industry. Based upon our internal tracking of the results of such competitive sales opportunities, we believe that we have historically competed favorably against our larger competitors, and that we have a proven track record of successfully competing against such larger competitors. Nonetheless, some of our larger competitors have numerous advantages, including, but not limited to, greater financial resources, broader product offerings and more established relationships with channel partners and customers. If we are unable to compete effectively for a share of the data security market, our business, results of operations and financial condition could be materially and adversely affected.

To date, we have incurred, and continue to incur, losses from operations and net losses. However, we believe that our existing cash, cash equivalents and short-term investments will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months. Further, we expect that, if we successfully execute our business plan and strategy, our loss from operations and our net losses will continue to decline, and that we will reach profitability. Should we need additional cash in the future, we may utilize existing lines of credit, enter into additional lines of credit or raise funds through the sale of equity securities.

Key Metrics of Our Business

We monitor the key financial metrics discussed below to help us evaluate growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts and assess operational efficiencies.

Net Revenue:    We measure our net revenue to assess the acceptance of our products from our customers, our growth in the markets we serve and to help us establish our strategic and operating plans for future periods. We discuss the components of our net revenue in “—Financial Overview— Net Revenue” below.

Gross Margin:    We monitor our gross margin to assess the impact on our current and forecasted financial results from any changes to the pricing and mix of products we are selling to our customers.

Loss from Operations:    We track our loss from operations to assess how effectively we are planning and monitoring our operations as well as controlling our operational costs, which are primarily driven by headcount.

 

48


Table of Contents

Cash, Cash Equivalents and Short-term Investments:    We evaluate the level of our cash, cash equivalents and short-term investments to ensure we have sufficient liquidity to fund our operations, including the development of future products and product enhancements and the expansion into new sales channels and territories.

Number of Customers:    We believe our customer count is a key indicator of our market penetration, the productivity of our sales organization and the value that our products bring to our customer base. We also believe our existing customers represent significant future revenue opportunities for us.

We discuss for the periods presented revenue, gross margin, the components of loss from operations and number of customers further below under “—Segments” and “—Results of Operations”, as applicable, and we discuss our cash and cash equivalents under “—Liquidity and Capital Resources.”

We also believe that deferred revenue and cash flow from operations are key financial metrics for our business. The components of deferred revenue and cash flow from operations, as well as our rationale for monitoring these metrics, are discussed immediately below this table:

 

    Years Ended or as of
December 31,
    Nine Months Ended or as of
September 30,
 
    2008     2009     2010     2010     2011  
    (dollars in thousands)  

Net revenue

  $ 32,146      $ 39,341      $ 55,382      $ 38,398      $ 54,987   

Gross margin

    77.9 %     76.2     77.7 %     77.2     79.1

Loss from operations

    (7,616     (12,157     (12,315     (9,219     (8,522

Total deferred revenue

    8,060        13,377        21,218        16,752        25,560   

Cash, cash equivalents and short-term investments

    24,949        19,050        17,655        17,543        13,025   

Net cash used in operations

    (5,164     (5,511     (1,049     (831     (5,056

Number of customers

    587        926        1,309        1,181        1,584   

Deferred Revenue

Our deferred revenue consists of amounts that have been invoiced but that have not yet been recognized as revenue. The majority of our deferred revenue balance consists of the unamortized portion of services revenue from maintenance and support contracts. We monitor our deferred revenue balance because it represents a significant portion of revenue to be recognized in future periods. We also assess the increase in our deferred revenue balance plus revenue we recognized in a particular period as a measure of our sales activity for that period. While the change in our deferred revenue and revenue recognized in a given period comprise the majority of our sales activity during that period, they do not constitute the entire sales activity during the period. Our total sales activity also includes sales of products and services for which we have not yet met the criteria to recognize revenue or add such amounts to our deferred revenue balance. Revenue and deferred revenue from these transactions is recognized or recorded in future periods when we have met the required criteria. We discuss for the periods presented deferred revenue further below under “—Results of Operations.”

Net Cash Flow Provided By (Used in) Operations

We monitor cash flow from operations as a measure of our overall business performance. Our cash flow from operations is driven primarily by sales of our products and licenses and, to a lesser

 

49


Table of Contents

extent, from up-front payments from customers under maintenance and support contracts. Our primary uses of cash in operating activities are for personnel-related expenditures, costs of acquiring the hardware used for our appliances, marketing and promotional expenses and costs related to our facilities. Monitoring cash flow from operations enables us to analyze our financial performance without the non-cash effects of certain items such as depreciation and amortization and stock-based compensation expenses, thereby allowing us to better understand and manage the cash needs of our business.

Segments

For financial reporting purposes, we operate as two reportable business segments: (i) Imperva, which is comprised of our financial position and results of operations and those of our wholly-owned subsidiaries; and (ii) Incapsula, which is comprised entirely of the financial position and results of operations of our majority owned subsidiary. Our Incapsula segment commenced operations in November 2009 and has not generated any significant revenue since inception. In discussing our results of operations, we have provided a consolidated discussion and analysis of the revenues from our two segments and, where significant, provided a separate discussion and analysis of the operating expenses of our two segments. See Note 16 of “Notes to Consolidated Financial Statements” for a discussion of our financial information by segment.

Financial Overview

Net Revenue

We derive our revenue from sales and licenses of our products and sales of our services. As discussed further in “—Critical Accounting Policies and Estimates—Revenue Recognition” below, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable and collection is probable.

Our net revenue is comprised of the following:

 

  Ÿ  

Products and License Revenue—Product and license revenue is generated from sales of perpetual software licenses installed on hardware appliances or virtual appliances for our SecureSphere Data Security Suite. Our SecureSphere Data Security Suite consists of database security, file security and web application security. We offer multiple hardware appliance versions that accompany our software, each with different throughput capacities. Perpetual software license revenue is generated from sales of our appliances, licenses for additional users and add-on software modules. We also generate a small amount of hardware revenue from sales of spares or replacement appliances, demonstration units and accessories.

 

  Ÿ  

Services Revenue—Services revenue consists of maintenance and support, professional services and training and subscriptions. Maintenance and support revenue is generated from support services that are bundled with appliances and add-on software modules. There are three levels of maintenance and support—Standard, Enhanced and Premium—and these are offered through agreements for 1-year, 2-year or 3-year terms. Maintenance and support includes major and minor if-and-when available software updates; customer care, which includes our designated support engineer program; content updates from our advanced security research group, the ADC, and hardware replacement. Subscription revenue is generated from sales of our cloud-based services. Professional services revenue consists of fees we earn related to implementation and consulting services we provide our customers. Training services revenue consists of fees we earn related to training customers and partners on the use of our products. We expect that the services revenue from maintenance and support contracts will continue to grow along with the increase in the size of our installed base.

 

50


Table of Contents

Most of our products and services are sold to customers in the Americas, primarily in the U.S., however, a significant portion of our revenue is generated from international sales. See Note 16 of “Notes to Consolidated Financial Statements” for a discussion of our financial information by geographic region. Our revenue by geographic region is as follows:

 

     Years Ended December 31,      Nine Months Ended September 30,  
         2008          2009          2010                  2010                      2011          

Americas

   $ 21,770       $ 24,869       $ 36,586       $ 25,519       $ 34,316   

EMEA

     6,706         9,929         13,492         9,085         12,805   

Asia Pacific

     3,670         4,543         5,304         3,794         7,866   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 32,146       $ 39,341       $ 55,382       $ 38,398       $ 54,987   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Cost of Revenue

Our total cost of revenue is comprised of the following:

 

  Ÿ  

Cost of Products and License Revenue—Cost of products and license revenue is comprised primarily of third-party hardware costs and royalty fees. Our cost of products and license revenue also includes personnel costs related to our operations team, shipping costs and write-offs for excess and obsolete inventory.

 

  Ÿ  

Cost of Services Revenue—Cost of services revenue is primarily comprised of personnel costs of our technical support team, our professional consulting services and training teams and our Security Operations Center (“SOC”) team. Cost of services revenue also includes facilities costs, subscription fees and depreciation. We expect that our cost of services revenue will increase in absolute dollars as we increase our headcount.

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 our operating expenses and consist of wages, benefits and bonuses and, with regard to the sales and marketing expense, sales commissions. Personnel costs also include stock-based compensation. We expect personnel costs to continue to increase in absolute dollars as we hire new employees to continue to grow our business. While our operating expenses have grown on an absolute basis each year, they have decreased as a percentage of revenue. As a result, our operating margins have improved.

Research and Development

Our research and development is focused on maintaining and improving our existing products and on new product development. A majority of our research and development expenses are comprised of personnel costs and, to a lesser extent, facility costs, hardware prototype costs, laboratory expenses and depreciation. We expense research and development costs as incurred. We expect our research and development expenses to increase in absolute dollars as we continue to enhance our existing products and develop new products and services that address the emerging market for data security and regulatory compliance.

Sales and Marketing

Sales and marketing expense is the largest component of our operating expenses and consists primarily of personnel costs, including commissions and travel expenses. Sales and marketing expenses also include costs related to marketing and promotional activities, third-party referral fees and, to a lesser extent, facilities costs and depreciation. We expect our sales and marketing expenses to increase in absolute dollars as we expand our sales and marketing efforts worldwide.

 

51


Table of Contents

General and Administrative

General and administrative expense consists primarily of personnel costs as well as professional fees, facilities costs and depreciation. General and administrative personnel costs include our executive, finance, purchasing, order entry, human resources, information technology and legal functions. Our professional fees consist primarily of accounting, external legal, information technology and other consulting costs. We expect that general and administrative expense will increase in absolute dollars to support our growth and following the completion of this offering, as we expect to incur significant additional legal and accounting costs related to compliance with rules and regulations of the Securities and Exchange Commission, including the additional costs of achieving and maintaining compliance with Section 404 of the Sarbanes-Oxley Act of 2002 and compliance with the rules of the New York Stock Exchange, as well as additional insurance, investor relations and other costs associated with being a public company.

Other Income (Expense), net

Other income (expense), net is comprised of the following items:

 

  Ÿ  

Interest Income—Interest income consists of interest earned on our cash, cash equivalents and short-term investments. We expect interest income will vary each reporting period depending on our average investment balances during the period and market interest rates.

 

  Ÿ  

Interest Expense—Interest expense consists of interest accrued or paid on debt obligations.

 

  Ÿ  

Foreign Currency Forward Contract Gains (Losses)—Foreign currency forward contract gains and losses pertain to the ineffective portion of derivative instruments that we have entered into primarily to manage our exposure to the variability in expected future expenses resulting from changes in foreign currency exchange rates. We do not use derivative financial instruments for speculative or trading purposes. We expect our foreign currency forward contract gains (losses) to continue to fluctuate in the future due to changes in foreign currency exchange rates.

 

  Ÿ  

Foreign Currency Exchange Gains (Losses)—Foreign currency exchange gains and losses relate to transactions denominated in currencies other than the U.S. Dollar.

 

  Ÿ  

Warrant Liability Gain (Losses)—Our outstanding convertible preferred stock warrants are classified as a liability on our consolidated balance sheets and, as such, are remeasured to fair value at each balance sheet date with the corresponding gain or loss from the adjustment recorded as other income (expense), net. We will continue to record adjustments to the fair value of the warrants until they are exercised, automatically converted into warrants to purchase common stock or expire, at which time the warrants will no longer be remeasured at each balance sheet date. Following completion of this offering, our outstanding warrants will automatically convert into warrants to purchase common stock and, upon such conversion, will no longer be classified as a liability on our consolidated balance sheet.

Provision for Income Taxes

We operate in several tax jurisdictions and are subject to taxes in each country or jurisdiction in which we conduct business including the United States and Israel. Earnings from our non-U.S. activities are subject to local country income tax and may be subject to U.S. income tax. To date, we have incurred net losses and have not recorded any U.S. federal or state income tax provisions. Our tax expense to date relates to foreign income taxes, mainly from our Israeli activities.

 

52


Table of Contents

Results of Operations

The following table is a summary of our consolidated statements of operations in dollars and as a percentage of our total revenue. We have derived the data for the years ended December 31, 2008, 2009 and 2010 from our audited consolidated financial statements included elsewhere in this prospectus. We have derived the data for the nine months ended September 30, 2010 and 2011 from our unaudited interim consolidated financial statements included elsewhere in this prospectus.

 

    Years Ended December 31,     Nine Months Ended September 30,  
    2008     2009     2010     2010     2011  
    Amount     % of Net
Revenue
    Amount     % of Net
Revenue
    Amount     % of Net
Revenue
    Amount     % of Net
Revenue
    Amount     % of Net
Revenue
 
    (dollars in thousands)  

Statement of Operations Data:

                   

Net revenue:

                   

Products and license

  $ 24,298        75.6      $ 25,727        65.4      $ 34,479        62.3      $ 23,532        61.3      $ 32,821        59.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Services:

                   

Maintenance and support

    7,192        22.4        11,840        30.1        18,064        32.5        12,916        33.6        17,766        32.3   

Professional services and training

    656        2.0        1,763        4.5        2,465        4.5        1,716        4.5        3,478        6.3   

Subscriptions

    —          0.0        11        0.0        374        0.7        234        0.6        922        1.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total services

    7,848        24.4        13,614        34.6        20,903        37.7        14,866        38.7        22,166        40.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenue

    32,146        100.0        39,341        100.0        55,382        100.0        38,398        100.0        54,987        100.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenue:

                   

Products and license

    3,661        11.4        4,795        12.2        5,905        10.7        4,123        10.7        4,433        8.1   

Services

    3,455        10.7        4,576        11.6        6,428        11.6        4,639        12.1        7,062        12.8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

    7,116        22.1        9,371        23.8        12,333        22.3        8,762        22.8        11,495        20.9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    25,030        77.9        29,970        76.2        43,049        77.7        29,636        77.2        43,492        79.1   

Operating expenses:

                   

Research and development

    8,591        26.7        10,538        26.8        13,214        23.9        9,468        24.7        12,858        23.4   

Sales and marketing

    20,447        63.7        26,920        68.4        34,168        61.7        24,095        62.7        30,970        56.3   

General and administrative

    3,608        11.2        4,669        11.9        7,982        14.4        5,292        13.8        8,186        14.9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    32,646        101.6        42,127        107.1        55,364        100.0        38,855        101.2        52,014        94.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (7,616     (23.7     (12,157     (30.9     (12,315     (22.3     (9,219     (24.0     (8,522     (15.5

Other income (expense), net

    190        0.6        178        0.5        474        0.8        357        (0.9     (238     (0.4
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

    (7,426     (23.1     (11,979     (30.4     (11,841     (21.5     (8,862     (23.1     (8,760     (15.9

Provision for income taxes

    229        0.7        360        0.9        527        0.8        331        0.9        471        0.9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (7,655     (23.8     (12,339     (31.3     (12,368     (22.3     (9,193     (24.0     (9,231     (16.8

Loss attributable to noncontrolling interest

    —          0.0        43        0.1        355        0.6        256        0.7        458        0.8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to Imperva, Inc. stockholders

  $ (7,655     (23.8   $ (12,296     (31.2   $ (12,013     (21.7   $ (8,937     (23.3   $ (8,773     (16.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

53


Table of Contents

Comparison of the Nine Months Ended September 30, 2010 and 2011

Net Revenue

 

     Nine Months Ended September 30,    Change
     2010    2011   
     Amount    % of
Net Revenue
   Amount    % of
Net Revenue
   Amount    %
     (dollars in thousands)

Net revenue by type:

                             

Products and license

     $ 23,532          61.3        $ 32,821          59.7        $ 9,289          39.5  
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

Services:

                             

Maintenance and support

       12,916          33.6          17,766          32.3          4,850          37.6  

Professional services and training

       1,716          4.5          3,478          6.3          1,762          102.7  

Subscriptions

       234          0.6          922          1.7          688          294.0  
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

Total services

       14,866          38.7          22,166          40.3          7,300          49.1  
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

Total net revenue

     $ 38,398          100.0        $ 54,987          100.0        $ 16,589          43.2  
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

Net revenue by geographic region:

                             

Americas

     $ 25,519          66.5        $ 34,316          62.4        $ 8,797          34.5  

EMEA

       9,085          23.6          12,805          23.3          3,720          40.9  

Asia Pacific

       3,794          9.9          7,866          14.3          4,072          107.3  
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

Total net revenue

     $ 38,398          100.0        $ 54,987          100.0        $ 16,589          43.2  
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

Our net revenue increased by $16.6 million, or 43.2%, to $55.0 million during the nine months ended September 30, 2011 from $38.4 million during the nine months ended September 30, 2010 due to growth in products and license revenue and services revenue. This revenue growth reflects the increasing demand for our product and service offerings consistent with our business plan and expectations for growth. The Americas region contributed the largest portion of this growth with a $8.8 million increase, or approximately a 34.5% change over the same period in 2010. In addition, increases in our sales personnel focused on the Asia Pacific region resulted in an increase in revenue in Asia Pacific of $4.1 million, or approximately a 107.3% change over the same period in 2010.

Products and license revenue increased by $9.3 million, or 39.5%, to $32.8 million during the nine months ended September 30, 2011 from $23.5 million during the nine months ended September 30, 2010. The change in product and license revenue was driven by a significant increase in product sales, primarily in the Americas region in the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010. This increase was due to increased sales volume of our products.

Services revenue increased by $7.3 million, or 49.1%, to $22.2 million during the nine months ended September 30, 2011 from $14.9 million during the nine months ended September 30, 2010. During the nine months ended September 30, 2011, our services revenue was comprised of $17.8 million in maintenance and support, $3.5 million in professional services and training and $0.9 million in subscriptions. The change in services revenue in the nine months ended September 30, 2011 from the nine months ended September 30, 2010 was primarily due to an increase of $4.9 million in maintenance and support revenue resulting from our larger installed base, $1.8 million in professional services and training revenues due primarily to an increase in the number of implementation projects and $0.7 million in subscriptions revenue from our ThreatRadar product, which was launched in the first quarter of 2010.

 

54


Table of Contents

Gross Profit

 

     Nine Months Ended September 30,        
     2010     2011     %
Change
 
     Amount      Gross
Margin
    Amount      Gross
Margin
   
     (dollars in thousands)        

Products and license gross profit

   $ 19,409         82.5   $ 28,388         86.5     4.0   

Services gross profit

     10,227         68.8     15,104         68.1     (0.7
  

 

 

      

 

 

      

Total gross profit

   $ 29,636         77.2   $ 43,492         79.1     1.9   
  

 

 

      

 

 

      

Total gross margin increased 1.9 percentage points from 77.2% during the nine months ended September 30, 2010 to 79.1% during the nine months ended September 30, 2011 primarily due to an increase in products and license gross margin of 4.0 percentage points in the nine months ended September 30, 2011 compared to the same period in 2010. The change was primarily due to a continued shift in product mix towards higher throughput appliances, which generally have higher gross margins. The 0.7 percentage point decrease in services gross margin was mostly due to higher use of outside contractors, which tend to be more costly than our internal service personnel, in order to support the growth of our services revenue.

Operating Expenses

 

     Nine Months Ended September 30,         
     2010      2011      Change  
     Amount      % of
Net Revenue
     Amount      % of
Net Revenue
     Amount      %  
     (dollars in thousands)  

Operating expenses:

                 

Research and development

   $ 9,468         24.7       $ 12,858         23.4       $ 3,390         35.8   

Sales and marketing

     24,095         62.7         30,970         56.3         6,875         28.5   

General and administrative

     5,292         13.8         8,186         14.5         2,894         54.7   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Total operating expenses

   $ 38,855         101.2       $ 52,014         94.2       $ 13,159         33.9   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Results above include stock-based compensation expense of:

 

     Nine Months
Ended September  30,
     Increase  
         2010              2011         
     (dollars in thousands)  

Research and development

   $ 37       $ 83       $ 46   

Sales and marketing

     191         245         54   

General and administrative

     60         753         693   
  

 

 

    

 

 

    

 

 

 
   $ 288       $ 1,081       $ 793   
  

 

 

    

 

 

    

 

 

 

Research and development expenses increased by $3.4 million, or 35.8%, to $12.9 million during the nine months ended September 30, 2011 from $9.5 million during the nine months ended September 30, 2010. The change was primarily attributable to an increase of $2.1 million in personnel costs, including stock-based compensation, due to additional research and development personnel being hired to support our ongoing product development efforts. The change was also partly due to an increase of $0.6 million in Incapsula costs mainly due to it increasing its headcount during the nine months ended September 30, 2011. In addition, facility and depreciation expenses increased by $0.6 million.

 

55


Table of Contents

Sales and marketing expenses increased by $6.9 million, or 28.5%, to $31.0 million during the nine months ended September 30, 2011 from $24.1 million during the nine months ended September 30, 2010. The change was due to an increase of $5.1 million in personnel costs, including stock-based compensation, due to increased headcount in all regions in an effort to help drive our overall revenue growth, $1.4 million in promotional and other marketing related expenses, $0.3 million in travel expenses, and $0.1 million in Incapsula marketing expenses.

General and administrative expenses increased by $2.9 million, or 54.7%, to $8.2 million during the nine months ended September 30, 2011 from $5.3 million during the nine months ended September 30, 2010. The change was primarily due to an increase of $2.6 million in personnel costs, including stock-based compensation, related to increased headcount to support the growth and operations of our business and to support our planned initial public offering, and $0.3 million in increased facility and depreciation expenses.

Loss from Operations

 

      Nine Months Ended
September 30,
     Change  
     2010      2011      Amount      %  
     (dollars in thousands)  
   $  (9,219    $ (8,522    $ (697      (7.6 )% 

Our loss from operations decreased by $0.7 million, or 7.6%, from $9.2 million during the nine months ended September 30, 2010 to $8.5 million during the nine months ended September 30, 2011. Our gross profit increased by $13.9 million during the nine months ended September 30, 2011 due to higher net revenues. This gross profit increase was partially offset by increased sales and marketing costs of $6.9 million to expand the Company’s global sales efforts, increased research and development personnel costs of $3.4 million from planned hiring to support our ongoing product development efforts, and an increase of $2.9 million of general and administrative costs primarily related to personnel costs related to the increased global scope and operations of our business. The increase in operating expenses during the nine months ended September 30, 2011 was consistent with our planned headcount increases to support the increase in scope and global reach of our business.

Other Income (Expense), net

Other (expense), net increased by $0.6 million to $0.2 million during the nine months ended September 30, 2011 from other income, net, of $0.4 million during the nine months ended September 30, 2010. The change was primarily due to an increase of $0.2 million in foreign currency exchange losses, a decrease of $0.1 million in forward foreign exchange contract gains, net, and an increase in convertible preferred stock warrant losses of $0.2 million in the nine months ended September 30, 2011.

Provision for Income Taxes

 

      Nine Months Ended
September 30,
    Change  
         2010             2011         Amount        %  
     (dollars in thousands)  

Provision for income taxes

   $ 331      $ 471      $ 140           42.3   

Effective tax rate

     (3.7 )%      (5.4 )%        

The provisions for income taxes for the nine months ended September 30, 2010 and 2011 are comprised primarily of foreign income taxes. The increase in the provision for income taxes in the nine months ended September 30, 2011 compared with the nine months ended September 30, 2010 was primarily attributable to an increase in income in our foreign operations.

 

56


Table of Contents

Deferred Revenue

 

     As of September 30,      Change  
         2010              2011          Amount      %  
     (In thousands)         

Total deferred revenue

     16,752         25,560         8,808         52.3   

Deferred revenue increased by $8.8 million, or 52.3%, to $25.6 million as of September 30, 2011 from $16.8 million as of September 30, 2010. The growth in our deferred revenue was primarily attributable to an increase in our installed base of products and licenses worldwide and new sales, as well as renewals, of maintenance and support agreements for our installed base of products and licenses.

Number of Customers

 

     As of September 30,      Change  
       2010          2011        Amount      %  

Number of customers

     1,181         1,584         403         34.1   

Our number of customers increased by 403, or 34.1%, to 1,584 as of September 30, 2011 from 1,181 as of September 30, 2010. Our growth in customer count was driven by increasing market acceptance of our products as well as an increase in our global sales organization from 120 people as of September 30, 2010 to 125 as of September 30, 2011. The growth in our sales organization was consistent with our plans to continue expanding our global sales coverage, in particular our channel partner sales and support teams. This increase allowed us to target additional customers across all of our geographies, particularly in the Asia Pacific region.

Comparison of the Years Ended December 31, 2009 and 2010

Net Revenue

 

    Years Ended December 31,    
    2009   2010   Change
    Amount   % of
Net
Revenue
  Amount   % of
Net
Revenue
  Amount   %
    (dollars in thousands)

Net revenue by type:

                       

Products and license

    $ 25,727         65.4       $ 34,479         62.3       $ 8,752         34.0  
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

Services:

                       

Maintenance and support

      11,840         30.1         18,064         32.5         6,224         52.6  

Professional services and training

      1,763         4.5         2,465         4.5         702         39.8  

Subscriptions

      11         0.0         374         0.7         363         *  
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

Total services

      13,614         34.6         20,903         37.7         7,289         53.5  
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

Total net revenue

    $ 39,341         100.0       $ 55,382         100.0       $ 16,041         40.8  
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

Net revenue by geographic region:

                       

Americas

    $ 24,869         63.3       $ 36,586         66.0       $ 11,717         47.1  

EMEA

      9,929         25.2         13,492         24.4         3,563         35.9  

Asia Pacific

      4,543         11.5         5,304         9.6         761         16.8  
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

Total net revenue

    $ 39,341         100.0       $ 55,382         100.0       $ 16,041         40.8  
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

  * Not meaningful

 

57


Table of Contents

Our net revenue increased by $16.1 million, or 40.8%, to $55.4 million in 2010 from $39.3 million in 2009 primarily due to growth in products and license revenue and services revenue. This increase reflects the increased demand for our product and service offerings consistent with our business plan and expectations for growth when compared to 2009 net revenues, which were somewhat impacted by challenging economic conditions. The Americas region contributed the largest portion of this growth with an $11.7 million increase, or 47.1% change over 2009, and the EMEA region contributed an increase of $3.6 million, or 35.9% growth over 2009.

Products and license revenue increased by $8.8 million, or 34.0%, to $34.5 million in 2010 from $25.7 million in 2009. The change was primarily due to increased sales volume of our products in the Americas and EMEA regions.

Services revenue increased by $7.3 million, or 53.5%, to $20.9 million in 2010 from $13.6 million in 2009. During 2010, our services revenue was comprised of $18.0 million in maintenance and support, $2.5 million in professional services and training and $0.4 million in subscriptions. The change in services revenue in 2010 compared to 2009 was primarily due to an increase of $6.2 million in maintenance and support revenue resulting from our larger installed base, a $0.7 million increase in professional services and training due to increased demand for our products and a $0.4 million increase in subscriptions revenue from our ThreatRadar service, which launched during the first quarter of 2010, and our SOC service, which launched in late 2009.

Gross Profit

 

     Years Ended December 31,        
     2009     2010        
     Amount      Gross
Margin
    Amount      Gross
Margin
    %
Change
 
     (dollars in thousands)        

Products and license gross profit

   $ 20,932         81.4   $ 28,574         82.9     1.5   

Services gross profit

     9,038         66.4     14,475         69.2     2.8   
  

 

 

      

 

 

      

Total gross profit

   $ 29,970         76.2   $ 43,049         77.7     1.5   
  

 

 

      

 

 

      

The 1.5 percentage point increase in products and license gross margin in 2010 was primarily due to margin improvement on all appliance platforms due to cost improvements in our hardware appliances and a shift in our product mix towards our higher throughput appliances, which generally have higher gross margins. The 2.8 percentage point increase in services gross margin was due to higher utilization of our support teams in addition to the continued maturation of our products, which results in lower support costs.

Operating Expenses

 

     Years Ended December 31,         
     2009      2010      Change  
     Amount      % of
Net
Revenue
     Amount      % of
Net
Revenue
     Amount      %  
     (dollars in thousands)  

Operating expenses:

                 

Research and development

   $ 10,538         26.8       $ 13,214         23.9       $ 2,676         25.4   

Sales and marketing

     26,920         68.4         34,168         61.7         7,248         26.9   

General and administrative

     4,669         11.9         7,982         14.4         3,313         71.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Total operating expenses

   $ 42,127         107.1       $ 55,364         100.0       $ 13,237         31.4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

58


Table of Contents

Results above include stock-based compensation of:

 

    

Years Ended

        
     December 31,      Increase  
     2009      2010     
     (In thousands)  

Research and development

   $ 57       $ 66       $ 9   

Sales and marketing

     218         257         39   

General and administrative

     109         273         164   
  

 

 

    

 

 

    

 

 

 
   $ 384       $ 596       $ 212   
  

 

 

    

 

 

    

 

 

 

Research and development expenses increased by $2.7 million, or 25.4%, to $13.2 million in 2010 from $10.5 million in 2009. The change was primarily due to an increase of $1.6 million in personnel costs, including stock-based compensation, due primarily to the hiring of additional research and development personnel to support our product development efforts. The change was also partly due to an increase of $0.9 million in research and development costs from Incapsula, which commenced operations in November 2009 and increased hiring throughout 2010.

Sales and marketing expenses increased by $7.3 million, or 26.9%, to $34.2 million in 2010 from $26.9 million in 2009. The change was primarily due to an increase of $5.4 million in personnel costs, including stock-based compensation, primarily related to increased headcount in the Americas region and, to a lesser extent, sales commissions, an increase of $1.1 million in marketing expenses primarily related to marketing promotions and initiatives aimed at promoting our brand and creating market awareness of our technology and our products and an increase of $0.5 million in travel expenses. The change was also partly due to an increase of $0.2 million primarily in Incapsula’s personnel costs.

General and administrative expenses increased by $3.3 million, or 71.0%, to $8.0 million in 2010 from $4.7 million in 2009. The change was primarily related to an increase of $1.8 million in personnel costs, including stock-based compensation, due to increased headcount in our accounting and legal departments, $1.0 million in professional services expense related primarily to patent litigation and $0.3 million in rent and occupancy-related expenses. The change was also partly due to an increase of $0.2 million primarily in Incapsula’s personnel costs.

Loss from Operations

 

     Years ended
December 31,
    Change  
     2009     2010     Amount     %  
           (dollars in thousands)        
   $ (12,157   $ (12,315   $ (158     (1.3 )% 

Our loss from operations increased by $0.2 million, or 1.3%, to $12.3 million in 2010 from $12.1 million in 2009. Our gross profit increased in 2010 by $13.1 million as a result of higher revenue. However, this gross profit increase was more than offset by increased operating expenses of $13.3 million. The higher operating expenses were attributable to sales and marketing spending of $7.3 million primarily related to increased sales headcount in the Americas region, higher research and development costs of $2.7 million as we expanded our product development efforts, including work on our Incapsula product offering which began in November 2009, and increased general and administrative costs of $3.3 million from additional legal and accounting personnel costs, and to a lesser extent, higher outside professional service expenses related primarily to patent litigation. The increase in operating expenses and resulting loss from operations in 2010 was consistent with our planned headcount increases to support the increase in scope and global reach of our business, in addition to the inclusion of Incapsula results for the full year ended December 31, 2010 as compared to only a portion of the year ended December 31, 2009.

 

59


Table of Contents

Other Income (Expense), net

Other income, net increased $0.3 million, or 166.3%, to $0.5 million in 2010 primarily due to increased foreign exchange gains of $0.3 million. The gains were primarily due to the weakening of the U.S. dollar against the Israeli shekel.

Provision for Income Taxes

 

     Years Ended
December 31,
    Change  
     2009     2010     Amount      %  
     (dollars in thousands)  

Provision for income taxes

   $ 360      $ 527      $ 167         46.4   

Effective tax rate

     (3.0 )%      (4.5 )%      

The provision for income taxes in 2009 and 2010 are comprised primarily of foreign income taxes. The increase in the provision for income taxes in 2010 compared with 2009 was primarily attributable to an increase in income in our foreign operations.

Deferred Revenue

 

       As of December 31,        Change  
       2009        2010        Amount        %  
       (In thousands)           

Total deferred revenue

       13,377           21,218           7,841           58.6   

Deferred revenue increased by $7.8 million, or 58.6%, to $21.2 million as of December 31, 2010 from $13.4 million as of December 31, 2009. The growth in our deferred revenue was primarily attributable to an increase in our installed base of products and licenses worldwide and new sales, as well as renewals, of maintenance and support agreements for our installed base of products and licenses. The balance of deferred revenue as of December 31, 2010 also included an increase in multi-year maintenance and support agreements, which resulted in the higher non-current deferred revenue balance of $7.5 million as of December 31, 2010 as compared to $2.1 million as of December 31, 2009.

Number of Customers

 

       As of December 31,        Change  
           2009               2010           Amount        %  

Number of customers

       926           1,309           383           41.4   

Our number of customers increased by 383, or 41.4%, to 1,309 as of December 31, 2010 from 926 as of December 31, 2009. During this period, we increased our sales organization from 101 employees as of December 31, 2009 to 120 as of December 31, 2010 as part of our strategy to continue to expand our global sales coverage, in particular our channel partner sales and support teams. This allowed us to increase the number of new accounts we could reach across all of our geographies.

 

60


Table of Contents

Comparison of the Years Ended December 31, 2008 and 2009

Net Revenue

 

    Years Ended December 31,        
    2008     2009     Change  
    Amount     % of
Net
Revenue
    Amount     % of
Net
Revenue
    Amount      %  
    (dollars in thousands)  

Net revenue by type:

            

Products and license

  $ 24,298        75.6      $ 25,727        65.4      $ 1,429         5.9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

Services:

            

Maintenance and support

    7,192        22.4        11,840        30.1        4,648         64.6   

Professional services and training

    656        2.0        1,763        4.5        1,107         168.8   

Subscriptions

    —          0.0        11        0.0        11         *   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

Total services

    7,848        24.4        13,614        34.6        5,766         73.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

Total net revenue

  $ 32,146        100.0      $ 39,341        100.0      $ 7,195         22.4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

Net revenue by geographic region:

            

Americas

  $ 21,770        67.7      $ 24,869        63.2      $ 3,099         14.2   

EMEA

    6,706        20.9        9,929        25.2        3,223         48.1   

Asia Pacific

    3,670        11.4        4,543        11.6        873         23.8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

Total net revenue

  $ 32,146        100.0      $ 39,341        100.0      $ 7,195         22.4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

  * Not meaningful

Our net revenue increased by $7.2 million, or 22.4%, to $39.3 million in 2009 from $32.1 million in 2008 primarily due to growth in products and license revenue and services revenue as we executed on planned hiring of sales personnel to further generate demand for our product and service offerings worldwide. The EMEA region contributed $3.2 million of the increase, or a 48.1% change over 2008, and the Americas region contributed $3.1 million of the increase, or a 14.2% change over 2008.

Products and license revenue increased by $1.4 million, or 5.9%, to $25.7 million in 2009 from $24.3 million in 2008. The change was primarily due to increased sales volume of our products in the EMEA and Asia Pacific regions, partially offset by a decrease in sales in the Americas region due to challenging economic conditions in the United States in 2009.

Services revenue increased by $5.8 million, or 73.5%, to $13.6 million in 2009 from $7.8 million in 2008. During 2009, our services revenue was comprised of $11.8 million in maintenance and support and $1.8 million in professional services and training. The increase in services revenue during 2009 compared to 2008 was primarily due to an increase of $4.6 million in maintenance and support revenue resulting from our larger installed base, and a $1.1 million increase in professional services and training revenue primarily related to increased demand for our products.

Gross Profit

 

     Years Ended December 31,        
     2008     2009        
     Amount      Gross
Margin
    Amount      Gross
Margin
    Change  
     (dollars in thousands)        

Products and license gross profit

   $ 20,637         84.9   $ 20,932         81.4     (3.5

Services gross profit

     4,393         56.0     9,038         66.4     10.4   
  

 

 

      

 

 

      

Total gross profit

   $ 25,030         77.9   $ 29,970         76.2     (1.7
  

 

 

      

 

 

      

 

61


Table of Contents

The 3.5 percentage point decrease in products and license gross margin in 2009 was primarily due to a shift in our product mix towards our lower margin, lower throughput products as a result of challenging economic conditions. The 10.4 percentage point increase in services gross margin in 2009 was primarily due to higher utilization of our support teams and improvement in our ability to renew pre-existing maintenance and support agreements.

Operating Expenses

 

     Years Ended December 31,         
     2008      2009      Change  
     Amount      % of
Net
Revenue
     Amount      % of
Net
Revenue
     Amount      %  
     (dollars in thousands)  

Operating expenses:

                 

Research and development

   $ 8,591         26.7       $ 10,538         26.8       $ 1,947         22.7   

Sales and marketing

     20,447         63.7         26,920         68.4         6,473         31.7   

General and administrative

     3,608         11.2         4,669         11.9         1,061         29.4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Total operating expenses

   $ 32,646         101.6       $ 42,127         107.1       $ 9,481         29.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Results above include stock-based compensation expense of:

 

             Years Ended December 31,           
     2008      2009      Increase  
    

(dollars in thousands)

 

Research and development

   $ 41       $ 57       $ 16   

Sales and marketing

     163         218         55   

General and administrative

     48         109         61   
  

 

 

    

 

 

    

 

 

 
   $ 252       $ 384       $ 132   
  

 

 

    

 

 

    

 

 

 

Research and development expenses increased by $1.9 million, or 22.7%, to $10.5 million in 2009 from $8.6 million in 2008. The change was primarily due to an increase of $1.3 million in personnel costs, including stock-based compensation, due to the hiring of additional research and development personnel in 2009 to support our ongoing product development efforts and a $0.6 million increase in facilities expenses and depreciation expenses.

Sales and marketing expenses increased by $6.5 million, or 31.7%, to $26.9 million in 2009 from $20.4 million in 2008. The change was primarily due to an increase of $5.0 million in personnel costs, including stock-based compensation, primarily related to increased headcount in the Americas region and, to a lesser extent, sales commissions, an increase of $0.9 million in travel costs due to additional sales and marketing personnel hired, a $0.3 million increase in facilities expenses and a $0.3 million increase in fees paid to third parties who generated sales leads for us.

General and administrative expenses increased by $1.1 million, or 29.4%, to $4.7 million in 2009 from $3.6 million in 2008. The change was primarily related to an increase in personnel costs, including stock-based compensation, due to increased headcount across the accounting and legal departments to support the growth of our business.

Loss from Operations

 

     Years ended
December 31,
    Change  
     2008     2009     Amount     %  
     (dollars in thousands)  
   $ (7,616   $ (12,157   $ (4,541     (59.6 )% 

 

62


Table of Contents

Our loss from operations increased by $4.5 million, or 59.6%, to $12.1 million in 2009 from $7.6 million in 2008. Operating expenses increased $9.5 million in 2009 as compared to 2008, and more than offset the $5.0 million increase in gross profit during 2009. The higher operating expenses can be primarily attributed to increased sales and marketing spending of $6.5 million from increased sales headcount in the Americas region, higher research and development costs of $1.9 million as we expanded our product development efforts, and increased general and administrative costs of $1.1 million as a result of increased legal and accounting staff to support our business growth. The increase in operating expenses and resulting loss from operations in 2009 was consistent with our planned headcount increases to support product development and product enhancement efforts and the increased scope and global reach of our business.

Other Income (Expense), net

Other income (expense), remained unchanged at $0.2 million in 2009 compared to 2008.

Provision for Income Taxes

 

       Years Ended
December 31,
    Change  
       2008     2009     Amount         
      

(dollars in thousands) 

 

Provision for income taxes

     $ 229      $ 360      $ 131           57.2   

Effective tax rate

       (3.1 )%      (3.0 )%        

The provision for income taxes in 2009 and 2008 are comprised primarily of foreign income taxes.

Deferred Revenue

 

       As of December 31,        Change  
         2008          2009        Amount        %  
       (In thousands)