S-1 1 d631034ds1.htm FORM S-1 Prepared by R.R. Donnelley Financial -- Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on February 18, 2014

Registration No. 333-            

 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

A10 NETWORKS, INC.

(Exact name of Registrant as specified in its charter)

 

California (prior to reincorporation)

Delaware (after reincorporation)

  3576   20-1446869
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)

3 West Plumeria Drive

San Jose, CA 95134

(408) 325-8668

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

 

Lee Chen

President and Chief Executive Officer

A10 Networks, Inc.

3 West Plumeria Drive

San Jose, CA 95134

(408) 325-8668

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

 

Copies to:

Herbert P. Fockler

Mark B. Baudler

Wilson Sonsini Goodrich & Rosati, P.C.

650 Page Mill Road

Palo Alto, California 94304

(650) 493-9300

 

Robert Cochran

Vice President,

Legal and Corporate Collaboration

A10 Networks, Inc.

3 West Plumeria Drive

San Jose, CA 95134

(408) 325-8668

 

Jorge del Calvo

Stanton D. Wong

Pillsbury Winthrop Shaw Pittman LLP

2550 Hanover Street

Palo Alto, California 94304

(650) 233-4500

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

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

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

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

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

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

  Large accelerated filer ¨     

Accelerated filer ¨

  Non-accelerated filer x  (Do not check if a smaller reporting company)     

Smaller reporting company ¨

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

 

Proposed

Maximum
Aggregate
Offering  Price(1)(2)

 

Amount of

Registration Fee

Common Stock, $0.00001 par value per share

  $100,000,000   $12,880

 

 

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

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

 

 

 


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

 

PROSPECTUS (Subject to Completion)

Issued February 18, 2014

 

             Shares

 

LOGO

 

COMMON STOCK

 

 

 

A10 Networks, Inc. is offering              shares of its common stock and the selling stockholders are offering              shares. We will not receive any proceeds from the sale of shares by the selling stockholders. This is our initial public offering and no public market currently exists for our shares. We anticipate that the initial public offering price will be between $         and $         per share.

 

 

 

We intend to apply to list our common stock on the New York Stock Exchange under the symbol “ATEN.”

 

 

 

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

 

 

 

PRICE $             A SHARE

 

 

 

      

Price to

Public

    

Underwriting

Discounts and

Commissions(1)

    

Proceeds to

A10 Networks

    

Proceeds to

Selling

Stockholders

Per Share

     $               $                       $                          $                

Total

     $               $                       $                          $                

 

(1)   See “Underwriters (Conflicts of Interest)” for additional information regarding underwriting compensation.

 

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

 

The Securities and Exchange Commission and any state securities regulators have not approved or disapproved of these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

The underwriters expect to deliver the shares of common stock to purchasers on                     , 2014.

 

 

 

MORGAN STANLEY   BofA MERRILL LYNCH   J.P. MORGAN
RBC CAPITAL MARKETS

 

 

 

PACIFIC CREST SECURITIES   OPPENHEIMER & CO.

 

                    , 2014


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LOGO

Meeting Needs in Mission-Critical Areas of the Network ADC TPS Customer Network Perimeter DDoS Security Detect and Mitiga DDoS Attacks Data Center Application Delivery Controller Optimize Data Center Performance and Security Web Web App Database CGN Service Provider Backbone Carrier Grade Network Address Translation/ IPv6 Transition Extend and Migrate Network Infrastructure ACOS Advanced Core Operating System Firewall IPv4 IPv6 Broad Solution offering We are a leading provider of advanced application networking technologies. We offer a range of software-based appliances that leverage our Advanced Core Operating System (ACOS). ACOS incorporates our proprietary shared memory architecture, which is designed to utilize multicore processors efficiently and provide increasing levels of performance with increasing processor density. Thunder Thunder vThunder hardware appliance hybrid virtual appliance virtual appliance


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TABLE OF CONTENTS

 

     Page  

Business

     85   

Management

     102   

Executive Compensation

     108   

Certain Relationships and Related Party Transactions

     119   

Principal and Selling Stockholders

     121   

Description of Capital Stock

     123   

Shares Eligible for Future Sale

     127   

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

     129   

Underwriters (Conflicts of Interest)

     133   

Legal Matters

     139   

Experts

     140   

Additional Information

     140   

Index to Consolidated Financial Statements

     F-1   
 

 

 

 

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

 

Through and including                     , 2014 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 

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


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PROSPECTUS SUMMARY

 

This summary highlights information contained in greater detail elsewhere in this prospectus. This summary is not complete and does not contain all of the information you should consider in making your investment decision. You should read the entire prospectus carefully before making an investment in our common stock. You should carefully consider, among other things, our consolidated financial statements and the related notes and the sections entitled “Risk Factors,” “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. Unless the context otherwise requires, the terms “A10,” “the company,” “we,” “us” and “our” in this prospectus refer to A10 Networks, Inc., and its subsidiaries.

 

A10 NETWORKS, INC.

 

Overview

 

We are a leading provider of advanced application networking technologies. Our solutions enable enterprises, service providers, Web giants and government organizations to accelerate, secure and optimize the performance of their data center applications and networks. Our products are built on our Advanced Core Operating System, or ACOS, platform of advanced networking technologies, which is designed to enable our products to deliver substantially greater performance and security relative to prior generation application networking products. Our software based ACOS architecture also provides the flexibility that enables us to expand our business to offer additional products to solve a growing array of networking and security challenges arising from increased Internet cloud and mobile computing.

 

We currently offer three software based advanced application networking solutions. These are Application Delivery Controllers, or ADCs, to optimize data center performance; Carrier Grade Network Address Translation, or CGN, to provide address and protocol translation services for service provider networks; and a Distributed Denial of Service Threat Protection System, or TPS, for network-wide security protection. We deliver these solutions both on optimized hardware appliances and as virtual appliances across our Thunder Series and AX Series product families.

 

Our ACOS platform architecture is optimized for modern 64-bit computer processors, or CPUs, which increasingly have multiple parallel processing cores that operate within a single CPU for higher efficiency and performance scalability. In order to maximize the capabilities of these increasingly dense multi-core CPUs, ACOS implements a proprietary shared memory architecture that provides all cores with simultaneous access to common memory. This shared memory architecture enables our products to utilize these multi-core CPUs efficiently and scale performance with increasing CPU cores. As a result, we believe our ACOS application networking platform enables us to provide our end-customers with products that can deliver superior price performance benefits over products that lack these capabilities. We believe our products can process two to five times more web transactions (measured as Layer 4 connections per second) in certain head to head product comparisons per unit of computing and memory resources, power, rack space or list price. ACOS’s high performance design enables our products to address a wide range of today’s performance-driven networking challenges. For example, we have expanded our products’ capabilities to defend against the rising volume of large scale, sophisticated cyber security threats, such as Distributed Denial of Service, or DDoS, and other increasingly sophisticated high volume network attacks. The flexible software design of ACOS enables our end-customers to deploy our products across a number of new models for IT operations, such as managed hosting of their network by a third party provider and Internet cloud-based applications and networks.

 

We are a leading provider of application network technologies, based on our networking solutions’ performance, security and scalability. We believe our products can process two to five times more web transactions (measured as Layer 4 connections per second) in certain head to head product comparisons per unit of computing and memory resources, power, rack space or list price. Furthermore, the flexible software design of

 

 

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ACOS enables our end customers to deploy our products across a number of new models for IT operations, such as managed hosting of their network by a third party provider and Internet cloud-based applications and networks. To maintain and strengthen our leadership position, we will need to continue to innovate and advance our application network technologies and compete effectively with other companies that participate in our markets, including larger and more well-established companies.

 

We sell our products globally to service providers and enterprises that depend on data center applications and networks to generate revenue and manage operations efficiently. Our high-touch sales force engages directly or through indirect distribution channels with our end-customers. We believe that a high-touch, customer-focused selling process is important before, during and after the sale of our products to maximize our sales success. Product fulfillment is generally done through our original equipment manufacturers or distribution channel partners. As of December 31, 2013, we had sold our products to more than 2,900 customers across 65 countries, including three of the top four United States wireless carriers, seven of the top ten United States cable providers, and the top three wireless carriers in Japan, in addition to other global enterprises, Web giants and governmental organizations. Our business is geographically diversified with 48% of our total revenue from the United States, 28% from Japan and 24% from the rest of the world for the year ended December 31, 2013.

 

For the years ended December 31, 2010, 2011, 2012 and 2013, our total revenue was $55.3 million, $91.3 million, $120.1 million and $141.7 million, representing a compound annual growth rate of approximately 37% from 2010 to 2013. Our total revenue grew 32% from 2011 to 2012 and 18% from 2012 to 2013. For the years ended December 31, 2010, 2011, 2012 and 2013, our gross margin was 78%, 80%, 80% and 76%. We generated net income (loss) of $5.2 million, $7.3 million, $(90.2) million and $(27.1) million for the years ended December 31, 2010, 2011, 2012 and 2013. Our net income (loss) in these periods was affected by the settlement of, and legal expenses related to, our litigation with Brocade Communications Systems, Inc.

 

Our Industry

 

Organizations are increasingly dependent on their websites and data center infrastructure for business operations. IT administrators struggle to ensure continuous availability of these business critical resources in the face of escalating performance expectations, demands to migrate to cloud computing and increasingly sophisticated cyber security attacks. IT administrators are therefore seeking new application networking technologies to optimize the performance and security of data center applications and networks.

 

Trends Driving Continued Evolution of Application Networking

 

Commercial damage and customer dissatisfaction from poor website, data center application and network performance can have a lasting negative impact well beyond the expenses related directly to the downtime. To optimize data center application and network performance and avoid unforeseen downtime, organizations deploy application networking technology to ensure the performance and security of data center resources. These organizations must simultaneously address significant networking industry trends such as:

 

   

Increased Adoption of Cloud Computing Applications. According to Cisco’s Global Cloud Index, global Internet Protocol, or IP, traffic for cloud-based applications will grow at a 35% compound annual growth rate from 2012 through 2017, while data center traffic generally will grow at a 25% compound annual growth rate over the same period. As organizations move their business critical applications to the cloud, they need application networking solutions optimized for cloud computing that can scale with the performance demands and security expectations of this growth.

 

   

Increased Network Complexity Due to Virtualization and Software Defined Networking Adoption. The increased use of virtual servers and software defined networks is increasing network complexity. To deal with this complexity, organizations require next-generation application networking solutions that are flexible and dynamic.

 

 

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Rapid Growth of Internet-Connected Devices and the Exhaustion of the Existing IP Address Space. The rapid growth of mobile and other Internet-connected devices has overwhelmed the current Internet Protocol addressing scheme, IPv4, which will be fully exhausted in major markets such as the United States, Europe and Asia by 2015. To support this rapid growth of Internet-connected devices, the industry is transitioning to the next-generation addressing system, IPv6. As this transition unfolds, application networking technology will play an increasingly significant role in managing two Internet connection standards, simultaneously extending the viability of IPv4 and enabling end-customers to move to the IPv6 standard.

 

   

Increasing Risk from Cyber Security Threats. Cybercriminals, foreign military intelligence organizations and amateur hackers are targeting the data centers of organizations of every type. One particular cyber threat, DDoS, is particularly nefarious and presents a significant threat to any network. As these and other types of attacks have become more frequent and sophisticated, organizations increasingly rely on application networking technologies for defense.

 

   

Exponential Growth in Data Center Speeds. Organizations are enhancing the performance of their networks by increasing the data traffic speeds of their data center networks from the 1 and 10 Gigabit Ethernet rates in use over the last ten years to 40 Gigabit Ethernet currently and evolving to 100 Gigabit Ethernet as soon as 2015. Organizations require high performance application networking technology to ensure data center application and network performance and security are maintained despite rapidly escalating data rates.

 

Limitations of Alternative Approaches in Addressing These Challenges

 

Conventional networking equipment is built on custom designed semiconductors and is limited to only basic data forwarding and security functions based on a narrow range of address fields within a data packet. Due to these rigid designs and limited capabilities, conventional networking equipment cannot process more advanced application data and thus cannot effectively perform application-layer networking functions.

 

To address these shortcomings, first-generation application networking products were developed that could inspect and take action based upon the specific application of data traffic. This capability is referred to as being application-aware. First generation application networking products were able to improve application performance and security in ways not possible for conventional networking equipment. Examples of these first-generation application networking products include server load balancers and intrusion prevention systems. However, these first-generation products have fundamental limitations, including general purpose computing architectures that do not provide for sharing of memory resources and thus cannot fully utilize the functionality of modern, multi-core processors. These products lack the performance capabilities necessary to rapidly analyze application data at the rates necessary to meet performance and security requirements in modern data centers.

 

Need for Next-Generation High Performance Application Networking

 

In order to address these increasingly complex network challenges, a new generation of application-aware networking solutions is needed in order to look deeply into application content, modify content for performance optimization or security purposes, and forward the traffic at rapidly escalating network data rates. Next-generation application networking solutions require:

 

   

Ability to Scale with High Speed Network Traffic. Next-generation application networking technologies must be able to analyze application data intelligently as they move through faster networks to take full advantage of the increasing computing power of modern multi-core processors.

 

   

Platform to Provide Broad Application Extensibility. First-generation application networking technology has been unable to respond effectively to the dynamic requirements of modern applications and cloud computing. Next-generation application networking technology must be flexible and agile to address the increasing array of networking and application challenges.

 

 

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Sophisticated Security Functionality. Next-generation application networking technology must provide exceptional application content, inspection capabilities and processing speeds to detect and mitigate the effects of large-scale sophisticated cyber security threats such as DDoS and other attacks at the application level of the network.

 

   

Ability to Accommodate a Variety of IT Delivery Models. Enterprises are increasingly handling their information technology needs in a variety of ways, including operating their own conventional dedicated data centers and outsourcing to managed IT hosting providers and providers of cloud-based applications to multiple clients. Organizations need consistent application networking features and functionality regardless of which IT model, or combination of models, they use, and regardless of whether their networks are in virtual or physical forms.

 

   

Predictable Operational Performance. As data center traffic grows, first-generation approaches have limitations that can cause unpredictable performance that cannot consistently meet expected service levels. Next-generation application networking needs to deliver appropriate levels of service at ever-increasing data traffic rates.

 

The Next-Generation Application Networking Market Opportunity

 

We believe that the total worldwide addressable market for next-generation application networking is a combination of discrete markets that represent aggregated expenditures of $12.6 billion in 2013. The next-generation application networking market consists of Application Delivery Controllers, Network Security Equipment and Secure Web Gateways. According to Gartner, these discrete market opportunities represent $1.9 billion, $8.5 billion and $2.2 billion.

 

The A10 Networks Solution

 

We are a leading provider of advanced application networking technologies. Our solutions are designed to enable enterprises, service providers, Web giants and governmental organizations to accelerate, secure and optimize the performance of their data center applications and networks. Our Advanced Core Operating System, or ACOS, platform incorporates our proprietary shared memory architecture, which is designed to utilize multi-core processors efficiently and provide increasing levels of performance with increasing processor density. We offer a range of software based solutions built on top of our ACOS platform that address a variety of performance and security challenges in customer networks. Our products can be deployed in a variety of forms, including optimized hardware appliances and as virtual appliances.

 

The customer benefits of our platform include:

 

   

High Performance Architecture Optimized for Efficiency. By taking advantage of the capabilities of multi-core processors through use of our proprietary shared memory architecture, we believe our ACOS application networking platform enables us to provide our end-customers with products that can deliver superior price performance benefits over products that lack these capabilities. We believe our products can process two to five times more web transactions (measured as Layer 4 connections per second) in certain head to head product comparisons per unit of computing and memory resources, power, rack space or list price.

 

   

Agile and Flexible Platform for a Growing Array of Application Networking Services. Our software based application networking platform is designed to provide flexibility for us to develop new applications to address broadening customer needs and to respond to increasing use of virtual services, software defined networks and other networking industry trends as they arise, helping end-customers integrate new networking models and technologies seamlessly.

 

   

High Performance Network Security Functionality. Our high performance application networking platform delivers a range of security features that decrypt, inspect and authenticate the flow of

 

 

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application content across a network, and then detect and mitigate the effects of sophisticated cyber security attacks, such as DDoS, that can threaten availability of the largest websites and networks around the world.

 

   

Support for Diverse IT Delivery Models. We offer a portfolio of solutions that address varying IT delivery models, including physical and virtual appliances, as well as licensing models that align to the particular IT delivery models used by the customer. We deliver a consistent set of features and interfaces for management of our products across a variety of IT models, so that enterprises and service providers can be assured of a similar experience regardless of model.

 

   

Predictable Policy Enforcement. The proprietary shared memory architecture of our ACOS platform is designed to assist network administrators in ensuring that desired levels of customer service are achieved and policies regarding network security are enforced.

 

   

Customer-Friendly Business Model. We have organized our product development, product pricing, sales and post-sales technical support efforts to collaborate with our end-customers to identify and satisfy their needs. For example, we offer single all-inclusive pricing for our products, which provides simplicity for end-customers, compared to our competitors who often have more complicated pricing and licensing models.

 

Our Growth Strategy

 

Our goal is to be the global leader in application networking. The key elements of our growth strategy include:

 

   

Extend Product Offerings Using Our ACOS Platform. We believe that our software based platform enables us to innovate quickly to adjust to the dynamics of the application networking market and customer trends. We intend to take advantage of the ACOS platform to continue to extend our portfolio of products, as we have demonstrated through the release of our CGN and TPS product lines.

 

   

Drive Greater Penetration into Our Customer Base. We intend to continue to expand our penetration into existing customer accounts, from an initial deployment of our products to broader deployments across the organization. We also intend to sell new products and services to existing end-customers, which provides us with opportunities for additional revenue.

 

   

Expand Our Global Sales Organization to Attract New Customers. We believe that the global market for application networking is large, and we intend to target new end-customers by continuing to invest in our high-touch sales organization.

 

   

Enhance and Expand Our Channel Partner Ecosystem. We intend to focus on enhancing and expanding in-depth relationships with partners that have strong application networking expertise and a reputation for providing solutions to customers. We also intend to increase the number of our distribution channel partners, OEMs and technology partners in order to expand our sales reach.

 

   

Invest and Enhance Our Marketing Programs. We intend to increase our investment substantially across all aspects of marketing, including product and solution marketing, branding, generation of leads, and corporate communications, to promote awareness of our ACOS platform.

 

Risks Affecting Us

 

Our business is subject to numerous risks and uncertainties, including those highlighted in the section entitled “Risk Factors” immediately following this prospectus summary. These risks include, among others, the following:

 

   

We must successfully anticipate market needs and opportunities, and the market must continue to adopt our application networking products.

 

 

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Our success depends on our timely development of new products and features to address rapid technological changes and evolving customer requirements.

 

   

We have experienced net losses in recent periods, anticipate increasing our operating expenses in the future and may not achieve or maintain profitability in the future.

 

   

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

 

   

Timing of shipments at the end of the quarter could cause our revenue for the applicable period to fall below expected levels.

 

   

A limited number of our end-customers, including service providers, make large and concentrated purchases that comprise a significant portion of our revenue.

 

   

We have been and are a party to litigation and claims regarding intellectual property rights, resolution of which has been and may in the future be time-consuming and expensive, as well as require a significant amount of resources to prosecute, defend or make our products non-infringing.

 

   

We may not be able to adequately protect our intellectual property, and if we are unable to protect our intellectual property, our competitive position could be harmed or we could be required to incur significant expenses to enforce our rights.

 

   

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

 

   

Some of our large end-customers require more favorable terms and conditions from their vendors and may request price concessions. As we seek to sell more products to these end-customers, we may be required to agree to terms and conditions that may have an adverse effect on our business.

 

Corporate Information

 

We were incorporated in the State of California in July 2004. We intend to reincorporate in the State of Delaware prior to the completion of this offering. Our principal executive offices are located at 3 West Plumeria Drive, San Jose, California 95134. Our telephone number at that location is (408) 325-8668. Our website address is www.a10networks.com. Information on our website is not part of this prospectus and should not be relied upon in determining whether to make an investment decision.

 

The A10 Networks design logo and the mark “A10” are the property of A10 Networks, Inc. This prospectus contains additional trade names, trademarks and service marks of other companies. We do not intend our use or display of other companies’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, these other companies.

 

We are an emerging growth company as defined in the Jumpstart Our Business Startups Act of 2012, or JOBS Act. We will remain an emerging growth company until the earliest of (a) the last day of the year (i) following the fifth anniversary of the completion of this offering, (ii) in which we have total annual gross revenue of at least $1.0 billion, or (iii) in which we qualify as a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700 million as of the prior June 30, or (b) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period.

 

 

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THE OFFERING

 

Common stock offered by us

               shares

Common stock offered by the selling stockholders

               shares

Total common stock offered

               shares

Over-allotment option being offered by us

               shares

Common stock to be outstanding after this offering

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

Use of proceeds

   General corporate purposes, working capital, sales and marketing activities, research and development activities, general and administrative matters and capital expenditures, although we do not currently have any specific or preliminary plans with respect to the use of proceeds for such purposes. Additionally, based on our current operating assumptions, we estimate that we will use between $20.0 million and $30.0 million of our net proceeds from this offering to fully implement our growth strategies described in this prospectus. The exact amount of net proceeds we use to fund our growth plans, however, will depend on the amount of cash generated from our operations and any strategic decisions we may make that could alter our expansion plans and the amount of cash necessary to fund these plans. We may also, in our discretion, use a portion of the net proceeds to pay down certain existing debt obligations. We will not receive any of the proceeds from the sale of shares to be offered by the selling stockholders. See “Use of Proceeds.”

Conflicts of Interest

   Some of our underwriters are affiliates of lenders under our credit agreement. Because we may use more than 5% of the net proceeds that we receive from this offering to reduce the balance under our credit agreement, RBC Capital Markets LLC, J.P. Morgan Securities LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated may each be deemed to have a “conflict of interest” with us within the meaning of Rule 5121(f)(5)(C) of the Conduct Rules of the Financial Industry Regulatory Authority, Inc., or FINRA. See “Use of Proceeds” and “Underwriters (Conflicts of Interests).”

Proposed New York Stock Exchange symbol

   ATEN

 

 

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The number of shares of common stock to be outstanding after this offering is based on 50,029,122 shares of our common stock outstanding as of December 31, 2013, and excludes:

 

   

9,971,381 shares of our common stock issuable upon the exercise of stock options outstanding as of December 31, 2013, with a weighted-average exercise price of $4.14 per share; and

 

   

10,735,029 shares of common stock reserved for future issuances and grants under our stock-based compensation plans, consisting of (i) 1,435,029 shares of common stock reserved for future awards under our 2008 Stock Option Plan as of December 31, 2013, (ii) 7,700,000 shares of common stock reserved for future issuance under our 2014 Equity Incentive Plan, which will become effective on the date of this prospectus, and (iii) 1,600,000 shares of common stock reserved for future issuance under our 2014 Employee Stock Purchase Plan, which will become effective on the date of this prospectus. Upon completion of this offering, any remaining shares available for future awards under our 2008 Stock Option Plan will be added to the shares reserved under our 2014 Equity Incentive Plan, and we will cease granting awards under our 2008 Option Plan. Our 2014 Equity Incentive Plan and 2014 Employee Stock Purchase Plan also provide for automatic annual increases in the number of shares reserved under the plans, as more fully described in “Executive Compensation—Employee Benefit and Stock Plans.”

 

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

 

   

our reincorporation from California to Delaware and the effectiveness of our restated certificate of incorporation, which we will file in connection with the completion of this offering;

 

   

a 1-for-3.75 reverse stock split of our common stock and our Series A, Series B and Series C convertible preferred stock, which will be effected prior to the completion of this offering;

 

   

the automatic conversion of all outstanding shares of our convertible preferred stock and redeemable convertible preferred stock into an aggregate of 39,997,112 shares of common stock upon the completion of this offering;

 

   

no exercise of outstanding options subsequent to December 31, 2013; and

 

   

no exercise of the underwriters’ over-allotment option.

 

 

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SUMMARY CONSOLIDATED FINANCIAL DATA

 

The following tables summarize our consolidated financial data. You should read the following tables in conjunction with “Selected Consolidated Financial Data,” “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. We derived the summary consolidated statements of operations data for the years ended December 31, 2011, 2012 and 2013 from our audited consolidated financial statements included elsewhere in this prospectus. In our opinion, such financial statements include all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of the financial information set forth in those statements. Our historical operating results are not necessarily indicative of results to be expected in the future.

 

     Year Ended
December 31,
 
     2011     2012     2013  
     (In thousands, except per share data)  

Consolidated Statements of Operations Data:

      

Revenue:

    

Products

   $ 79,763      $ 99,891      $ 112,045   

Services

      11,515        20,175        29,693   
  

 

 

   

 

 

   

 

 

 

Total revenue

     91,278        120,066        141,738   

Cost of revenue(1):

    

Products

     16,442        18,619        25,284   

Services

     2,033        5,891        8,112   
  

 

 

   

 

 

   

 

 

 

Total cost of revenue

     18,475        24,510        33,396   
  

 

 

   

 

 

   

 

 

 

Gross profit

     72,803        95,556        108,342   

Operating expenses(1):

    

Sales and marketing

     34,504        51,323        70,756   

Research and development

     16,652        25,513        33,348   

General and administrative

     3,110        10,225        15,556   

Litigation

     9,524        95,515        11,525   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     63,790        182,576        131,185   
  

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     9,013        (87,020     (22,843

Other income (expense), net:

    

Interest expense

     (241     (135     (1,495

Interest income and other income (expense), net

     (618     (2,237     (2,118
  

 

 

   

 

 

   

 

 

 

Total other income (expense), net

     (859     (2,372     (3,613
  

 

 

   

 

 

   

 

 

 

Income (loss) before provision for income taxes

     8,154        (89,392     (26,456

Provision for income taxes

     850        758        640   
  

 

 

   

 

 

   

 

 

 

Net income (loss)

     7,304        (90,150     (27,096

Accretion of redeemable convertible preferred stock dividend(2)

                   (1,982
  

 

 

   

 

 

   

 

 

 

Net income available (loss attributable) to common stockholders

   $ 7,304      $ (90,150   $ (29,078
  

 

 

   

 

 

   

 

 

 

Net income available (loss attributable) to common stockholders, basic

   $ 943      $ (90,150   $ (29,078
  

 

 

   

 

 

   

 

 

 

 

 

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     Year Ended
December 31,
 
     2011      2012     2013  
     (In thousands, except per share
data)
 

Net income per share available (loss attributable) to common stockholders(3):

    

Basic

   $ 0.13       $ (10.80   $ (3.14
  

 

 

    

 

 

   

 

 

 

Diluted

   $ 0.12       $ (10.80   $ (3.14
  

 

 

    

 

 

   

 

 

 

Weighted-average shares used in computing net income per share available (loss attributable) to common stockholders(3):

    

Basic

     7,397         8,344        9,262   
  

 

 

    

 

 

   

 

 

 

Diluted

     10,403         8,344        9,262   
  

 

 

    

 

 

   

 

 

 

Pro forma net loss per share attributable to common stockholders (unaudited)(3):

       

Basic

      $ (2.32   $ (0.62
     

 

 

   

 

 

 

Diluted

      $ (2.32   $ (0.62
     

 

 

   

 

 

 

Weighted-average shares used in computing pro forma net loss attributable to common stockholders (unaudited)(3):

       

Basic

        38,456        43,723   
     

 

 

   

 

 

 

Diluted

        38,456        43,723   
     

 

 

   

 

 

 

Supplemental pro forma net loss attributable to common stockholders
(unaudited)
(4):

       

Basic

      $        $     
     

 

 

   

 

 

 

Diluted

      $        $     
     

 

 

   

 

 

 

Supplemental pro forma weighted-average common shares outstanding used in computing supplemental pro forma net loss attributable to common stockholders (unaudited)(4):

       

Basic

       
     

 

 

   

 

 

 

Diluted

       
     

 

 

   

 

 

 

Other Financial Data:

       

Adjusted EBITDA (loss)(5)

   $ 20,227       $ 15,110      $ (4,164
  

 

 

    

 

 

   

 

 

 

 

(1)   Results above include stock-based compensation expense as follows:

 

     Year Ended
December 31,
 
     2011      2012      2013  
     (In thousands)  

Cost of revenue

   $ 49       $ 87       $ 162   

Sales and marketing

     696         1,316         2,228   

Research and development

     551         776         1,356   

General and administrative

     168         361         536   
  

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 1,464       $ 2,540       $ 4,282   
  

 

 

    

 

 

    

 

 

 

 

(2)   The redemption price of our Series D redeemable convertible preferred stock accretes at the rate of 6.0% per annum, compounding annually. In the event of a qualified initial public offering, the redeemable convertible preferred stock will automatically convert into common stock. See Note 8 to our consolidated financial statements appearing elsewhere in this prospectus.
(3)   See Notes 1 and 11 to our consolidated financial statements appearing elsewhere in this prospectus for an explanation of the calculations of basic and diluted net income per share available (loss attributable) to common stockholders.

 

 

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(4)   See Notes 1 and 11 to our consolidated financial statements appearing elsewhere in this prospectus for an explanation of the calculation of supplemental basic and diluted pro forma net loss per share attributable to common stockholders.
(5)   See “Adjusted EBITDA” below for more information and for a reconciliation of net income (loss) to Adjusted EBITDA (loss).

 

     As of
December 31, 2013
 
     Actual     Pro
Forma(1)
    Pro  Forma
as
Adjusted(2)(3)
 
    

(In thousands)

 

Consolidated Balance Sheet Data:

      

Cash and cash equivalents

   $ 20,793      $   20,793      $                

Working capital

     15,122        14,822     

Total assets

     93,794        93,794     

Total debt

     20,000        20,000     

Deferred revenue, net—current and long-term

     41,232        41,232     

Redeemable convertible preferred stock

     81,426            

Convertible preferred stock

     44,749            

Total stockholders’ equity (deficit)

     (134,880     (9,005  

 

(1)   Pro forma consolidated balance sheet data reflect (i) the automatic conversion of all outstanding shares of our convertible preferred stock and redeemable convertible preferred stock into 39,997,112 shares of our common stock upon completion of this offering, and (ii) the reduction in working capital and increase in accumulated deficit of $0.3 million to pay a contingent payment to a lender.
(2)   Pro forma as adjusted consolidated balance sheet data reflect: (i) the items described in footnote 1 above; (ii) the application of the net proceeds from this offering to repay the outstanding borrowings under our credit facility, which were $20.0 million as of December 31, 2013; and (iii) the receipt of $        in net proceeds, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, from the sale of shares of common stock by us in this offering at an assumed initial public offering price of $        per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus.
(3)   A $1.00 increase or decrease in the assumed initial public offering price of $         per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease our pro forma as adjusted cash and cash equivalents, working capital, total assets, total stockholders’ equity (deficit) by approximately $         million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions payable by us.

 

Other Financial Data

 

Adjusted EBITDA

 

Adjusted EBITDA (loss) is an important measure used by our management and board of directors to evaluate our operating performance, develop future operating plans, make strategic decisions for the allocation of capital and determine our compliance with debt covenants. In particular, the exclusion of certain expenses, primarily the amounts paid in settlement of, and other expenses associated with, litigation between ourselves and Brocade Communication Systems, Inc., in calculating Adjusted EBITDA facilitates comparisons of our operating performance on a period-to-period basis. Accordingly, we believe that Adjusted EBITDA also may provide useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors. We define Adjusted EBITDA as our net income (loss) minus: (i) amounts paid in settlement of, and other expenses associated with, the Brocade litigation, (ii) interest expense, (iii) interest income and other (income) expense, net, which primarily includes changes in the fair value of convertible preferred stock warrant liabilities and foreign exchange gains and losses, (iv) stock-based compensation, (v) depreciation and amortization and (vi) our provision for income taxes.

 

 

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Reconciliation of Net Income (Loss) to Adjusted EBITDA (Loss)

 

     Year Ended
December  31,
 
     2011      2012     2013  
     (In thousands)  

Net income (loss)

   $ 7,304       $ (90,150   $ (27,096

Brocade litigation

        6,333         94,296        7,317   

Interest expense

     241         135        1,495   

Interest income and other (income) expense, net

     618         2,237        2,118   

Stock-based compensation

     1,464         2,540        4,282   

Depreciation and amortization

     3,417         5,294        7,080   

Provision for income taxes

     850         758        640   
  

 

 

    

 

 

   

 

 

 

Adjusted EBITDA (loss)

   $ 20,227       $ 15,110      $ (4,164
  

 

 

    

 

 

   

 

 

 

 

Adjusted EBITDA (loss) is a supplemental measure of financial performance that is not required by, or presented in accordance with, U.S. generally accepted accounting principles, or GAAP. Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for net income or any of our other operating results reported under GAAP. Adjusted EBITDA excludes some costs, namely, non-cash stock-based compensation and depreciation and amortization, that are recurring, and therefore it does not reflect the non-cash impact of such expenses or working capital needs even though they will continue for the foreseeable future. Moreover, other companies may calculate Adjusted EBITDA differently or may use other measures to evaluate their performance, both of which could reduce the usefulness of our Adjusted EBITDA as a tool for comparison. Because of these limitations, you should consider Adjusted EBITDA alongside other financial performance measures, including net income (loss), various cash flow metrics, and other financial results presented in accordance with GAAP.

 

 

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RISK FACTORS

 

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information in this prospectus, including our consolidated financial statements and related notes, 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, may also become important factors that affect us. If any of the following risks occur, our business, financial condition, operating results, and prospects could be materially harmed. In that event, the price of our common stock could decline, and could lose part or all of your investment.

 

If we do not successfully anticipate market needs and opportunities or if the market does not continue to adopt our application networking products, our business, financial condition and results of operations could be significantly harmed.

 

The application networking market is rapidly evolving and difficult to predict. Technologies, customer requirements, security threats and industry standards are constantly changing. As a result, we must anticipate future market needs and opportunities and then develop new products or enhancements to our current products that are designed to address those needs and opportunities, and we may not be successful in doing so.

 

Even if we are able to anticipate, develop and commercially introduce new products and enhancements that address the market’s needs and opportunities, there can be no assurance that new products or enhancements will achieve widespread market acceptance. For example, organizations that use other conventional or first-generation application networking products for their needs may believe that these products are sufficient. In addition, as we launch new product offerings, organizations may not believe that such new product offerings offer any additional benefits as compared to the existing application networking products that they currently use. Accordingly, organizations may continue allocating their IT budgets for conventional or first-generation application networking products and may not adopt our products, regardless of whether our products can offer superior performance or security.

 

If we fail to anticipate market needs and opportunities or if the market does not continue to adopt our application networking products, then market acceptance and sales of our current and future application networking products could be substantially decreased or delayed, we could lose customers, and our revenue may not grow or may decline. Any of such events would significantly harm our business, financial condition and results of operations.

 

Our success depends on our timely development of new products and features to address rapid technological changes and evolving customer requirements. If we are unable to timely develop new products and features that adequately address these changes and requirements, our business and operating results could be adversely affected.

 

Changes in application software technologies, data center and communications hardware, networking software and operating systems, and industry standards, as well as our end-customers’ continuing business growth, result in evolving application networking needs and requirements. Our continued success depends on our ability to identify and develop in a timely manner new products and new features for our existing products that meet these needs and requirements.

 

Our future plans include significant investments in research and development and related product opportunities. Developing our products and related enhancements is time-consuming and expensive. We have made significant investments in our research and development team in order to address these product development needs. Our investments in research and development may not result in significant design and performance improvements or marketable products or features, or may result in products that are more expensive than anticipated. We may take longer to generate revenue, or generate less revenue, than we anticipate from our new products and product enhancements. We believe that we must continue to dedicate a significant amount of resources to our research and development efforts to maintain our competitive position.

 

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If we are unable to develop new products and features to address technological changes and new customer requirements in the application networking market or if our investments in research and development do not yield the expected benefits in a timely manner, our business and operating results could be adversely affected.

 

We have experienced net losses in recent periods, anticipate increasing our operating expenses in the future and may not achieve or maintain profitability in the future. If we cannot achieve or maintain profitability, our financial performance will be harmed and our business may suffer.

 

We experienced net losses for the years ended December 31, 2012 and 2013. Although we experienced revenue growth over these same periods and had achieved profitability in prior year periods, we may not be able to sustain or increase our revenue growth or achieve profitability in the future or on a consistent basis. During 2013, we have invested in our sales, marketing and research and development teams in order to develop, market and sell our products. We expect to continue to invest significantly in these areas in the future. As a result of these increased expenditures, we will have to generate and sustain increased revenue, manage our cost structure and avoid significant liabilities to achieve future profitability. In particular, in 2012 and 2013, we incurred substantial expenses associated with defending ourselves in separate litigation matters involving Brocade Communications Systems, Inc. and Radware Ltd. and in our settlement of the Brocade litigation. As a public company, we will also incur significant accounting, legal and other expenses that we did not incur as a private company.

 

Revenue growth may slow or decline, and we may incur significant losses in the future for a number of possible reasons, including our inability to develop products that achieve market acceptance, general economic conditions, increasing competition, decreased growth in the markets in which we operate, or our failure for any reason to capitalize on growth opportunities. Additionally, we may encounter unforeseen operating expenses, difficulties, complications, delays and other unknown factors that may result in losses in future periods. If these losses exceed our expectations or our revenue growth expectations are not met in future periods, our financial performance will be harmed and our stock price could be volatile or decline.

 

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

 

Our operating results – in particular, revenue, margins and operating expenses – have fluctuated in the past, and we expect this will continue, which makes it difficult for us to predict our future operating results. The timing and size of sales of our products are highly variable and difficult to predict and can result in significant fluctuations in our revenue from period to period. This is particularly true of sales to our largest end-customers, such as service providers, Web giants and governmental organizations, who typically make large and concentrated purchases and for whom sales cycles can be long, as a result of their complex networks and data centers. Our quarterly results may vary significantly based on when these large end-customers place orders with us.

 

Our operating results may also fluctuate due to a number of other factors, many of which are outside of our control and may be difficult to predict. In addition to other risks listed in this “Risk Factors” section, factors that may affect our operating results include:

 

   

fluctuations in purchases from, or loss of, large customers;

 

   

the budgeting cycles and purchasing practices of end-customers;

 

   

our ability to attract and retain new end-customers;

 

   

changes in demand for our products and services, including seasonal variations in customer spending patterns or cyclical fluctuations in our markets;

 

   

our reliance on shipments at the end of our quarters;

 

   

variations in product mix or geographic locations of our sales, which can affect the revenue we realize for those sales;

 

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the timing and success of new product and service introductions by us or our competitors;

 

   

our ability to increase the size of our distribution channel and to maintain relationships with important distribution channel partners;

 

   

the effect of currency exchange rates on our revenue and expenses;

 

   

the cost and potential outcomes of existing and future litigation;

 

   

the effect of discounts negotiated by our largest end-customers for sales or pricing pressure from our competitors;

 

   

changes in the growth rate of the application networking market or changes in market needs;

 

   

inventory write downs, which may be necessary for our older products when our new products are launched and adopted by our end-customers; and

 

   

our third-party manufacturers’ and component suppliers’ capacity to meet our product demand forecasts on a timely basis, or at all.

 

Any one of the factors above or the cumulative effect of some of these factors may result in significant fluctuations in our financial and other operating results. This variability and unpredictability could result in our failure to meet our or our investors’ or securities analysts’ revenue, margin or other operating results expectations for a particular period, resulting in a decline in the trading price of our common stock.

 

Reliance on shipments at the end of the quarter could cause our revenue for the applicable period to fall below expected levels.

 

As a result of end-customer buying patterns and the efforts of our sales force and distribution channel partners to meet or exceed their sales objectives, we have historically received a substantial portion of purchase orders and generated a substantial portion of revenue during the last few weeks of each quarter. We can recognize such revenue in the quarter received, however, only if all of the requirements of revenue recognition, especially shipment, are met by the end of the quarter. In addition, any significant interruption in our information technology systems, which manage critical functions such as order processing, revenue recognition, financial forecasts, inventory and supply chain management, could result in delayed order fulfillment and thus decreased revenue for that quarter. If expected revenue at the end of any quarter is delayed for any reason, including the failure of anticipated purchase orders to materialize, our third-party manufacturers’ inability to manufacture and ship products prior to quarter-end to fulfill purchase orders received near the end of the quarter, our failure to manage inventory to meet demand, our inability to release new products on schedule, any failure of our systems related to order review and processing, or any delays in shipments or achieving specified acceptance criteria, our revenue for that quarter could fall below our, or our investors’ or securities analysts’ expectations, resulting in a decline in the trading price of our common stock.

 

A limited number of our end-customers, including service providers, make large and concentrated purchases that comprise a significant portion of our revenue. Any loss or delay of expected purchases by our largest end-customers could adversely affect our operating results.

 

As a result of the nature of our target market and the current stage of our development, a substantial portion of our revenue in any period comes from a limited number of large end-customers, including service providers. For example, NTT DoCoMo, Inc., through a reseller, accounted for approximately 32% of our total revenue during the year ended December 31, 2012 and approximately 13% of our total revenue during the year ended December 31, 2013. In addition, during the years ended December 31, 2012 and 2013, purchases from our ten largest end-customers accounted for approximately 49% and 43% of our total revenue. The composition of the group of these ten largest end-customers changes from period to period, but often includes service providers, who accounted for approximately 53% and 47% of our total revenue during the years ended December 31, 2012 and 2013.

 

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Sales to these large end-customers have typically been characterized by large but irregular purchases with long initial sales cycles. After initial deployment, subsequent purchases of our products typically have a more compressed sales cycle. The timing of these purchases and of the requested delivery of the purchased product is difficult to predict. As a consequence, any acceleration or delay in anticipated product purchases by or requested deliveries to our largest end-customers could materially affect our revenue and operating results in any quarter and cause our quarterly revenue and operating results to fluctuate from quarter to quarter.

 

We cannot provide any assurance that we will be able to sustain or increase our revenue from our largest end-customers nor that we will be able to offset any absence of significant purchases by our largest end-customers in any particular period with purchases by new or existing end-customers in that or a subsequent period. We expect that sales of our products to a limited number of end-customers will continue to contribute materially to our revenue for the foreseeable future. The loss of, or a significant delay or reduction in purchases by, a small number of end-customers could have a material adverse effect on our consolidated financial position, results of operations or cash flows.

 

We have been and are a party to litigation and claims regarding intellectual property rights, resolution of which has been and may in the future be time-consuming, expensive and adverse to us, as well as require a significant amount of resources to prosecute, defend, or make our products non-infringing.

 

Our industry is characterized by the existence of a large number of patents and by increasingly frequent claims and related litigation based on allegations of infringement or other violations of patent and other intellectual property rights. In the ordinary course of our business, we have been and are involved in disputes and licensing discussions with others regarding their patents and other claimed intellectual property and proprietary rights. Intellectual property infringement and misappropriation lawsuits and other claims are subject to inherent uncertainties due to the complexity of the technical and legal issues involved, and we cannot be certain that we will be successful in defending ourselves against such claims or in concluding licenses on reasonable terms or at all.

 

We currently have fewer issued patents than our major competitors, and therefore may not be able to utilize our patent portfolio effectively to assert defenses or counterclaims in response to patent infringement claims or litigation brought against us by third parties. Further, litigation may involve patent holding companies or other adverse patent owners that have no relevant product revenue and against which our potential patents may provide little or no deterrence. In addition, many potential litigants have the capability to dedicate substantially greater resources than we can to enforce their intellectual property rights and to defend claims that may be brought against them. We expect that infringement claims may increase as the numbers of product types and the number of competitors in our market increases. Also, to the extent we gain greater visibility, market exposure and competitive success, we face a higher risk of being the subject of intellectual property infringement claims.

 

If we are found in the future to infringe the proprietary rights of others, or if we otherwise settle such claims, we could be compelled to pay damages or royalties and either obtain a license to those intellectual property rights or alter our products such that they no longer infringe. Any license could be very expensive to obtain or may not be available at all. Similarly, changing our products or processes to avoid infringing the rights of others may be costly, time-consuming or impractical. Alternatively, we could also become subject to an injunction or other court order that could prevent us from offering our products. Any of these claims, regardless of their merit, may be time-consuming, result in costly litigation and diversion of technical and management personnel, or require us to cease using infringing technology, develop non-infringing technology or enter into royalty or licensing agreements.

 

Many of our commercial agreements require us to indemnify our end-customers, distributors and resellers for certain third-party intellectual property infringement actions related to our technology, which may require us to defend or otherwise become involved in such infringement claims, and we could incur liabilities in excess of the amounts we have received for the relevant products and/or services from our end-customers, distributors or resellers. These types of claims could harm our relationships with our end-customers, distributors and resellers,

 

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may deter future end-customers from purchasing our products or could expose us to litigation for these claims. Even if we are not a party to any litigation between an end-customer, distributor or reseller, on the one hand, and a third party, on the other hand, an adverse outcome in any such litigation could make it more difficult for us to defend our intellectual property rights in any subsequent litigation in which we are a named party.

 

We have in the past been involved in two litigation matters with F5 Networks, Inc., a litigation matter with Allegro Software Development, Inc. and a litigation matter with Brocade, all of which have since settled. We are currently party to two litigation matters. In May 2013, Radware filed suit against us for patent infringement in the United States District Court for the Northern District of California, alleging that our AX and EX Series products infringe three Radware patents. In November 2013, Parallel Networks, LLC, which we believe is a patent holding company, filed a lawsuit against us in the United States District Court for the District of Delaware alleging that our AX and Thunder series products infringe two of their patents. These plaintiffs are seeking injunctive relief, damages, costs and, in the case of the Radware lawsuit, attorneys’ fees. While we intend to defend ourselves vigorously against the allegations in these lawsuits and, in the case of the Radware lawsuit, have filed motions to dismiss and answers denying Radware’s claims, these litigation matters, regardless of the outcome, could result in significant costs and diversion of our management’s efforts. As an example of how intellectual property litigation could harm our business and results of operations, in the now-settled litigation with Brocade, a jury had rendered a verdict that (1) Brocade had proved non-willful patent infringement claims, non-willful copyright infringement claims and trade secret misappropriation claims against us, and (2) Brocade had proved intentional interference with contract claims against us and against Lee Chen, our founder and Chief Executive Officer. The court determined, subsequent to the jury verdict, that (i) a re-trial was needed with respect to the amount of damages for the patent infringement claims, but that the jury verdict that patent infringement existed should be maintained, (ii) the $60.0 million in damages awarded by the jury for the copyright infringement claims was appropriate, (iii) the one dollar in damages awarded by the jury for the trade secret misappropriation claims was appropriate, (iv) the one dollar in damages awarded by the jury for the intentional interference with contract claims was appropriate, and (v) the punitive damages of $500,000 awarded by the jury with respect to the intentional interference with contract claims against each of the company and Lee Chen were excessive and should be limited to the constitutionally maximum amount. The court also entered permanent injunctions against us as a result of the patent infringement and trade secret determinations, which were subsequently dissolved as a result of the settlement. At the time of the settlement, the appeals to the Court of Appeals for the Federal Circuit were unresolved. As a result of all these circumstances with respect to this litigation with Brocade, we determined that it was in our best interest to settle with Brocade in May 2013, and that settlement included (1) a dismissal of all claims against the individual defendants, including Lee Chen, which was followed by entry of a final judgment in favor of the individual defendants on all claims, (2) a $75.0 million dollar cash payment by us to Brocade, (3) a license by us to Brocade of all of our issued patents, our pending patent applications, and any future patents and patent applications that we may acquire, obtain, apply for or have a right to license to Brocade through May 2025, (4) a covenant by us not to sue Brocade on claims relating to its products and services through May 2025, (5) certain covenants by Brocade not to sue us, which are intended to prevent lawsuits against our Layer 4-7 products by Brocade with respect to thirteen specific Brocade patent families through May 2025 for the life of each such patent and with respect to any other Brocade patents through May 2017 and (6) general releases to all parties. A satisfaction of judgment was entered by the court in October 2013.

 

We may not be able to adequately protect our intellectual property, and if we are unable to do so, our competitive position could be harmed, or we could be required to incur significant expenses to enforce our rights.

 

We rely on a combination of patent, copyright, trademark and trade secret laws, and contractual restrictions on disclosure of confidential and proprietary information, to protect our intellectual property. We cannot be certain that the intellectual property we decide to protect will be desirable or necessary to our competitors or will ultimately have commercial value, or that we will be the first to seek protection for the intellectual property we attempt to protect.

 

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We also rely in part on confidentiality and/or assignment agreements with our technology partners, employees, consultants, advisors and others. We did not, however, obtain general employee confidentiality and assignment agreements from certain former employees who worked with us prior to July 2010, although we did receive specific assignments from each of these employees who was an inventor of any technologies that we patented. These protections and agreements may not effectively prevent disclosure of our confidential information and may not provide an adequate remedy in the event of unauthorized disclosure. In addition, others may independently discover our trade secrets and intellectual property information we thought to be proprietary, and in these cases we would not be able to assert any trade secret rights against those parties. Despite our efforts to protect our intellectual property, unauthorized parties may attempt to copy or otherwise obtain and use our intellectual property or technology. Monitoring unauthorized use of our intellectual property is difficult and expensive, we have not made such monitoring a priority to date and will not likely make this a priority in the future. We cannot be certain that the steps we have taken or will take will prevent misappropriation of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States.

 

If we fail to protect our intellectual property adequately, our competitors might gain access to our technology, and our business might be harmed. In addition, even if we protect our intellectual property, we may need to license it to competitors, which could also be harmful. For example, we have already licensed all of our issued patents, pending applications, and future patents and patent applications that we may acquire, obtain, apply for or have a right to license to Brocade until May 2025, for the life of each such patent. In addition, we might incur significant expenses in defending our intellectual property rights. Any of our patents, copyrights, trademarks or other intellectual property rights could be challenged by others or invalidated through administrative process or litigation.

 

We may in the future initiate claims or litigation against third parties for infringement of our proprietary rights or to establish the validity of our proprietary rights. Any litigation, whether or not resolved in our favor, could result in significant expense to us and divert the efforts of our management and technical personnel, as well as cause other claims to be made against us, which might adversely affect our business, operating results and financial condition.

 

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

 

The application networking market is intensely competitive, and we expect competition to increase in the future. To the extent that we sell our solutions in adjacent markets, we expect to face intense competition in those markets as well. We believe that our main competitors fall into three categories:

 

   

Companies that sell products in the traditional ADC market. In the ADC market, we compete against other companies that are well established in this market, including F5 Networks, Inc., Brocade, Cisco Systems, Inc., Citrix Systems, Inc., and Radware Ltd.

 

   

Companies that sell CGN products. Our purpose-built CGN solution competes primarily against products originally designed for other networking purposes, such as edge routers and security appliances from vendors such as Alcatel-Lucent USA Inc., Cisco Systems, Inc. and Juniper Networks, Inc., and

 

   

Companies that sell traditional DDoS mitigation products. We are a new entrant into the DDoS market and first publicly launched our DDoS detection and mitigation solution, TPS, in January 2014. We believe our principle competitors in this market are Arbor Networks, Inc., a subsidiary of Danaher Corporation, and Radware.

 

Many of our competitors are substantially larger and have greater financial, technical, research and development, sales and marketing, manufacturing, distribution and other resources and greater name recognition.

 

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In addition, some of our larger competitors have broader products offerings and could leverage their customer relationships based on their other products. Potential customers who have purchased products from our competitors in the past may also prefer to continue to purchase from these competitors rather than change to a new supplier regardless of the performance, price or features of the respective products. We could also face competition from new market entrants, which may include our current technology partners. As we continue to expand globally, we may also see new competitors in different geographic regions. Such current and potential competitors may also establish cooperative relationships among themselves or with third parties that may further enhance their resources.

 

Many of our existing and potential competitors enjoy substantial competitive advantages, such as:

 

   

longer operating histories;

 

   

the capacity to leverage their sales efforts and marketing expenditures across a broader portfolio of products and services at a greater range of prices;

 

   

the ability to incorporate functionality into existing products to gain business in a manner that discourages users from purchasing our products, including through selling at zero or negative margins, product bundling or closed technology platforms;

 

   

broader distribution and established relationships with distribution channel partners in a greater number of worldwide locations;

 

   

access to larger end-customer bases;

 

   

the ability to use their greater financial resources to attract our research and development engineers as well as other employees of ours;

 

   

larger intellectual property portfolios; and

 

   

the ability to bundle competitive offerings with other products and services.

 

Our ability to compete will depend upon our ability to provide a better solution than our competitors at a competitive price. We may be required to make substantial additional investments in research and development, marketing and sales in order to respond to competition, and there is no assurance that these investments will achieve any returns for us or that we will be able to compete successfully in the future. We also expect increased competition if our market continues to expand. Moreover, conditions in our market could change rapidly and significantly as a result of technological advancements or other factors.

 

In addition, current or potential competitors may be acquired by third parties that have greater resources available. As a result of these acquisitions, our current or potential competitors might take advantage of the greater resources of the larger organization to compete more vigorously or broadly with us. In addition, continued industry consolidation might adversely impact end-customers’ perceptions of the viability of smaller and even medium-sized networking companies and, consequently, end-customers’ willingness to purchase from companies like us.

 

As a result, increased competition could lead to fewer end-customer orders, price reductions, reduced margins and loss of market share.

 

Some of our large end-customers demand favorable terms and conditions from their vendors and may request price concessions. As we seek to sell more products to these end-customers, we may agree to terms and conditions that may have an adverse effect on our business.

 

Some of our large end-customers have significant purchasing power and, accordingly, have requested from us and received more favorable terms and conditions, including lower prices, than we typically provide. As we seek to sell products to this class of end-customer, we may agree to these terms and conditions, which may include terms that reduce our gross margin and have an adverse effect on our business.

 

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If we are unable to attract new end-customers, sell additional products to our existing end-customers or achieve the anticipated benefits from our investment in additional sales personnel and resources, our revenue may decline, and our gross margin will be adversely affected.

 

To maintain and increase our revenue, we must continually add new end-customers and sell additional products to existing end-customers. The rate at which new and existing end-customers purchase solutions depends on a number of factors, including some outside of our control, such as general economic conditions. If our efforts to sell our solutions to new end-customers and additional solutions to our existing end-customers are not successful, our business and operating results will suffer.

 

In recent periods, we have been adding personnel and other resources to our sales and marketing functions, as we focus on growing our business, entering new markets and increasing our market share. We expect to incur significant additional expenses by hiring additional sales personnel and expanding our international operations in order to seek revenue growth. The return on these and future investments may be lower, or may be realized more slowly, than we expect, if realized at all. If we do not achieve the benefits anticipated from these investments, or if the achievement of these benefits is delayed, our growth rates will decline, and our gross margin would likely be adversely affected.

 

Our gross margin may fluctuate from period to period based on the mix of products sold, the geographic location of our customers, price discounts offered, required inventory write downs and current exchange rate fluctuations.

 

Our gross margin may fluctuate from period to period in response to a number of factors, such as the mix of our products sold and the geographic locations of our sales. Our products tend to have varying gross margins in different geographic regions. We also may offer pricing discounts from time to time as part of a targeted sales campaign or as a result of pricing pressure from our competitors. In addition, our larger end-customers may negotiate pricing discounts in connection with large orders they place with us. The sale of our products at discounted prices could have a negative impact on our gross margin. We also must manage our inventory of existing products when we introduce new products. For example, in the fourth quarter of 2013, our gross margin decreased to 74% due primarily to geographical mix and selling some end-of-life product at low margins. If we are unable to sell the remaining inventory of our older products prior to or following the launch of such new product offerings, we may be forced to write down inventory for such older products, which could also negatively affect our gross margin. Our gross margin may also vary based on international currency exchange rates. In general, our sales are denominated in U.S. Dollars; however, in Japan they are denominated in Yen. Changes in the Dollar/Yen exchange rate may therefore affect our actual revenue and gross margin.

 

We generate a significant amount of revenue from sales to distributors, resellers, and end-customers outside of the United States, and we are therefore subject to a number of risks that could adversely affect these international sources of our revenue.

 

A significant portion of our revenue is generated in international markets, including Japan, Western Europe, China, Taiwan and South Korea. During 2012 and 2013, approximately 64% and 52% of our total revenue was generated from customers located outside of the United States. As a result, we must hire and train experienced personnel to staff and manage our foreign operations. To the extent that we experience difficulties in recruiting, training, managing and retaining an international staff, and specifically sales management and sales personnel, we may experience difficulties in sales productivity in foreign markets. We also seek to enter into distributor and reseller relationships with companies in certain international markets where we do not have a local presence. If we are not able to maintain successful distributor relationships internationally or recruit additional companies to enter into distributor relationships, our future success in these international markets could be limited. Business practices in the international markets that we serve may differ from those in the United States and may require us in the future to include terms in customer contracts other than our standard terms. To the extent that we may enter into customer contracts in the future that include non-standard terms, our operating results may be adversely impacted.

 

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We have a significant presence in international markets and plan to continue to expand our international operations, which exposes us to a number of risks that could affect our future growth.

 

Our sales team is comprised of field sales and inside sales personnel who are organized by geography and maintain sales presence in 23 countries, including in the following countries and regions: United States, Western Europe, Japan, China, Taiwan and South Korea. We expect to continue to increase our sales headcount in all markets, particularly in markets where we currently do not have a sales presence. As we continue to expand our international sales and operations, we are subject to a number of risks, including the following:

 

   

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

 

   

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

 

   

fluctuations in exchange rates between the U.S. Dollar and foreign currencies in markets where we do business;

 

   

greater difficulty in recruiting local experienced personnel, and the costs and expenses associated with such activities;

 

   

general economic and political conditions in these foreign markets;

 

   

economic uncertainty around the world, including continued economic uncertainty as a result of sovereign debt issues in Europe;

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

Because of our worldwide operations, we are also subject to risks associated with compliance with applicable anticorruption laws. One such applicable anticorruption law is the U.S. Foreign Corrupt Practices Act, or FCPA, which generally prohibits U.S. companies and their employees and intermediaries from making payments to foreign officials for the purpose of obtaining or keeping business, securing an advantage, or directing business to another, and requires public companies to maintain accurate books and records and a system of internal accounting controls. Under the FCPA, U.S. companies may be held liable for actions taken by directors, officers, employees, agents, or other strategic or local partners or representatives. As such, if we or our intermediaries, such as channel partners and distributors, fail to comply with the requirements of the FCPA or similar legislation, governmental authorities in the United States and elsewhere could seek to impose civil and/or criminal fines and penalties which could have a material adverse effect on our business, operating results and financial conditions.

 

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

 

Our consolidated results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates. Historically, the majority of our revenue contracts are denominated in U.S. Dollars,

 

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with the most significant exception being Japan, where we invoice primarily in Yen. Our expenses are generally denominated in the currencies in which our operations are located, which is primarily in North America and Japan. Revenue resulting from selling in local currencies and costs incurred in local currencies are exposed to foreign currency exchange rate fluctuations that can affect our operating income. For example, a hypothetical 10% adverse movement in the Dollar/Yen exchange rate would have resulted in a decrease of $2.8 million in our total revenue and operating income for the year ended December 31, 2012, and a hypothetical 10% favorable movement in the Dollar/Yen exchange rate would have resulted in an increase of $3.5 million in our total revenue and operating income for the year ended December 31, 2012. As exchange rates vary, our operating income may differ from expectations. To date, we have not entered into any hedging arrangements with respect to foreign currency risk or other derivative instruments.

 

Our success depends on our key personnel and our ability to hire, retain and motivate qualified product development, sales, marketing and finance personnel.

 

Our success depends to a significant degree upon the continued contributions of our key management, product development, sales, marketing and finance personnel, many of whom may be difficult to replace. The complexity of our products, their integration into existing networks and ongoing support of our products requires us to retain highly trained professional services, customer support and sales personnel with specific expertise related to our business. Competition for qualified professional services, customer support and sales personnel in our industry is intense, because of the limited number of people available with the necessary technical skills and understanding of our products. We may not be successful in attracting, integrating, or retaining qualified personnel to fulfill our current or future needs, nor may we be successful in keeping the qualified personnel we currently have. Our ability to hire and retain these personnel may be adversely affected by volatility or reductions in the price of our common stock, since these employees are generally granted equity-based awards. Also, to the extent we hire personnel from competitors, we may be subject to allegations that they have been improperly solicited, or that they have divulged proprietary or other confidential information, or that their former employers own their inventions or other work product.

 

Our future performance also depends on the continued services and continuing contributions of our senior management to execute on our business plan and to identify and pursue new opportunities and product innovations. In particular, Lee Chen, our founder and Chief Executive Officer, and Rajkumar Jalan, our Chief Technology Officer, are critical to the development of our technology and the future vision and strategic direction of our company. The loss of services of senior management could significantly delay or prevent the achievement of our development and strategic objectives, which could adversely affect our business, financial condition, and operating results.

 

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

 

We will be required, pursuant to the Exchange Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting for the first fiscal year beginning after the effective date of this offering. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting, as well as, for the second year beginning after the date of this offering, a statement that our auditors have issued an attestation report on our management’s assessment of our internal controls.

 

We are currently evaluating our internal controls, identifying and remediating deficiencies in those internal controls and documenting the results of our evaluation, testing and remediation. 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 that we

 

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are unable to remediate before the end of the same fiscal year in which the material weakness is identified, we will be unable to assert that our internal control over financial reporting is effective. If we are unable to conclude that our internal control over financial reporting is effective, if our auditors are unable to attest to management’s report on the effectiveness of our internal control over financial reporting, or if we are required to restate our financial statements as a result of ineffective internal control over financial reporting, 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.

 

As a public company, we will be required to disclose material changes made in our internal control and procedures on a quarterly basis. However, our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act until the later of the year following our first annual report required to be filed with the SEC or the date we are no longer an emerging growth company as defined in the JOBS Act, if we take advantage of the exemptions contained in the JOBS Act. To comply with the requirements of being a public company, we may need to undertake various actions, such as implementing new internal controls and procedures and hiring accounting or internal audit staff.

 

We currently have significant deficiencies in our internal control over financial reporting. Failure to properly remediate these significant deficiencies could impair our ability to comply with the accounting and reporting requirements applicable to public companies.

 

We currently have significant deficiencies in our internal control over financial reporting relating to our inadequate design of the financial closing and reporting process. We did not maintain financial close process and procedures that were adequately designed, documented and executed to support the accurate and timely reporting of our financial results. Specifically, during 2013, we did not maintain effective controls in relation to reviews of account reconciliations and the tax provision. Although we are taking steps to strengthen our accounting staff and internal controls and plan to take additional measures to remediate the underlying causes of these significant deficiencies, we cannot at this time estimate how long it will take, and our initiatives may not prove to be successful in remediating these significant deficiencies. If we are unable to successfully remediate these significant deficiencies, it could harm our operating results, cause us to fail to meet our SEC reporting obligations or applicable stock exchange listing requirements on a timely basis, cause our stock price to be adversely affected or result in inaccurate financial reporting or material misstatements in our annual or interim financial statements.

 

If we are not able to maintain and enhance our brand and reputation, our business and operating results may be harmed in tangible or intangible ways.

 

We believe that maintaining and enhancing our brand and reputation are critical to our relationships with, and our ability to attract, new end-customers, technology partners and employees. The successful promotion of our brand will depend largely upon our ability to continue to develop, offer and maintain high-quality products and services, our marketing and public relations efforts, and our ability to differentiate our products and services successfully from those of our competitors. Our brand promotion activities may not be successful and may not yield increased revenue. In addition, extension of our brand to products and uses different from our traditional products and services may dilute our brand, particularly if we fail to maintain the quality of products and services in these new areas. We have in the past, and may in the future, become involved in litigation that could negatively affect our brand. If we do not successfully maintain and enhance our brand and reputation, our growth rate may decline, we may have reduced pricing power relative to competitors with stronger brands or reputations, and we could lose end-customers or technology partners, all of which would harm our business, operating results and financial condition.

 

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

 

A substantial portion of our business depends on the demand for information technology by large enterprises and service providers, the overall economic health of our current and prospective end-customers and the

 

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continued growth and evolution of the Internet. The timing of the purchase of our products is often discretionary and may involve a significant commitment of capital and other resources. The recent financial recession resulted in a significant weakening of the economy in the United States and Europe and of the global economy, more limited availability of credit, a reduction in business confidence and activity, deficit-driven austerity measures that continue to affect governments and educational institutions, and other difficulties that may affect one or more of the industries to which we sell our products and services. If economic conditions in the United States, Europe and other key markets for our products continue to remain uncertain or deteriorate further, many end-customers may delay or reduce their IT spending. This could result in reductions in sales of our products and services, longer sales cycles, slower adoption of new technologies and increased price competition. Any of these events would likely harm our business, operating results and financial condition. In addition, there can be no assurance that IT spending levels will increase following any recovery.

 

We are dependent on third-party manufacturers, and changes to those relationships, expected or unexpected, may result in delays or disruptions that could harm our business.

 

We outsource the manufacturing of our hardware components to third-party original design manufacturers who assemble these hardware components to our specifications. Our primary manufacturers are Lanner Electronics, Inc. and AEWIN Technologies Co., Ltd., each of which is located in Taiwan. Our reliance on these third-party manufacturers reduces our control over the manufacturing process and exposes us to risks, including reduced control over quality assurance, product costs, and product supply and timing. Any manufacturing disruption at these manufacturers could severely impair our ability to fulfill orders. Our reliance on outsourced manufacturers also may create the potential for infringement or misappropriation of our intellectual property rights or confidential information. If we are unable to manage our relationships with these manufacturers effectively, or if these manufacturers suffer delays or disruptions for any reason, experience increased manufacturing lead-times, experience capacity constraints or quality control problems in their manufacturing operations, or fail to meet our future requirements for timely delivery, our ability to ship products to our end-customers would be severely impaired, and our business and operating results would be seriously harmed.

 

These manufacturers typically fulfill our supply requirements on the basis of individual orders. We do not have long-term contracts with our manufacturers that guarantee capacity, the continuation of particular pricing terms, or the extension of credit limits. Accordingly, they are not obligated to continue to fulfill our supply requirements, which could result in supply shortages, and the prices we are charged for manufacturing services could be increased on short notice. In addition, our orders may represent a relatively small percentage of the overall orders received by our manufacturers from their customers. As a result, fulfilling our orders may not be considered a priority by one or more of our manufacturers in the event the manufacturer is constrained in its ability to fulfill all of its customer obligations in a timely manner.

 

Although the services required to manufacture our hardware components may be readily available from a number of established manufacturers, it is time-consuming and costly to qualify and implement such relationships. If we are required to change manufacturers, whether due to an interruption in one of our manufacturers’ businesses, quality control problems or otherwise, or if we are required to engage additional manufacturers, our ability to meet our scheduled product deliveries to our customers could be adversely affected, which could cause the loss of sales to existing or potential customers, delayed revenue or an increase in our costs that could adversely affect our gross margin.

 

Because some of the key components in our products come from limited sources of supply, we are susceptible to supply shortages or supply changes, which could disrupt or delay our scheduled product deliveries to our end-customers and may result in the loss of sales and end-customers.

 

Our products incorporate key components, including certain integrated circuits, that our third-party manufacturers purchase on our behalf from a limited number of suppliers, including some sole-source providers. In addition, the lead times associated with these and other components of our products can be lengthy and preclude rapid changes in quantities and delivery schedules. Moreover, long-term supply and maintenance

 

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obligations to our end-customers increase the duration for which specific components are required, which may further increase the risk we may incur component shortages or the cost of carrying inventory. If we are unable to obtain a sufficient quantity of these components in a timely manner for any reason, sales and/or shipments of our products could be delayed or halted, which would seriously affect present and future sales and cause damage to end-customer relationships, which would, in turn, adversely affect our business, financial condition and results of operations.

 

In addition, our component suppliers change their selling prices frequently in response to market trends, including industry-wide increases in demand, and because we do not necessarily have contracts with these suppliers, we are susceptible to price fluctuations related to raw materials and components. If we are unable to pass component price increases along to our end-customers or maintain stable pricing, our gross margin and operating results could be negatively impacted. Furthermore, poor quality in sole-sourced components or certain other components in our products could also result in lost sales or lost sales opportunities. If the quality of such components does not meet our standards or our end-customers’ requirements, if we are unable to obtain components from our existing suppliers on commercially reasonable terms, or if any of our sole source providers cease to continue to manufacture such components or to remain in business, we could be forced to redesign our products and qualify new components from alternate suppliers. The development of alternate sources for those components can be time-consuming, difficult and costly, and we may not be able to develop alternate or second sources in a timely manner. Even if we are able to locate alternate sources of supply, we could be forced to pay for expedited shipments of such components or our products at dramatically increased costs.

 

If our products fail to protect against malicious attacks and our end-customers experience security breaches, our reputation and business could be harmed, and our operating results could be adversely impacted.

 

Defects may cause our products to be vulnerable to security attacks or cause them to fail to help secure networks. Data thieves are increasingly sophisticated, often affiliated with organized crime and operate large-scale and complex automated attacks. In addition, the techniques they use to access or sabotage networks change frequently and generally are not recognized until launched against a target. As a result, we may be unable to anticipate these techniques and provide a solution in time to protect our end-customers’ networks. 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 end-customers’ critical business data, our business, operating results and reputation could suffer.

 

In addition, an actual or perceived security breach or theft of sensitive data of one of our end-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 end-customers may also misuse our products, which could result in a breach or theft of business data.

 

Undetected software or hardware errors may harm our business and results of operations.

 

Our products may contain undetected errors or defects when first introduced or as new versions are released. We have experienced these errors or defects in the past in connection with new products and product upgrades. We expect that these errors or defects will be found from time to time in new or enhanced products after commencement of commercial distribution. These problems may cause us to incur significant warranty and repair costs, divert the attention of our engineering personnel from our product development efforts and cause significant customer relations problems. We may also be subject to liability claims for damages related to product errors or defects. While we carry insurance policies covering this type of liability, these policies may not provide sufficient protection should a claim be asserted. A material product liability claim may harm our business and results of operations.

 

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Any errors, defects or vulnerabilities in our products could result in:

 

   

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

 

   

loss of existing or potential end-customers or distribution channel partners;

 

   

delayed or lost revenue;

 

   

delay or failure to attain market acceptance;

 

   

indemnification obligations under our agreements with resellers, distributors and/or end-customers;

 

   

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

 

   

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

 

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

 

We incorporate open source software such as the Linux operating system kernel into our products. We recently implemented a formal open source use policy, including written guidelines for use of open source software and business processes for approval of that use. We have developed and implemented our open source policies according to industry practice; however, best practices in this area are subject to change, because there is little reported case law on the interpretation of material terms of many open source licenses. We are in the process of reviewing our open source use and our compliance with open source licenses and implementing remediation and changes necessary to comply with the open source licenses related thereto. We cannot guarantee that our use of open source software has been, and will be, managed effectively for our intended business purposes and/or compliant with applicable open source licenses. We may face legal action by third parties seeking to enforce their intellectual property rights related to our use of such open source software. Failure to adequately manage open source license compliance and our use of open source software may result in unanticipated obligations regarding our products and services, such as a requirement that we license proprietary portions of our products or services on unfavorable terms, that we make available source code for modifications or derivative works we created based upon, incorporating or using open source software, that we license such modifications or derivative works under the terms of the particular open source license and/or that we redesign the affected products or services, which could result, for example, in a loss of intellectual property rights, or delay in providing our products and services. From time to time, there have been claims against companies that distribute or use third-party open source software in their products and services, asserting that the open source software or its combination with the products or services infringes third parties’ patents or copyrights, or that the companies’ distribution or use of the open source software does not comply with the terms of the applicable open source licenses. Use of certain open source software can lead to greater risks than use of warranted third-party commercial software, as open source licensors generally do not provide warranties or controls on the origin of such open source software. From time to time, there have been claims against companies that use open source software in their products, challenging the ownership of rights in such open source software. As a result, we could also be subject to suits by parties claiming ownership of rights in what we believe to be open source software and so challenging our right to use such software in our products. If any such claims were asserted against us, we could be required to incur significant legal expenses defending against such a claim. Further, if our defenses to such a claim were not successful, we could be, for example, subject to significant damages, be required to seek licenses from third parties in order to continue offering our products and services without infringing such third party’s intellectual property rights, be required to re-engineer such products and services, or be required to discontinue making available such products and services if re-engineering cannot be accomplished on a timely or successful basis. The need to engage in these or other remedies could increase our costs or otherwise adversely affect our business, operating results and financial condition.

 

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Our products must interoperate with operating systems, software applications and hardware that are developed by others and if we are unable to devote the necessary resources to ensure that our products interoperate with such software and hardware, we may fail to increase, or we may lose market share and we may experience a weakening demand for our products.

 

Our products must interoperate with our end-customers’ existing infrastructure, specifically their networks, servers, software and operating systems, which may be manufactured by a wide variety of vendors and original equipment manufacturers. As a result, when problems occur in a network, it may be difficult to identify the source of the problem. The occurrence of software or hardware problems, whether caused by our products or another vendor’s products, may result in the delay or loss of market acceptance of our products. In addition, when new or updated versions of our end-customers’ software operating systems or applications are introduced, we must sometimes develop updated versions of our software so that our products will interoperate properly. We may not accomplish these development efforts quickly, cost-effectively or at all. These development efforts require capital investment and the devotion of engineering resources. If we fail to maintain compatibility with these applications, our end-customers may not be able to adequately utilize our products, and we may, among other consequences, fail to increase, or we may lose market share and experience a weakening in demand for our products, which would adversely affect our business, operating results and financial condition.

 

We license technology from third parties, and our inability to maintain those licenses could harm our business.

 

Many of our products include proprietary technologies licensed from third parties. In the future, it may be necessary to renew licenses for third party technology or obtain new licenses for other technology. These third- party licenses may not be available to us on acceptable terms, if at all. As a result, we could also face delays or be unable to make changes to our products until equivalent technology can be identified, licensed or developed and integrated with our products. Such delays or an inability to make changes to our products, if it were to occur, could adversely affect our business, operating results and financial condition. The inability to obtain certain licenses to third-party technology, or litigation regarding the interpretation or enforcement of license agreements and related intellectual property issues, could have a material adverse effect on our business, operating results and financial condition.

 

Failure to prevent excess inventories or inventory shortages could result in decreased revenue and gross margin and harm our business.

 

We purchase products from our manufacturers outside of, and in advance of, reseller or end-customer orders, which we hold in inventory and resell. We place orders with our manufacturers based on our forecasts of our end-customers’ requirements and forecasts provided by our distribution channel partners. These forecasts are based on multiple assumptions, each of which might cause our estimates to be inaccurate, affecting our ability to provide products to our customers. There is a risk we may be unable to sell excess products ordered from our manufacturers. Inventory levels in excess of customer demand may result in obsolete inventory and inventory write-downs. For example, we incurred inventory write downs of $2.6 million for 2013 as a result of end-customers’ decisions to purchase our new product offering rather than our existing product offerings as originally expected. The sale of excess inventory at discounted prices could impair our brand image and have an adverse effect on our financial condition and results of operations. Conversely, if we underestimate demand for our products or if our manufacturers fail to supply products we require at the time we need them, we may experience inventory shortages. Inventory shortages might delay shipments to resellers, distributors and customers and cause us to lose sales. These shortages may diminish the loyalty of our distribution channel partners or customers.

 

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

 

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Our sales cycles can be long and unpredictable, primarily due to the complexity of our end-customers’ networks and data centers and the length of their budget cycles. As a result, our sales and revenue are difficult to predict and may vary substantially from period to period, which may cause our operating results to fluctuate significantly.

 

The timing of our sales is difficult to predict because of the length and unpredictability of our products’ sales cycles. A sales cycle is the period between initial contact with a prospective end-customer and any sale of our products. Our sales cycle, in particular to our large end-customers, may be lengthy due to the complexity of their networks and data centers. Because of this complexity, prospective end-customers generally consider a number of factors over an extended period of time before committing to purchase our products. End-customers often view the purchase of our products as a significant and strategic decision that can have important implications on their existing networks and data centers and, as a result, require considerable time to evaluate, test and qualify our products prior to making a purchase decision and placing an order to ensure that our products will successfully interoperate with our end-customers’ complex network and data centers. Additionally, the budgetary decisions at these entities can be lengthy and require multiple organization reviews. The length of time that end-customers devote to their evaluation of our products and decision making process varies significantly. The length of our products’ sales cycles typically ranges from three to 12 months but can be longer for our large end-customers.

 

For all of these reasons, it is difficult to predict whether a sale will be completed or the particular fiscal period in which a sale will be completed, both of which contribute to the uncertainty of our future operating results. If our sales cycles lengthen, our revenue could be lower than expected, which would have an adverse impact on our operating results and could cause our stock price to decline.

 

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

 

We believe that our ability to provide consistent, high quality customer service and technical support is a key factor in attracting and retaining end-customers of all sizes and is critical to the deployment of our products. When support is purchased our end-customers depend on our support organization to provide a broad range of support services, including on-site technical support, 24-hour support and shipment of replacement parts on an expedited basis. If our support organization or our distribution channel partners do not assist our end-customers in deploying our products effectively, succeed in helping our end-customers resolve post-deployment issues quickly, or provide ongoing support, it could adversely affect our ability to sell our products to existing end-customers and could harm our reputation with potential end-customers. We currently have technical support centers in the United States, Japan, China and the Netherlands. As we continue to expand our operations internationally, our support organization will face additional challenges, including those associated with delivering support, training and documentation in languages other than English.

 

We typically sell our products with maintenance and support as part of the initial purchase, and a substantial portion of our support revenue comes from renewals of maintenance and support contracts. Our end-customers have no obligation to renew their maintenance and support contracts after the expiration of the initial period. If we are unable to provide high quality support, our end-customers may elect not to renew their maintenance and support contracts or to reduce the product quantity under their maintenance and support contracts, thereby reducing our future revenue from maintenance and support contracts.

 

Our failure or the failure of our distribution channel partners to maintain high-quality support and services could have a material and adverse effect on our business, revenue and operating results.

 

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We depend on growth in markets relating to network security, management and analysis, and lack of growth or contraction in one or more of these markets could have a material adverse effect on our results of operations and financial condition.

 

Demand for our products is linked to, among other things, growth in the size and complexity of network infrastructures and the demand for networking technologies addressing the security, management and analysis of such infrastructures. These markets are dynamic and evolving. Our future financial performance will depend in large part on continued growth in the number of organizations investing in their network infrastructure and the amount they commit to such investments. If this demand declines, our results of operations and financial condition would be materially and adversely affected. Segments of the network infrastructure industry have in the past experienced significant economic downturns. Furthermore, the market for network infrastructure may not continue to grow at historic rates, or at all. The occurrence of any of these factors in the markets relating to network security, management and analysis could materially and adversely affect our results of operations and financial condition.

 

Our revenue growth rate in recent periods may not be indicative of our future performance.

 

You should not consider our revenue growth rate in recent periods as indicative of our future performance. We have recently experienced revenue growth rates of 32% and 18% in 2012 and 2013. We may not achieve similar revenue growth rates in future periods. You should not rely on our revenue for any prior quarterly or annual periods as any indication of our future revenue or revenue growth. If we are unable to maintain consistent revenue or revenue growth, our stock price could be volatile, and it may be difficult to achieve and maintain profitability.

 

Our business and operations have experienced rapid growth in recent periods, and if we do not effectively manage any future growth or are unable to improve our controls, systems and processes, our operating results will be adversely affected.

 

In recent periods, we have significantly increased the number of our employees and independent contractors. As we hire new employees and independent contractors and expand into new locations outside the United States, we are required to comply with varying local laws for each of these new locations. We anticipate that further expansion of our infrastructure and headcount will be required. Our rapid growth has placed, and will continue to place, a significant strain on our administrative and operational infrastructure and financial resources. Our ability to manage our operations and growth across multiple countries will require us to continue to refine our operational, financial and management controls, human resource policies, and reporting systems and processes.

 

We need to continue to improve our internal systems, processes, and controls to effectively manage our operations and growth. We may not be able to successfully implement improvements to these systems, processes and controls in an efficient or timely manner. In addition, our systems and processes may not prevent or detect all errors, omissions, or fraud. We may experience difficulties in managing improvements to our systems, processes, and controls or in connection with third-party software, which could impair our ability to provide products or services to our customers in a timely manner, causing us to lose customers, limit us to smaller deployments of our products, increase our technical support costs, or damage our reputation and brand. 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, any of which may harm our business and results of operations.

 

We may not be able to sustain or develop new distributor and reseller relationships, and a reduction or delay in sales to significant distribution channel partners could hurt our business.

 

We sell our products and services through multiple distribution channels in the United States and internationally. We may not be able to increase our number of distributor or reseller relationships or maintain our existing relationships. Recruiting and retaining qualified distribution channel partners and training them on our

 

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technologies requires significant time and resources. These distribution channel partners may also market, sell and support products and services that are competitive with ours and may devote more resources to the marketing, sales and support of such competitive products. Our sales channel structure could subject us to lawsuits, potential liability and reputational harm if, for example, any of our distribution channel partners misrepresent the functionality of our products or services to end-customers or violate laws or our corporate policies. If we are unable to establish or maintain our sales channels or if our distribution channel partners are unable to adapt to our future sales focus and needs, our business and results of operations will be harmed.

 

The terms of our credit facility could restrict our operations, particularly our ability to respond to changes in our business or to take specified actions.

 

Our credit facility contains a number of restrictive covenants that impose operating and financial restrictions on us, including restrictions on our ability to take actions that may be in our best interests. Our credit facility requires us to satisfy specified financial covenants. Our ability to meet those financial covenants can be affected by events beyond our control, and we may not be able to continue to meet those covenants. As of December 31, 2013, we were not in compliance with the total leverage ratio covenant under the credit facility. Although we received a waiver from our lenders with respect to this covenant, we will not be able to borrow additional funds under the credit facility until we can show that we meet the necessary leverage ratio, and our inability to borrow additional funds may negatively affect our operations. We may not be able to obtain waivers of covenant non-compliance in the future, and a breach of any of these covenants or the occurrence of other events specified in the credit facility could result in an event of default under the credit facility. Upon the occurrence of an event of default, our lenders could elect to declare all amounts outstanding under the credit facility to be immediately due and payable and terminate all commitments to extend further credit. If our lenders accelerate the repayment, if any, we may not have sufficient funds to repay our existing debt. If we were unable to repay those amounts, our lenders could proceed against the collateral granted to them to secure such indebtedness. We have pledged substantially all of our assets, including our intellectual property, as collateral under the credit facility.

 

Our sales to governmental organizations are subject to a number of challenges and risks.

 

We sell to governmental organization end-customers. Sales to governmental organizations are subject to a number of challenges and risks. Selling to governmental organizations can be highly competitive, expensive and time consuming, often requiring significant upfront time and expense without any assurance that these efforts will generate a sale. We have not yet received security clearance from the United States government, which prevent us from being able to sell directly for certain governmental uses. There can be no assurance that such clearance will be obtained, and failure to do so may adversely affect our operating results. Governmental organization demand and payment for our products may be impacted by public sector budgetary cycles and funding authorizations, with funding reductions or delays adversely affecting public sector demand for our products. Governmental organizations may have statutory, contractual or other legal rights to terminate contracts with our distributors and resellers for convenience or due to a default, and any such termination may adversely impact our future operating results.

 

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

 

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

 

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

 

Our products are subject to U.S. export controls and may be exported outside the United States only with the required level of export license or through an export license exception because we incorporate encryption technology into our products. In addition, various countries regulate the import of certain encryption technology and have enacted laws that could limit our ability to distribute our products or our end-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 end-customers with international operations from deploying our products throughout their global systems or, in some cases, prevent the export or import of our products to certain countries altogether. Any change in export or import regulations or related legislation, shift in approach to the enforcement or scope of existing regulations or change in the countries, persons or technologies targeted by 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 end-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, operating results and financial condition.

 

We discovered that we inadvertently reported incorrect information to the U.S. Census Bureau when reporting certain exports, although the underlying exports were authorized under the Export Administration Regulations. We implemented corrective actions and filed a Voluntary Self Disclosure with the U.S. Census Bureau regarding these technical violations. We do not believe the potential imposition of any fines by the Census Bureau would be material to us. However, there can be no assurances that any such fines or penalties would not be material, and if such fine or penalties were material, they could harm our operating results or financial condition.

 

We are subject to various environmental laws and regulations that could impose substantial costs upon us.

 

Our company must comply with local, state, federal, and international environmental laws and regulations in the countries in which we do business. We are also subject to laws, which restrict certain hazardous substances, including lead, used in the construction of our products, such as the European Union Restriction on the Use of Hazardous Substances in electrical and electronic equipment directive. We are also subject to the European Union Directive, known as the Waste Electrical and Electronic Equipment Directive, or WEEE Directive, which requires producers of certain electrical and electronic equipment to properly label products, register as a WEEE producer, and provide for the collection, disposal, and recycling of waste electronic products. Failure to comply with these environmental directives and other environmental laws could result in the imposition of fines and penalties, inability to sell covered products in certain countries, the loss of revenues, or subject us to third-party property damage or personal injury claims, or require us to incur investigation, remediation or engineering costs. Our operations and products will be affected by future environmental laws and regulations, but we cannot predict the ultimate impact of any such future laws and regulations at this time.

 

Our products must conform to industry standards in order to be accepted by end-customers in our markets.

 

Generally, our products comprise only a part of a data center. The servers, network, software and other components and systems of a data center must comply with established industry standards in order to interoperate and function efficiently together. We depend on companies that provide other components of the servers and systems in a data center to support prevailing industry standards. Often, these companies are significantly larger and more influential in driving industry standards than we are. Some industry standards may not be widely adopted or implemented uniformly, and competing standards may emerge that may be preferred by our end-customers. If larger companies do not support the same industry standards that we do, or if competing standards emerge, market acceptance of our products could be adversely affected and we may need to incur substantial costs to conform our products to such standards, which could harm our business, operating results and financial condition.

 

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We are dependent on various information technology systems, and failures of or interruptions to those systems could harm our business.

 

Many of our business processes depend upon our information technology systems, the systems and processes of third parties, and on interfaces with the systems of third parties. If those systems fail or are interrupted, or if our ability to connect to or interact with one or more networks is interrupted, our processes may function at a diminished level or not at all. This would harm our ability to ship products, and our financial results may be harmed.

 

In addition, reconfiguring or upgrading our information technology systems or other business processes in response to changing business needs may be time-consuming and costly and is subject to risks of delay or failed deployment. To the extent this impacts our ability to react timely to specific market or business opportunities, our financial results may be harmed.

 

Future acquisitions we may undertake may not result in the financial and strategic goals that are contemplated at the time of the transaction.

 

We may make acquisitions of complementary companies, products or technologies. With respect to any other future acquisitions we may undertake, we may find that the acquired businesses, products or technologies do not further our business strategy as expected, that we paid more than what the assets are later worth or that economic conditions change, all of which may generate future impairment charges. Any future acquisitions may be viewed negatively by customers, financial markets or investors. There may be difficulty integrating the operations and personnel of an acquired business, and we may have difficulty retaining the key personnel of an acquired business. We may have difficulty in integrating acquired technologies or products with our existing product lines. Any integration process may require significant time and resources, and we may not be able to manage the process successfully. Our ongoing business and management’s attention may be disrupted or diverted by transition or integration issues and the complexity of managing geographically and culturally diverse locations. We may have difficulty maintaining uniform standards, controls, procedures and policies across locations. We may experience significant problems or liabilities associated with product quality, technology and other matters.

 

Our inability to successfully operate and integrate future acquisitions appropriately, effectively and in a timely manner, or to retain key personnel of any acquired business, could have a material adverse effect on our revenue, gross margin and expenses.

 

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. In the event we have undergone an ownership change under Section 382 of the Internal Revenue Code, 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.

 

Our business is subject to the risks of warranty claims, product returns, product liability, and product defects.

 

Real or perceived errors, failures or bugs in our products could result in claims by end-customers for losses that they sustain. If end-customers make these types of claims, we may be required, or may choose, for customer relations or other reasons, to expend additional resources in order to help correct the problem. Historically, the amount of warranty claims has not been significant, but there are no assurances that the amount of such claims will not be material in the future. Liability provisions in our standard terms and conditions of sale, and those of our resellers and distributors, may not be enforceable under some circumstances or may not fully or effectively protect us from customer claims and related liabilities and costs, including indemnification obligations under our

 

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agreements with resellers, distributors or end-customers. The sale and support of our products also entail the risk of product liability claims. We maintain insurance to protect against certain types of claims associated with the use of our products, but our insurance coverage may not adequately cover any such claims. In addition, even claims that ultimately are unsuccessful could result in expenditures of funds in connection with litigation and divert management’s time and other resources.

 

We are exposed to the credit risk of our distribution channel partners and end-customers, which could result in material losses and negatively impact our operating results.

 

Most of our sales are on an open credit basis, with typical payment terms ranging from 30 to 90 days depending on local customs or conditions that exist in the sale location. If any of the distribution channel partners or end-customers responsible for a significant portion of our revenue becomes insolvent or suffers a deterioration in its financial or business condition and is unable to pay for our products, our results of operations could be harmed.

 

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

 

Our executive officers and directors, together with entities affiliated with these individuals and stockholders who own greater than 5% of our outstanding common stock, will hold     % of our outstanding common stock after this offering, based on the number of shares outstanding as of                     , 2014. Accordingly, these stockholders, acting together, can elect a majority of our directors, have the voting power to approve or not approve all matters requiring stockholder approval and have significant influence over our affairs. The interests of these stockholders could conflict with your interests. These stockholders may also have an interest in pursuing acquisitions, divestitures, financings or other transactions that, in their judgment, could enhance their investments, even though such transactions might involve risks to you. In addition, this concentration of ownership could have the effect of delaying or preventing a liquidity event such as a merger or liquidation of our company.

 

We may need to raise additional funds in future private or public offerings, and such funds may not be available on acceptable terms, if at all. If we do raise additional funds, existing stockholders will suffer dilution.

 

We may need to raise additional funds in private or public offerings, and these funds may not be available to us when we need them or on acceptable terms, if at all. If we raise additional funds through further issuances of equity or convertible debt securities, you could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of our then-existing capital stock. Any debt financing secured by us in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities. If we cannot raise additional funds when we need them, our business and prospects could fail or be materially and adversely affected.

 

The price of our common stock may be volatile, and the value of your investment could decline.

 

Technology stocks have historically experienced high levels of volatility. The trading price of our common stock following this offering may fluctuate substantially. Following the completion of this offering, the market price of our common stock may be higher or lower than the price you pay in the offering, depending on many factors, some of which are beyond our control and may not be related to our operating performance. These fluctuations could cause you to lose all or part of your investment in our common stock. Factors that could cause fluctuations in the trading price of our common stock include the following:

 

   

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

 

   

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

 

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

 

   

fluctuations in the trading volume of our shares or the size of our public float;

 

   

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

 

   

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

 

   

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

 

   

litigation or investigations involving us, our industry, or both;

 

   

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

 

   

general economic conditions and trends;

 

   

major catastrophic events;

 

   

sales of large blocks of our common stock; or

 

   

departures of key personnel.

 

In addition, if the market for technology stocks or the stock market in general experiences a loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, results of operations or financial condition. The trading price of our common stock might also decline in reaction to events that affect other companies in our industry even if these events do not directly affect us. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company. If our stock price is volatile, we may become the target of securities litigation. Securities litigation could result in substantial costs and divert our management’s attention and resources from our business. This could have a material adverse effect on our business, results of operations and financial condition.

 

Sales of substantial amounts of our common stock in the public markets, or the perception that such sales might occur, could reduce the price that our common stock might otherwise attain and may dilute your voting power and your ownership interest in us.

 

Sales of a substantial number of shares of our common stock in the public market after this offering, or the perception that such sales could occur, could adversely affect the market price of our common stock and may make it more difficult for you to sell your common stock at a time and price that you deem appropriate. Based on the total number of outstanding shares of our common stock as of                     , 2014, upon completion of this offering, we will have             shares of common stock outstanding. All of the shares of common stock sold in this offering will be freely tradable without restrictions or further registration under the Securities Act of 1933, as amended, or the Securities Act, except for any shares held by our “affiliates” as defined in Rule 144 under the Securities Act.

 

Subject to certain exceptions described under the caption “Underwriters,” we and all of our directors and executive officers and substantially all of our equity holders have agreed not to offer, sell or agree to sell, directly or indirectly, any shares of common stock without the permission of the representatives of the underwriters for a period of 180 days from the date of this prospectus. When the lockup period expires, we and our locked-up security holders will be able to sell our shares in the public market. In addition, Morgan Stanley & Co. LLC may, in its sole discretion, release all or some portion of the shares subject to lock-up agreements prior to the expiration of the lock-up period. See the section of this prospectus captioned “Shares Eligible for Future Sale” for more information. Sales of a substantial number of such shares upon expiration, or the perception that such sales may occur, or early release of the lock-up, could cause our share price to fall or make it more difficult for you to sell your common stock at a time and price that you deem appropriate.

 

Based on shares outstanding as of         , 2014, holders of up to approximately                      shares, or     %, of our common stock will have rights, subject to certain conditions, to require us to file registration statements

 

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covering the sale of their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. We also intend to register the offer and sale of all shares of common stock that we may issue under our equity compensation plans.

 

We are an emerging growth company, and any decision on our part to comply only with certain reduced disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors.

 

We are an emerging growth company, and, for as long as we continue to be an emerging growth company, we may choose to take advantage of exemptions from various reporting requirement applicable to other public companies but not to “emerging growth companies,” including, but not limited to, not being required to have our independent registered public accounting firm audit our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We could be an emerging growth company for up to five years following the completion of this offering. We will remain an emerging growth company until the earliest of: (a) the last day of the year (i) following the fifth anniversary of the completion of this offering, (ii) in which we have total annual gross revenue of at least $1.0 billion, or (iii) in which we qualify as a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700 million as of the prior June 30, or (b) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period. We cannot predict if investors will find our common stock less attractive if we choose to rely on these exemptions. If some investors find our common stock less attractive as a result of any choices to reduce future disclosure, there may be a less active trading market for our common stock and the price of our common stock may be more volatile.

 

Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this accommodation allowing for delayed adoption of new or revised accounting standards, and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

 

The requirements of being a public company will increase costs and may divert management attention.

 

As a reporting company, we will incur increased legal, accounting and other expenses, including costs associated with SEC reporting and corporate governance requirements. These requirements include compliance with Section 404 and other provisions of the Sarbanes-Oxley Act, as well as rules implemented by the SEC. In addition, our management team will also have to adapt to the requirements of being a reporting company. The expenses incurred 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.

 

In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs, and making some activities more time consuming. Additionally, implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, may also cause us to incur additional costs and subject us to risks if we are unable to fully comply. For instance, the SEC adopted new disclosure requirements in 2012 as part of implementation of the Dodd-Frank Act regarding the use of conflict minerals mined from the Democratic Republic of Congo and adjoining countries and procedures regarding a manufacturer’s efforts to prevent the sourcing of such conflict minerals. The implementation of these requirements could adversely affect our costs and our relationships with customers and suppliers. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in

 

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continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations, and standards, and this investment may result in increased general and administrative expense and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations, and standards differ from the activities intended by regulatory or governing bodies, regulatory authorities may initiate legal proceedings against us and our business may be harmed.

 

The increased costs associated with operating as a reporting 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.

 

Because the initial public offering price of our common stock will be substantially higher than the pro forma net tangible book value per share of our outstanding common stock following this offering, new investors will experience immediate and substantial dilution.

 

The initial public offering price of our common stock will be substantially higher than the pro forma net tangible book value per share of our common stock immediately following this offering based on the total value of our tangible assets less our total liabilities. Therefore, if you purchase shares of our common stock in this offering, you will experience immediate dilution of $             per share, the difference between the price per share you pay (based on the midpoint of the price range on the cover of this prospectus) for our common stock and the pro forma net tangible book value per share of our common stock as of                     , 2014, after giving effect to the issuance of shares of our common stock in this offering. See “Dilution” below.

 

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

 

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

 

Our charter documents and Delaware law could discourage takeover attempts and lead to management entrenchment.

 

Our restated certificate of incorporation and bylaws that will be in effect upon completion of this offering contain provisions that could delay or prevent a change in control of our company. These provisions could also make it difficult for stockholders to elect directors that are not nominated by the current members of our board of directors or take other corporate actions, including effecting changes in our management. These provisions include:

 

   

a classified board of directors with three-year staggered terms, which could delay the ability of stockholders to change the membership of a majority of our board of directors;

 

   

the ability of our board of directors to issue shares of preferred stock and to determine the price and other terms of those shares, including preference and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquirer;

 

   

the exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of our board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors;

 

   

a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our stockholders;

 

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the requirement that a special meeting of stockholders may be called only by the chairman of our board of directors, our Chief Executive Officer, our secretary, or a majority vote of our board of directors, which could delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors;

 

   

the requirement for the affirmative vote of holders of at least 66-2/3% of the voting power of all of the then-outstanding shares of the voting stock, voting together as a single class, to amend the provisions of our restated certificate of incorporation relating to the issuance of preferred stock and management of our business or our bylaws, which may inhibit the ability of an acquirer to effect such amendments to facilitate an unsolicited takeover attempt;

 

   

the ability of our board of directors, by majority vote, to amend the bylaws, which may allow our board of directors to take additional actions to prevent an unsolicited takeover and inhibit the ability of an acquirer to amend the bylaws to facilitate an unsolicited takeover attempt; and

 

   

advance notice procedures with which stockholders must comply to nominate candidates to our board of directors or not to propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquiror’s own slate of directors or otherwise attempting to obtain control of us.

 

In addition, as a Delaware corporation, we are subject to Section 203 of the Delaware General Corporation Law. These provisions may prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us for a certain period of time.

 

Proceeds received from the sale of our capital stock may be used for general corporate purposes, and we may not use such proceeds effectively.

 

The principal purposes of this offering are to raise additional capital, to create a public market for our common stock and to facilitate our future access to the public equity markets. We have not yet determined the specific allocation of the net proceeds that we receive in this offering. Rather, we intend to use the net proceeds that we receive in this offering primarily for general corporate purposes, including working capital, sales and marketing activities, research and development activities, general and administrative matters and capital expenditures, and we may use a portion of the net proceeds for the acquisition of, or investment in, business products, services or technologies that complement our business. Accordingly, our management will have broad discretion over the specific use of the net proceeds that we receive in this offering and might not be able to obtain a significant return, if any, on investment of these net proceeds. Investors in this offering will need to rely upon the judgment of our management with respect to the use of proceeds. We cannot assure you that we will use such proceeds effectively. If we do not use the net proceeds that we receive in this offering effectively, our business, results of operations and financial condition could be harmed.

 

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

 

A significant natural disaster, such as an earthquake, fire, a flood, or 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, our two primary manufacturers are located in Taiwan, which is near major earthquake fault lines and subject to typhoons during certain times of the year. In the event of a major earthquake or typhoon, or other natural or man-made disaster, our manufacturers in Taiwan may face business interruptions, which may impact quality assurance, product costs, and product supply and timing. In the event our or 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 missed financial targets, such as revenue and shipment targets, and our operations could be disrupted, for the affected quarter or quarters. In addition, cyber security attacks, acts of war or terrorism, or other geo-political unrest could cause disruptions in our business or the business of our supply chain,

 

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

 

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

 

We intend to retain any earnings to finance the operation and expansion of our business, and we do not anticipate paying any cash dividends in the future. In addition, our various credit facilities currently restrict our ability to pay dividends while these facilities remain outstanding. As a result, you may only receive a return on your investment in our common stock if the value of our common stock increases.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

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

 

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

 

   

our ability to maintain an adequate rate of revenue growth;

 

   

our business plan and our ability to effectively manage our growth;

 

   

costs associated with defending intellectual property infringement and other claims, such as those claims discussed in “Business—Legal Proceedings”;

 

   

our ability to attract and retain end-customers;

 

   

our ability to further penetrate our existing customer base;

 

   

our ability to displace existing products in established markets;

 

   

our ability to expand our leadership position in next-generation application delivery and server load balancing solutions;

 

   

our ability to timely and effectively scale and adapt our existing technology;

 

   

our ability to innovate new products and bring them to market in a timely manner;

 

   

our ability to expand internationally;

 

   

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

 

   

the effects of seasonal trends on our results of operations;

 

   

our expectations concerning relationships with third parties;

 

   

the attraction and retention of qualified employees and key personnel;

 

   

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

 

   

future acquisitions of or investments in complementary companies, products, services or technologies.

 

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

 

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

 

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

 

MARKET AND INDUSTRY DATA

 

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

 

The Gartner Reports described herein, (the “Gartner Reports”) represent data, research opinion or viewpoints published, as part of a syndicated subscription service, by Gartner, Inc. (“Gartner”), and are not representations of fact. Each Gartner Report speaks as of its original publication date (and not as of the date of this filing) and the opinions expressed in the Gartner Reports are subject to change without notice. The Gartner Reports consist of:

 

   

Forecast Overview: Information Security, WW, 2011-2017 4Q13 Update Gartner Jan 2014.

 

   

Forecast: Enterprise Network Equipment by Market Segment, WW, 2010-2017, 4Q13 Gartner Dec 2013.

 

   

Gartner Press Release dated October 7, 2013: “Gartner Says It’s the Beginning of a New Era: The Digital Industrial Economy.”

 

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USE OF PROCEEDS

 

We estimate that the net proceeds from the sale of the shares of our common stock that we are selling in this offering will be approximately $         million, based on an assumed initial public offering price of $         per share, which is the midpoint of the estimated offering price range reflected on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters’ over-allotment option to purchase additional shares in this offering is exercised in full, we estimate that our net proceeds would be approximately $         million, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any proceeds from the sale of shares of our common stock by the selling stockholders.

 

A $1.00 increase or decrease in the assumed initial public offering price of $         per share would increase or decrease the net proceeds that we receive from this offering by approximately $         million, assuming that the number of shares offered by us, as reflected on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions payable by us. Similarly, each one million share increase or decrease in the number of shares of common stock offered by us would increase or decrease the net proceeds that we receive from this offering by approximately $         million, assuming the assumed initial public offering price, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions payable by us.

 

The principal purposes of this offering are to create a public market for our stock, increase our visibility in our marketplace, obtain additional capital and increase our capitalization and financial flexibility. We currently intend to use the net proceeds we receive from this offering primarily for general corporate purposes, including working capital, sales and marketing activities, research and development activities, general and administrative matters and capital expenditures although we do not currently have any specific or preliminary plans with respect to the use of proceeds for such purposes. Additionally, based on our current operating assumptions, we estimate that we will use between $20.0 million and $30.0 million of our net proceeds from this offering to fully implement our growth strategies described in this prospectus. The exact amount of net proceeds we use to fund our growth plans, however, will depend on the amount of cash generated from our operations and any strategic decisions we may make that could alter our expansion plans and the amount of cash necessary to fund these plans. We may also, in our discretion, use a portion of the net proceeds for the acquisition of, or investment in, businesses, products, services, or technologies that complement our business, although we have no current commitments or agreements to enter into any acquisitions or investments. We may also, in our discretion, use a portion of the net proceeds to pay down certain existing debt obligations. Our credit facilities do not contain any restrictions on the amount of offering proceeds we may use for such purpose. As of December 31, 2013, we had outstanding borrowings of $20.0 million under our credit facility which bore an interest rate of 3.85% per annum. The credit facility matures on September 30, 2016.

 

We will have broad discretion over the uses of the net proceeds of this offering. Pending the above uses, we intend to invest the net proceeds from this offering in short-term, interest-bearing obligations, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of the U.S. government. We cannot predict whether the invested proceeds will yield a favorable return.

 

DIVIDEND POLICY

 

We have never declared or paid any cash dividends on our common stock. We currently intend to retain any future earnings and do not expect to pay any cash dividends on our common stock for 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. Currently, the agreement for our revolving credit facility contains restrictions on our ability to pay dividends.

 

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CAPITALIZATION

 

The following table sets forth our cash and cash equivalents and our capitalization as of December 31, 2013 on:

 

   

An actual basis.

 

   

A pro forma basis, giving effect to (i) the automatic conversion of all outstanding shares of our convertible preferred stock and redeemable convertible preferred stock into 39,997,112 shares of our common stock upon completion of this offering, as if such conversion had happened on December 31, 2013; (ii) the increase in accrued liabilities and accumulated deficit of $0.3 million to pay a contingent payment to a lender upon completion of this offering, as if such payment was due December 31, 2013; and (iii) the effectiveness of amendments to our certificate of incorporation upon completion of this offering, as if such amendment had also become effective on December 31, 2013.

 

   

A pro forma as adjusted basis to give further effect to (i) the sale of shares of common stock by us in this offering at an assumed initial public offering price of $         per share, the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses and (ii) the application of the net proceeds from this offering to repay the outstanding borrowings under our credit facility, which were $20.0 million as of December 31, 2013.

 

The information below is illustrative only, and our capitalization following completion of this offering will be adjusted based on the actual initial public offering price and other terms of the offering determined at the pricing of this offering. You should read this table together with “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and related notes, each included elsewhere in this prospectus.

 

     As of
December 31, 2013
 
     Actual     Pro Forma     Pro Forma
as  Adjusted
 
     (In thousands, except share and
per share data)
 
     (Unaudited)  

Cash and cash equivalents

   $ 20,793      $ 20,793      $                
  

 

 

   

 

 

   

 

 

 

Total debt

   $ 20,000      $ 20,000      $     

Redeemable convertible preferred stock, no par value per share—115,000 shares authorized; 80,000 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma or pro forma as adjusted

     81,426                 

Convertible preferred stock, no par value per share—30,569,325 shares authorized; 30,569,268 issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma or pro forma as adjusted

     44,749                 

Stockholders’ deficit:

      

Preferred stock, $0.00001 par value per share—no shares authorized, issued or outstanding, actual;              shares authorized, no shares issued or outstanding, pro forma and pro forma as adjusted

                     

Common stock, no par value per share—65,600,000 shares authorized, 10,032,010 shares issued and outstanding, actual; $0.00001 par value per share              shares authorized, 50,029,122 shares issued and outstanding, pro forma;              shares issued and outstanding, pro forma as adjusted

     4,225        130,400     

Additional paid-in capital

     7,960        7,960     

Accumulated deficit

     (147,065     (147,365  
  

 

 

   

 

 

   

 

 

 

Total stockholders’ deficit

     (134,880     (9,005  
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 11,295      $ 10,995      $     
  

 

 

   

 

 

   

 

 

 

 

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A $1.00 increase or decrease in the assumed initial public offering price of $         per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease our pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders’ deficit and total capitalization by approximately $         million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions payable by us. Similarly, each one million share increase or decrease in the number of shares of common stock offered by us would increase or decrease the net proceeds that we receive from this offering by approximately $         million, assuming the assumed initial public offering price of $         per share, the midpoint of the estimated offering price range set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions 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 does not include the following shares:

 

   

9,971,381 shares of our common stock issuable upon the exercise of stock options outstanding as of December 31, 2013, with a weighted-average exercise price of $4.14 per share; and

 

   

10,735,029 shares of common stock reserved for future issuances and grants under our stock-based compensation plans, consisting of (i) 1,435,029 shares of common stock reserved for future awards under our 2008 Stock Option Plan as of December 31, 2013, (ii) 7,700,000 shares of common stock reserved for future issuance under our 2014 Equity Incentive Plan, which will become effective on the date of this prospectus, and (iii) 1,600,000 shares of common stock reserved for future issuance under our 2014 Employee Stock Purchase Plan, which will become effective on the date of this prospectus. Upon completion of this offering, any remaining shares available for future awards under our 2008 Stock Option Plan will be added to the shares reserved under our 2014 Equity Incentive Plan, and we will cease granting awards under our 2008 Option Plan. Our 2014 Equity Incentive Plan and 2014 Employee Stock Purchase Plan also provide for automatic annual increases in the number of shares reserved under the plans, as more fully described in “Executive Compensation—Employee Benefit and Stock Plans.”

 

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DILUTION

 

If you invest in our common stock, your interest will be diluted to the extent of the difference between the initial public offering price per share and the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering. Our pro forma net tangible book value as of December 31, 2013 was $(10.1) million, or $(0.20) per share of common stock. Net tangible book value 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 December 31, 2013, after giving effect to the conversion of all outstanding shares of our convertible preferred stock and redeemable convertible preferred stock into shares of common stock upon completion of this offering.

 

After giving effect to the sale by us of shares of common stock in this offering at an assumed initial public offering price of $         per share, which is the midpoint of the estimated offering price range 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 December 31, 2013 would have been approximately $         million, or approximately $         per share. This amount represents an immediate increase in pro forma net tangible book value of $         per share to our existing stockholders and an immediate dilution in pro forma net tangible book value of approximately $         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

     $            

Pro forma net tangible book value per share as of December 31, 2013

   $ (0.20  

Increase in pro forma net tangible book value per share attributable to new investors

    
  

 

 

   

Pro forma as adjusted net tangible book value per share after this offering

    
    

 

 

 

Dilution per share to investors in this offering

     $     
    

 

 

 

 

A $1.00 increase or decrease in the assumed initial public offering price of $         per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease our pro forma as adjusted net tangible book value per share to new investors by approximately $         and would increase or decrease dilution per share to new investors by approximately $        , 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 payable by us. In addition, to the extent any outstanding options are exercised, you will experience further dilution.

 

The following table presents on a pro forma as adjusted basis as of December 31, 2013, after giving effect to the conversion of all outstanding shares of convertible preferred stock and redeemable convertible preferred stock into common stock upon completion of this offering, the differences between the existing stockholders and the 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 stock, convertible preferred stock and redeemable convertible preferred stock, cash received from the exercise of stock options and the amount to be paid to us by new investors at an assumed offering price of $         per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus.

 

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

Existing stockholders

     50,029,122                $                                 $               

New investors

             $     
  

 

 

    

 

 

   

 

 

    

 

 

   

Totals

        100.0   $           100.0  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

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A $1.00 increase or decrease in the assumed initial public offering price of $         per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease the total consideration paid by new investors by $         million and increase or decrease the percent of total consideration paid by new investors by     %, 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 payable by us.

 

Assuming the underwriters’ option to purchase additional shares is exercised in full, sales by us in this offering will reduce the percentage of shares held by existing stockholders to     % of the total shares of common stock outstanding after this offering, and will increase the number of shares held by our new investors to             , or     % of the total shares of common stock outstanding after this offering.

 

The number of shares of our common stock to be outstanding after this offering is based upon the number of shares of our common stock outstanding as of December 31, 2013 and excludes:

 

   

9,971,381 shares of our common stock issuable upon the exercise of stock options outstanding as of December 31, 2013, with a weighted-average exercise price of $4.14 per share; and

 

   

10,735,029 shares of common stock reserved for future issuances and grants under our stock-based compensation plans, consisting of (i) 1,435,029 shares of common stock reserved for future awards under our 2008 Stock Option Plan as of December 31, 2013, (ii) 1,600,000 shares of common stock reserved for future issuance under our 2014 Equity Incentive Plan, which will become effective on the date of this prospectus, and (iii) 7,700,000 shares of common stock reserved for future issuance under our 2014 Employee Stock Purchase Plan, which will become effective on the date of this prospectus. Upon completion of this offering, any remaining shares available for future awards under our 2008 Stock Option Plan will be added to the shares reserved under our 2014 Equity Incentive Plan, and we will cease granting awards under our 2008 Option Plan. Our 2014 Equity Incentive Plan and 2014 Employee Stock Purchase Plan also provide for automatic annual increases in the number of shares reserved under the plans, as more fully described in “Executive Compensation—Employee Benefit and Stock Plans.”

 

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SELECTED CONSOLIDATED FINANCIAL DATA

 

The following tables summarize our selected consolidated statements of operations data. You should read the following tables in conjunction with “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. We derived the selected consolidated statements of operations data for the years ended December 31, 2011, 2012 and 2013 and the consolidated balance sheet data as of December 31, 2012 and 2013 from our audited consolidated financial statements included elsewhere in this prospectus. We derived the selected consolidated statements of operations data for the year ended December 31, 2010 and the consolidated balance sheet data as of December 31, 2011 from our audited consolidated financial statements which are not included in this prospectus. Our historical results are not necessarily indicative of results to be expected in the future.

 

     Year Ended
December 31,
 
     2010     2011     2012     2013  
     (In thousands, except per share data)  

Consolidated Statements of Operations Data:

  

Revenue:

        

Products

   $ 50,288      $ 79,763      $ 99,891      $ 112,045   

Services

     5,014        11,515        20,175        29,693   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     55,302        91,278        120,066        141,738   

Cost of revenue(1):

        

Products

     11,206        16,442        18,619        25,284   

Services

     1,050        2,033        5,891        8,112   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     12,256        18,475        24,510        33,396   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     43,046        72,803        95,556        108,342   

Operating expenses(1):

        

Sales and marketing

     21,597        34,504        51,323        70,756   

Research and development

     9,016        16,652        25,513        33,348   

General and administrative

     2,351        3,110        10,225        15,556   

Litigation

     3,410        9,524        95,515        11,525   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     36,374        63,790        182,576        131,185   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     6,672        9,013        (87,020     (22,843

Other income (expense), net:

        

Interest expense

     (609     (241     (135     (1,495

Interest income and other income (expense), net

     (567     (618     (2,237     (2,118
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense), net

     (1,176     (859     (2,372     (3,613
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before provision for income taxes

     5,496        8,154        (89,392     (26,456

Provision for income taxes

     285        850        758        640   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     5,211        7,304        (90,150     (27,096

Accretion of redeemable convertible preferred stock dividend(2)

                          (1,982
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income available (loss attributable) to common stockholders

   $ 5,211      $ 7,304      $ (90,150   $ (29,078
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income available (loss attributable) to common stockholders, basic

   $ 479      $ 943      $ (90,150   $ (29,078
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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     Year Ended December 31,  
     2010      2011      2012     2013  
     (In thousands, except per share data)  

Net income per share available (loss attributable) to common stockholders(3):

          

Basic

   $ 0.07       $ 0.13       $ (10.80   $ (3.14
  

 

 

    

 

 

    

 

 

   

 

 

 

Diluted

   $ 0.07       $ 0.12       $ (10.80   $ (3.14
  

 

 

    

 

 

    

 

 

   

 

 

 

Weighted-average shares used in computing net income per share available (loss attributable) to common stockholders(3):

          

Basic

     6,494         7,397         8,344        9,262   
  

 

 

    

 

 

    

 

 

   

 

 

 

Diluted

     9,178         10,403         8,344        9,262   
  

 

 

    

 

 

    

 

 

   

 

 

 

Pro forma net loss per share attributable to common stockholders (unaudited)(3):

          

Basic

         $ (2.32   $ (0.62
        

 

 

   

 

 

 

Diluted

         $ (2.32   $ (0.62
        

 

 

   

 

 

 

Weighted-average shares used in computing pro forma net loss attributable to common stockholders (unaudited)(3):

          

Basic

           38,456        43,723   
        

 

 

   

 

 

 

Diluted

           38,456        43,723   
        

 

 

   

 

 

 

Supplemental pro forma net loss per share attributable to common stockholders (unaudited)(4):

          

Basic

         $        $     
        

 

 

   

 

 

 

Diluted

         $        $     
        

 

 

   

 

 

 

Supplemental pro forma weighted-average common shares outstanding used in computing supplemental pro forma net loss attributable to common stockholders (unaudited)(4):

          

Basic

          
        

 

 

   

 

 

 

Diluted

          
        

 

 

   

 

 

 

Other Financial Data:

          

Adjusted EBITDA (loss)(5)

   $ 10,866       $ 20,227       $ 15,110      $ (4,164
  

 

 

    

 

 

    

 

 

   

 

 

 

 

(1)   Results above include stock-based compensation expense as follows:

 

     Year Ended
December 31,
 
     2010      2011      2012      2013  
     (In thousands)  

Cost of revenue

   $ 17       $ 49       $ 87       $ 162   

Sales and marketing

     265         696         1,316         2,228   

Research and development

        249         551         776         1,356   

General and administrative

     90         168         361         536   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 621       $ 1,464       $ 2,540       $ 4,282   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(2)   The redemption price of our Series D redeemable convertible preferred stock accretes at the rate of 6.0% per annum, compounding annually. In the event of a qualified initial public offering, the Series D redeemable convertible preferred stock will automatically convert into common stock. See Note 8 to our consolidated financial statements appearing elsewhere in this prospectus.
(3)   See Notes 1 and 11 to our consolidated financial statements appearing elsewhere in this prospectus for an explanation of the calculations of basic and diluted net income per share available (loss attributable) to common stockholders.

 

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(4)   See Notes 1 and 11 to our consolidated financial statements appearing elsewhere in this prospectus for an explanation of the calculation of supplemental basic and diluted pro forma net loss per share attributable to common stockholders.
(5)   See “Adjusted EBITDA” below for more information and for a reconciliation of net income (loss) to Adjusted EBITDA (loss).

 

     As of December 31,  
     2010     2011     2012     2013  
     (In thousands)  

Consolidated Balance Sheet Data:

        

Cash and cash equivalents

   $ 6,877      $ 19,048      $ 23,867      $ 20,793   

Working capital (deficit)

     8,437        19,064        (61,460     15,122   

Total assets

     36,198        55,433        76,794        93,794   

Total debt

     4,159        1,654        5,631        20,000   

Deferred revenue, net—current and long-term

     14,463        18,050        27,707        41,232   

Redeemable convertible preferred stock

                          81,426   

Convertible preferred stock

     41,648        41,665        41,737        44,749   

Total stockholders’ deficit

     (34,829     (25,590     (111,892     (134,880

 

Other Financial Data

 

Adjusted EBITDA

 

Adjusted EBITDA (loss) is an important measure used by our management and board of directors to evaluate our operating performance, develop future operating plans, make strategic decisions for the allocation of capital and determine our compliance with debt covenants. In particular, the exclusion of certain expenses, primarily the amounts paid in settlement of, and other expenses associated with, litigation between ourselves and Brocade Communications Systems, Inc., in calculating Adjusted EBITDA facilitates comparisons of our operating performance on a period-to-period basis. Accordingly, we believe that Adjusted EBITDA also may provide useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors. We define Adjusted EBITDA as our net income (loss) minus: (i) amounts paid in settlement of, and expenses associated with, the Brocade litigation, (ii) interest expense, (iii) interest income and other (income) expense, net, which primarily includes changes in the fair value of convertible preferred stock warrant liabilities and foreign exchange gains and losses, (iv) stock-based compensation, (v) depreciation and amortization and (vi) our provision for income taxes.

 

Reconciliation of Net Income (Loss) to Adjusted EBITDA (Loss)

 

     Year Ended
December 31,
 
     2010      2011      2012     2013  
     (In thousands)  

Net income (loss)

   $ 5,211       $ 7,304       $ (90,150   $ (27,096

Brocade litigation

     1,462         6,333         94,296        7,317   

Interest expense

     609         241         135        1,495   

Interest income and other (income) expense, net

     567         618         2,237        2,118   

Stock-based compensation

     621         1,464         2,540        4,282   

Depreciation and amortization

     2,111         3,417         5,294        7,080   

Provision for income taxes

     285         850         758        640   
  

 

 

    

 

 

    

 

 

   

 

 

 

Adjusted EBITDA (loss)

   $ 10,866       $ 20,227       $ 15,110      $ (4,164
  

 

 

    

 

 

    

 

 

   

 

 

 

 

Adjusted EBITDA (loss) is a supplemental measure of financial performance that is not required by, or presented in accordance with, U.S. generally accepted accounting principles, or GAAP. Our use of Adjusted EBITDA has limitations as an analytical tool, however, and you should not consider it in isolation or as a substitute for net income or any of our other operating results reported under GAAP. Adjusted EBITDA excludes

 

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some costs, namely, non-cash stock-based compensation and depreciation and amortization expense, that are recurring, and therefore it does not reflect the non-cash impact of such expenses or working capital needs even though they will continue for the foreseeable future. Moreover, other companies may calculate Adjusted EBITDA differently or may use other measures to evaluate their performance, both of which could reduce the usefulness of our Adjusted EBITDA as a tool for comparison. Because of these limitations, you should consider Adjusted EBITDA alongside other financial performance measures, including net income (loss), various cash flow metrics, and other financial results presented in accordance with GAAP.

 

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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.

 

Overview

 

We are a leading provider of application networking technologies. Our solutions enable enterprises, service providers, Web giants and government organizations to accelerate, secure and optimize the performance of their data center applications and networks. Our products are built on our Advanced Core Operating System, or ACOS, platform of advanced network technologies, which is designed to enable our products to deliver substantially greater performance and security relative to prior generation application networking products. Our software based ACOS architecture also provides the flexibility that enables us to expand our business to offer additional products to solve a growing array of networking and security challenges arising from increased Internet cloud and mobile computing.

 

We currently offer three software based advanced application networking solutions. These are Application Delivery Controllers, or ADCs, to optimize data center performance, Carrier Grade Network Address Translation, or CGN, to provide address and protocol translation services for service provider networks, and a Distributed Denial of Service Threat Protection System, or TPS, for network-wide security protection. We deliver these solutions both on optimized hardware appliances and as virtual appliances across our Thunder Series and AX Series product families.

 

Our company was founded in 2004 to create efficient, application-aware application networking performance and security solutions. Through development of the ACOS platform, accompanied by a sustained high level of innovation and continued feature development, we have produced a growing portfolio of application networking products. In 2005, we released our first product, and in 2007, we introduced our AX Series of ADCs to optimize data center performance. In 2009, we added security capabilities to our AX Series. In 2010, we further expanded our AX Series products to provide our CGN solution that extends the life of increasingly scarce IPv4 address blocks and their associated infrastructure, and provides migration solutions to the IPv6 addressing standard. In May 2013, we released our Thunder Series, a family of physical and virtual appliances that integrate an application delivery controller with security, network control and management tools. Thunder Series products can provide both ADC and CGN solutions, as well as network-wide security protection through our TPS solution. We deliver these solutions both on optimized hardware appliances and as virtual appliances across our Thunder Series and AX Series product families.

 

We derive revenue from sales of products and related support services. Products revenue is generated primarily by sales of hardware appliances with perpetual licenses to our software solutions. We generate services revenue primarily from sales of maintenance and support. End-customers predominantly purchase maintenance and support in conjunction with purchases of our products.

 

We sell our products globally to service providers and enterprises that depend on data center applications and networks to generate revenue and manage operations efficiently. Our end-customers operate in a variety of industries, including telecommunications, technology, industrial, retail, financial and education. Since inception, our customer base has grown rapidly. As of December 31, 2013, we had sold products to more than 2,900 customers across 65 countries, including three of the top four United States wireless carriers, seven of the top ten United States cable service providers, and the top three wireless carriers in Japan, in addition to other global enterprises, Web giants and governmental organizations. Our end-customers often follow an initial purchase with subsequent additional purchases. For example, our top 25 end-customers, as measured by revenue generated in 2012 and 2013, have, on average, made follow-on purchases in 81% of the quarters following their initial purchase.

 

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We sell substantially all of our solutions through our high-touch sales organization as well as distribution channel partners, including distributors, value added resellers and system integrators, and fulfill nearly all orders globally through such partners. We believe this sales approach allows us to obtain the benefits of channel distribution, such as expanding our market coverage, while still maintaining face-to-face relationships with our end-customers. We outsource the manufacturing of our hardware products to original design manufacturers. We perform quality assurance and testing at our San Jose, California facilities, as well as at our manufacturers’ locations. We warehouse and deliver our products out of our San Jose warehouse. We also outsource warehousing and delivery to a third-party logistics provider in some regions.

 

During the year ended December 31, 2012, 36% of our total revenue was generated from the United States, 49% from Japan, 9% from the Asia Pacific region, excluding Japan, 5% from EMEA, and 1% from other geographical regions. During the year ended December 31, 2013, 48% of our total revenue was generated from the United States, 28% from Japan, 11% from the Asia Pacific region, excluding Japan, 8% from EMEA, and 5% from other geographical regions.

 

As a result of the nature of our target market and the current stage of our development, a substantial portion of our revenue comes from a limited number of large end-customers, including service providers, in any period. For example, sales to NTT DoCoMo, Inc., through a reseller, accounted for approximately 32% of our total revenue during the year ended December 31, 2012 and approximately 13% of our total revenue during the year ended December 31, 2013. In addition, during the years ended December 31, 2012 and 2013, purchases from our ten largest end-customers accounted for approximately 49% and 43% of our total revenue. The composition of the group of these ten largest end-customers changes from period to period, but often includes service providers, who accounted for approximately 53% and 47% of our total revenue during the years ended December 31, 2012 and 2013. Sales to these large end-customers have typically been characterized by large but irregular purchases with long initial sales cycles. After initial deployment, subsequent purchases of our products typically have a more compressed sales cycle. The timing of these purchases and the delivery of the purchased product is difficult to predict. As a consequence, any acceleration or delay in anticipated product purchases by or deliveries to our largest end-customers could materially impact our revenue and operating results in any quarterly period and cause our quarterly revenue and operating results to fluctuate from quarter to quarter and also be difficult to predict.

 

In recent years, our financial performance was affected by a protracted, but now settled, intellectual property litigation with Brocade Communications Systems, Inc. Since the litigation commenced in August 2010, we incurred substantial legal expenses in each financial period, as shown in our results of operations. In addition, the agreement to settle the litigation in May 2013 resulted in the cash payment by us of an aggregate of $75.0 million in the second and third quarters of 2013, plus interest. We also believe that the presence of such litigation, and the uncertainty it created in our market, affected our revenue during these periods, especially following the issuance of injunctions in the litigation in the first quarter of 2013. Although such injunctions did not prevent us from selling our redesigned products, certain customers informed us that they would not purchase any of our products until we settled the dispute. In particular, total revenue for the quarters ended March 31 and June 30, 2013 grew 12% and 7% year over year, as compared to growth of 27% and 23% in the quarters ended September 30 and December 31, 2013, year over year. We chose to invest in product development and sales and marketing during the period of the Brocade litigation in order to best position our portfolio and presence in the market in anticipation of the time that the litigation was over. To calculate Adjusted EBITDA we exclude the Brocade litigation settlement and associated litigation fees and expenses. This facilitates comparisons of our operating performance on a period-to-period basis.

 

We intend to continue to invest for long-term growth. We have invested and expect to continue to invest heavily in our product development efforts to deliver new products and additional features in our current products to address customer needs. In addition, we expect to continue to expand our global sales and marketing organizations, expand our distribution channel partner programs and increase awareness of our solutions on a global basis. Additionally we will be investing in general and administration resources to meet the requirements to operate as a public company. Our investments in growth in these areas may affect short-term profitability.

 

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For the years ended December 31, 2010, 2011, 2012 and 2013, our total revenue was $55.3 million, $91.3 million, $120.1 million and $141.7 million, representing a compound annual growth rate of approximately 37% from 2010 to 2013. Our total revenue grew 32% from 2011 to 2012 and 18% from 2012 to 2013. We expect our overall revenue to increase as a result of the investments described above, coupled with the impact of the resolution of our litigation with Brocade. Internationally we anticipate revenue to increase on an absolute basis, primarily in EMEA and China. The majority of the revenue increase is expected to be from repeat customer purchases, however, we also expect to increase revenue expansion of both our direct sales force and distribution channel partner programs. However, our expectations regarding increases in revenue in future periods are subject to numerous risks and uncertainties and our revenue may not increase as we expect. Please see “Risk Factors” beginning on page 12.

 

For our years ended December 31, 2010, 2011, 2012 and 2013 our gross margin was 78%, 80%, 80% and 76%. We generated net income (loss) of $5.2 million, $7.3 million, $(90.2) million and $(27.1) million for our years ended December 31, 2010, 2011, 2012 and 2013. Our net income in these periods was affected by the settlement and legal expenses related to our litigation with Brocade.

 

Adjusted EBITDA

 

Adjusted EBITDA (loss) is an important measure used by our management and board of directors to evaluate our operating performance, develop future operating plans, make strategic decisions for the allocation of capital and determine our compliance with debt covenants. In particular, the exclusion of certain expenses, primarily the amounts paid in settlement of, and other expenses associated with, litigation between ourselves and Brocade, in calculating Adjusted EBITDA facilitates comparisons of our operating performance on a period-to-period basis. Accordingly, we believe that Adjusted EBITDA also may provide useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors. We define Adjusted EBITDA as our net income (loss) minus: (i) amounts paid in settlement of, and other expenses associated with, the Brocade litigation, (ii) interest expense, (iii) interest income and other (income) expense, net, which primarily includes changes in the fair value of convertible preferred stock warrant liabilities and foreign exchange gains and losses, (iv) stock-based compensation, (v) depreciation and amortization and (vi) our provision for income taxes.

 

     Year Ended
December 31,
 
     2011      2012      2013  
     (In thousands)  

Adjusted EBITDA (loss)

   $ 20,227       $ 15,110       $ (3,726

 

Adjusted EBITDA decreased from $20.2 million in 2011 to $15.1 million in 2012 to a loss of $(3.7) million in 2013. The decrease in Adjusted EBITDA from 2011 to 2012 was primarily a result of a 31.5% increase in revenue, while operating expenses excluding the Brocade litigation increased by 53.6%, as we continued to invest in research and development of new products and product enhancements, sales and marketing, and general and administrative infrastructure to support our growth. The decrease in Adjusted EBITDA in 2012 to 2013 was primarily a result of a 18.1% increase in revenue, while operating expenses excluding the Brocade litigation increased by 39.8%. We believe the Brocade litigation affected our revenue during the first half of 2013 due to the uncertainty created by the injunctions outstanding during the first half of 2013. In addition, we continued to invest in our research and development for our products and product enhancements, sales and marketing, and general and administrative infrastructure to support our planned growth.

 

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Basis of Presentation

 

Revenue

 

Our total revenue consists of the following:

 

Products Revenue

 

Our products revenue consists of revenue from sales of our hardware appliances upon which our software is installed. Such software includes our ACOS software, as well as one of our ADC, CGN and TPS solutions. Purchase of a hardware appliance includes a perpetual license to the included software. We recognize product revenue at the time of shipment, provided that all other revenue recognition criteria have been met. As a percentage of revenue, our products revenue may vary from quarter to quarter based on, among other things, the timing of orders and delivery of products, cyclicality and seasonality, changes in currency exchange rates and the impact of significant transactions with unique terms and conditions.

 

Services Revenue

 

We generate services revenue from sales of post contract support, or PCS, which is bundled with sales of products and professional services. We offer tiered PCS services under renewable, fee-based PCS contracts, primarily including technical support, hardware repair and replacement parts, and software upgrades on a when-and-if-released basis. We recognize services revenue ratably over the term of the PCS contract, which is typically one year, but can be up to five years. In absolute dollars, we expect our services revenue to increase as we expand our installed base.

 

Cost of Revenue

 

Our cost of revenue consists of the following:

 

Cost of Products Revenue

 

Cost of products revenue is comprised primarily of the cost of third-party manufacturing services and cost of component inventory, each for the hardware component of our products. Cost of products revenue also includes personnel costs, shipping costs, inventory write-downs, certain allocated facilities and information technology infrastructure costs, and expenses associated with logistics and quality control.

 

Cost of Services Revenue

 

Cost of services revenue is comprised primarily of personnel costs for our technical support, training and professional service teams. Cost of services revenue also includes the costs of inventory used to provide hardware replacements to end-customers under PCS contracts and certain allocated facilities and information technology infrastructure costs.

 

Gross Margin

 

Gross margin may vary and be unpredictable from quarter to quarter based on a variety of factors. These may include the mix of revenue from each of our regions, the mix of our products sold within a period, discounts provided to customers, discounts on early sales of new products to gain market penetration, write-downs of obsolete inventory and international currency exchange rates. As to currency, in general our sales are denominated in U.S. Dollars, however in Japan they are denominated in Yen. Changes in the Dollar/Yen exchange rate will therefore affect the dollar value received and gross margin. Any of the factors noted above can generate either a positive or negative impact on gross margin as compared to another period.

 

Operating Expenses

 

Our operating expenses consist of sales and marketing, research and development, general and administrative and litigation. The largest component of our operating expenses, excluding litigation, is personnel costs. Personnel costs consist of wages, benefits, bonuses, and, with respect to sales and marketing expenses,

 

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sales commissions. Personnel costs also include stock-based compensation and travel expenses. We expect personnel costs to continue to increase in absolute dollars as we hire new employees to continue to grow our business.

 

Sales and Marketing

 

Sales and marketing expenses are our largest functional category of total operating expense. These expenses primarily consist of personnel costs related to our employees engaged in sales and marketing activities. Sales and marketing expenses also include the cost of marketing programs, trade shows, consulting services, promotional materials, demonstration equipment, depreciation and certain allocated facilities and information technology infrastructure costs. We expect our sales and marketing expenses to continue to increase in absolute dollars as we increase the size of our sales and marketing organization and expand into new countries.

 

Research and Development

 

Research and development efforts are focused on new product development and on developing additional functionality for our existing products. These expenses consist of personnel costs, and to a lesser extent, prototype materials, depreciation and certain allocated facilities and information technology infrastructure costs. We expense research and development costs as incurred. We expect our research and development expenses to increase in absolute dollars as we continue to develop new products and enhance our existing products.

 

General and Administrative

 

General and administrative expenses consist primarily of personnel costs, professional fees and facility costs. General and administrative personnel costs include executive, finance, human resources, information technology, facility and legal (excluding litigation) related expenses. Professional fees consist primarily of fees for outside accounting, tax, legal, recruiting and other administrative services. We expect our general and administrative expenses to increase in absolute dollars following the completion of this offering due to the additional legal, accounting, insurance, investor relations and other costs that we will incur as a public company, as well as other costs associated with growing our business.

 

Litigation

 

Litigation is comprised of legal expenses and changes in our litigation reserve, primarily relating to our litigation with Brocade Communications Systems, Inc. Legal expenses consist of professional fees incurred in defending ourselves against litigation matters and are expensed as incurred when professional services are provided. The litigation reserve consists of accruals we make for estimated losses in pending legal proceedings. Changes in the reserve are made as we change our estimates or make payments in damages or settlement. In May 2013, we entered into a settlement agreement with Brocade for $75.0 million, which we recognized in our consolidated statement of operations in the first quarter of 2012. The settlement of the litigation provided additional evidence about conditions that existed at the date of the December 31, 2012 financial statements. As the December 31, 2012 financial statements had not been issued at the time of the settlement, in accordance with ASC 855-10, Subsequent Events, the entire settlement amount was recorded in the first quarter of 2012. With this settlement, we expect our litigation expenses to decrease in absolute dollars going forward; however, we cannot predict with certainty that this will occur.

 

Other Income (Expense), Net

 

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

 

Interest Expense

 

Interest expense consists primarily of interest expense on our debt obligations. We expect our interest expense to increase on an absolute basis in the near term due to outstanding amounts under the credit agreement we entered into in September 2013.

 

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Interest Income and Other Income (Expense), Net

 

Interest income consists primarily of interest income earned on our cash and cash equivalents balances. Other income (expense) consists primarily of foreign currency exchange gains and losses and, through February 2013, fair value adjustments related to then-outstanding warrants to purchase our convertible preferred stock. Foreign currency exchange gains and losses relate to transactions and asset and liability balances denominated in currencies other than the U.S. Dollar. We expect our foreign currency gains and losses to continue to fluctuate in the future due to changes in foreign currency exchange rates.

 

Provision for Income Taxes

 

Provision for income taxes consists of federal and state income taxes in the United States and in certain foreign jurisdictions. Earnings from our non-U.S. activities are subject to local country income taxes and may be subject to U.S. income taxes. We record a valuation allowance to reduce our U.S. deferred tax assets to the amount that we believe we are more likely than not to realize. As a result, provision for income taxes primarily relates only to foreign and state taxes at this time, as we have recorded a full valuation allowance for federal income taxes.

 

Results of Operations

 

The following tables provide consolidated statements of operations data in dollars and as a percentage of our revenue. We have derived the data for the years ended December 31, 2011, 2012 and 2013 from our audited consolidated financial statements included elsewhere in this prospectus.

 

     Year Ended
December 31,
 
     2011     2012     2013  
     (In thousands, except percentages)  

Consolidated Statements of Operations Data:

    

Revenue:

      

Products

   $ 79,763      $ 99,891      $ 112,045   

Services

     11,515        20,175        29,693   
  

 

 

   

 

 

   

 

 

 

Total revenue

     91,278        120,066        141,738   

Cost of revenue(1)

      

Products

      16,442        18,619        25,284   

Services

     2,033        5,891        8,112   
  

 

 

   

 

 

   

 

 

 

Total cost of revenue

     18,475        24,510        33,396   
  

 

 

   

 

 

   

 

 

 

Gross profit

     72,803        95,556        108,342   

Operating expenses(1)

      

Sales and marketing

     34,504        51,323        70,756   

Research and development

     16,652        25,513        33,348   

General and administrative

     3,110        10,225        15,556   

Litigation

     9,524        95,515        11,525   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     63,790        182,576        131,185   
  

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     9,013        (87,020     (22,843

Other income (expense), net:

      

Interest expense

     (241     (135     (1,495

Interest income and other income (expense), net

     (618     (2,237     (2,118
  

 

 

   

 

 

   

 

 

 

Total other income (expense), net

     (859     (2,372     (3,613
  

 

 

   

 

 

   

 

 

 

Income (loss) before provision for income taxes

     8,154        (89,392     (26,456

Provision for income taxes

     850        758        640   
  

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 7,304      $ (90,150   $ (27,096
  

 

 

   

 

 

   

 

 

 

 

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     Year Ended
December 31,
 
     2011     2012     2013  

Revenue:

      

Products

     87.4  %      83.2  %      79.1  % 

Services

     12.6  %      16.8  %      20.9  % 
  

 

 

   

 

 

   

 

 

 

Total revenue

     100.0  %      100.0  %      100.0  % 

Cost of revenue:

      

Products

        18.0  %         15.5  %         17.9  % 

Services

     2.2  %      4.9  %      5.7  % 
  

 

 

   

 

 

   

 

 

 

Total cost of revenue

     20.2  %      20.4  %      23.6  % 
  

 

 

   

 

 

   

 

 

 

Gross profit

     79.8  %      79.6  %      76.4  % 

Operating expenses:

      

Sales and marketing

     37.8  %      42.7  %      49.9  % 

Research and development

     18.2  %      21.3  %      23.5  % 

General and administrative

     3.5  %      8.5  %      11.0  % 

Litigation

     10.4  %      79.6  %      8.1  % 
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     69.9  %      152.1  %      92.5  % 
  

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     9.9  %      (72.5 )%      (16.1 )% 

Other income (expense), net:

      

Interest expense

     (0.3 )%      (0.1 )%      (1.1 )% 

Interest income and other income (expense), net

     (0.7 )%      (1.9 )%      (1.4 )% 
  

 

 

   

 

 

   

 

 

 

Total other income (expense), net

     (1.0 )%      (2.0 )%      (2.5 )% 
  

 

 

   

 

 

   

 

 

 

Income (loss) before provision for income taxes

     8.9  %      (74.5 )%      (18.6 )% 

Provision for income taxes

     0.9  %      0.6  %      0.5
  

 

 

   

 

 

   

 

 

 

Net income (loss)

     8.0  %      (75.1 )%      (19.1 )% 
  

 

 

   

 

 

   

 

 

 

 

(1)   Results above include stock-based compensation expense as follows:

 

     Year Ended
December 31,
 
     2011      2012      2013  
     (In thousands)  

Cost of revenue

   $ 49       $ 87       $ 162   

Sales and marketing

     696         1,316         2,228   

Research and development

     551         776         1,356   

General and administrative

     168         361         536   
  

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 1,464       $ 2,540       $ 4,282   
  

 

 

    

 

 

    

 

 

 

 

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Comparison of the Years Ended December 31, 2012 and 2013

 

Revenue

 

     Year Ended
December 31,
     Change  
     2012      2013      Amount     %  
     (In thousands, except percentages)  

Revenue:

          

Products

   $ 99,891       $ 112,045       $ 12,154        12.2

Services

     20,175         29,693         9,518        47.2
  

 

 

    

 

 

    

 

 

   

Total revenue

   $ 120,066       $ 141,738       $ 21,672        18.1
  

 

 

    

 

 

    

 

 

   

Revenue by geographic location:

          

United States

   $ 43,389       $ 68,127       $ 24,738        57.0

Japan

      58,653          39,581         (19,072     (32.5 )% 

Asia Pacific, excluding Japan

     10,315         15,052         4,737        45.9

EMEA

     6,469         12,087         5,618        86.8

Other

     1,240         6,891         5,651        N.M.   
  

 

 

    

 

 

    

 

 

   

Total revenue

   $ 120,066       $ 141,738       $ 21,672        18.1
  

 

 

    

 

 

    

 

 

   

 

Revenue growth from the year ended December 31, 2012 to 2013 reflects increased demand for our products and related support and services. The increase in products revenue was driven by increased sales of our products primarily to existing customers. The increase in services revenue was related to the increase in PCS sales in connection with the increased unit sales of our hardware products, and the resulting increase in our installed base and the renewals of PCS on our installed customer base. The percentage increase in service revenue exceeds that of product revenue because service revenue is directly related to the installed base of product rather than the current year’s sales of product. Current year sales of product generate service revenue only after the date the unit is received by the customer. Services revenue in 2013, excluding revenue from new 2013 service contracts, as compared to services revenue in 2012, excluding revenue from new 2012 service contracts, grew by 58.9%. Services revenue related to new product orders during 2013 accounted for 21.6% of total services revenue during the year.

 

We believe the Brocade litigation affected our revenues during both these periods, but we believe this effect was particularly evident in the year ended December 31, 2013, due to the uncertainty created by injunctions issued in the matter in the six months ended June 30, 2013. Although such injunctions did not prevent us from selling our redesigned products, certain customers informed us that they would not purchase any of our products until we settled the dispute. The settlement of the Brocade litigation did not result in any material restrictions to our business.

 

In the year ended December 31, 2013, U.S. revenue was positively affected by a few large orders from existing customers purchasing our products for significant new project deployments within their organizations. These few large orders from existing customers accounted for 10% of revenue for 2013. We cannot be certain that similar orders will be received from these customers, or from other customers in the future. Similarly, we experienced a decrease in revenue in Japan primarily due to certain end-customers deploying and absorbing products in 2013 that were purchased in 2012 to accommodate anticipated growth in data traffic. As a result, 2013 revenues generated from our Japan region on a constant Dollar/Yen exchange rate declined by approximately 25% as compared to 2012. Even though we continue to communicate with our customers on their purchasing requirements, we cannot be certain of the timing of their future product purchases for specific projects from period to period. Revenue growth in other geographic locations was primarily due to our continued investment in increasing the size of our sales force and the number of distribution channel partners in those regions.

 

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Cost of Revenue, Gross Profit and Gross Margin

 

     Year Ended
December 31,
     Change  
     2012      2013      Amount      %  
     (In thousands, except percentages)  

Cost of revenue:

           

Products

   $ 18,619       $ 25,284       $ 6,665         35.8

Services

     5,891         8,112           2,221         37.7
  

 

 

    

 

 

    

 

 

    

Total cost of revenue

   $ 24,510       $ 33,396       $ 8,886         36.3
  

 

 

    

 

 

    

 

 

    

 

     Year Ended December 31,        
     2012     2013     Change  
     Amount      Gross
Margin
    Amount      Gross
Margin
    Amount      Gross
Margin
 
     (In thousands, except percentages)  

Gross profit:

               

Products

   $ 81,272         81.4   $ 86,761         77.4   $ 5,489         (4.0

Services

     14,284         70.8     21,581         72.7       7,297         1.9   
  

 

 

      

 

 

      

 

 

    

Total gross profit

   $ 95,556         79.6   $ 108,342         76.4   $ 12,786         (3.2
  

 

 

      

 

 

      

 

 

    

 

The decrease of 4.0 percentage points in product gross margin from the year ended December 31, 2012 to the year ended December 31, 2013 was primarily due to a higher than historical gross margin in the year ended December 31, 2012, related to higher than historical volumes coming from geographic regions with generally higher gross margins. In the year ended December 31, 2013, the geographical revenue mix returned to historical levels, as did gross margins. Additionally, in 2013 there was a modest negative impact to gross margin due to changes to the Dollar/Yen exchange rate. The increase of 1.9 percentage points in service gross margin was primarily a result of a 47.2% growth in services revenue, while cost of services revenue increased by only 37.7% due to increased operating efficiencies in our service and support group.

 

Operating Expenses

 

     Year Ended
December 31,
     Change  
     2012      2013      Amount     %  
     (In thousands, except percentages)  

Operating expenses:

          

Sales and marketing

   $ 51,323       $ 70,756       $ 19,433        37.9

Research and development

     25,513         33,348         7,835        30.7

General and administrative

     10,225         15,556         5,331        52.1
  

 

 

    

 

 

    

 

 

   

Non-GAAP operating expenses excluding litigation

     87,061         119,660         32,599        37.4

Litigation

     95,515         11,525         (83,990     (87.9 )% 
  

 

 

    

 

 

    

 

 

   

Total operating expenses

   $ 182,576       $ 131,185       $ (51,391     (28.1 )% 
  

 

 

    

 

 

    

 

 

   

 

Non-GAAP operating expenses, excluding litigation, is an important measure used by our management to evaluate our operating performance, develop future operating plans, and make strategic decisions related to the allocation of resources. In particular, the exclusion of litigation expenses facilitates comparison of our operating expenses on a period to period basis and with other companies. Accordingly, we believe the Non-GAAP operating expenses excluding litigation also may provide useful information to investors and others in understanding and evaluating our operating expenses in the same manner as our management.

 

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Sales and Marketing

 

The increase in sales and marketing expenses was primarily attributable to a $15.4 million increase in personnel and related costs, which includes a $7.3 million increase in employee compensation, a $6.1 million increase in commission and bonus expenses, a $0.9 million increase in stock-based compensation and a $1.1 million increase in travel costs, as a result of an increase in sales and marketing headcount from 213 as of December 31, 2012 to 262 as of December 31, 2013. The increase was also attributable to a $1.5 million increase in marketing and promotion costs associated with advertising and trade shows, as we increased our sales and marketing efforts to grow our revenue.

 

Research and Development

 

The increase in research and development expenses was primarily attributable to a $7.2 million increase in personnel and related costs, which includes a $5.8 million increase in employee compensation, a $0.5 million increase in bonuses and a $0.6 million increase in stock-based compensation, as a result of an increase in research and development headcount from 182 as of December 31, 2012 to 210 as of December 31, 2013, as we continued our efforts to develop new products and additional functionality for our existing products. The increase also reflected a $1.6 million increase in depreciation and allocated facilities and information technology infrastructure costs.

 

General and Administrative

 

The increase in general and administrative expenses was primarily attributable to higher professional services costs of $2.5 million, which related to increased general legal fees, audit fees, finance and accounting consulting fees, human resources and IT implementation services, in connection with scaling our organization to support increased business activity and preparing for an initial public offering. The increase was also attributable to a $1.8 million increase in personnel and related costs, including bonuses and stock-based compensation, and a $0.4 million increase in bad debt expense. Our general and administrative headcount increased from 36 as of December 31, 2012 to 46 as of December 31, 2013.

 

Litigation

 

The decrease in litigation expenses was primarily attributable to the $75.0 million legal settlement with Brocade in May 2013, which we recognized in the three months ended March 31, 2012. See the subsection titled “Basis of Presentation” for an explanation of why this expense was booked in the three months ended March 31, 2012. The decrease was offset by $3.0 million of legal expenses incurred in connection with the Radware litigation. The remaining change was primarily attributable to a decrease in professional legal service fees related to the Brocade litigation as a result of the settlement.

 

Interest Expense

 

     Year Ended
December 31,
 
         2012             2013      
     (In thousands)  

Interest expense

   $ (135   $ (1,495

 

Interest expense increased by $1.4 million due primarily to the $1.1 million in interest expense we incurred on an unsecured convertible promissory note we issued to Brocade in July 2013 in accordance with the terms of the settlement of the Brocade litigation. We repaid the note in full in September 2013. The increase was also attributable to interest expense and amortization of debt issuance cost totaling $0.3 million related to the draw down of $25.0 million of our revolving credit facility in September 2013, $5.0 million of which we repaid in December 2013.

 

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Interest Income and Other Income (Expense), Net

 

     Year Ended
December 31,
 
         2012             2013      
     (In thousands)  

Interest income and other income (expense), net

   $ (2,237   $ (2,118

 

Interest income and other income (expense), net changed by $0.1 million due primarily to an increase of $0.7 million in foreign currency exchange losses as a result of the Japanese Yen weakening against the U.S. Dollar offset by a decrease of $0.8 million non-cash expense related to a change in the value of convertible preferred stock warrants outstanding through their exercise or expiration in February 2013.

 

Provision for Income Taxes

 

     Year Ended
December 31,
 
         2012              2013      
     (In thousands)  

Provision for income taxes

   $ 758       $ 640   

 

The $0.1 million decrease in our provision for income taxes was attributable to a decrease in our provision for foreign income taxes.

 

Comparison of the Years Ended December 31, 2011 and 2012

 

Revenue

 

     Year Ended
December 31,
     Change  
     2011      2012      Amount     %  
     (In thousands, except percentages)  

Revenue:

          

Products

   $ 79,763       $ 99,891       $ 20,128        25.2

Services

     11,515         20,175         8,660        75.2
  

 

 

    

 

 

    

 

 

   

Total revenue

   $ 91,278       $ 120,066       $ 28,788        31.5
  

 

 

    

 

 

    

 

 

   

Revenue by geographic location:

          

United States

   $ 38,674       $ 43,389       $ 4,715        12.2

Japan

       37,504         58,653           21,149        56.4

Asia Pacific, excluding Japan

     8,679         10,315         1,636        18.9

EMEA

     4,812         6,469         1,657        34.4

Other

     1,609         1,240         (369     (22.9 )% 
  

 

 

    

 

 

    

 

 

   

Total revenue

   $ 91,278       $ 120,066       $ 28,788        31.5
  

 

 

    

 

 

    

 

 

   

 

Revenue growth from the year ended December 31, 2011 to the year ended December 31, 2012 reflects increased demand for our products and related services. The increase in products revenue was driven by increased sales of our products to existing and new customers. Japan contributed the largest portion of the revenue increase from 2011 to 2012, primarily due to a significant increase in sales by our distribution channel partners to large service providers, as they expanded their mobile network capacity to address current and anticipated growth in data traffic. The revenue growth in other geographic locations was primarily due to our continued investment in increasing the size of our sales force which increased by 26% during 2012, and the number of distribution channel partners in those regions. The increase in services revenue was related to the increase in PCS sales in connection with the increased unit sales of our hardware products, and the renewals of

 

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PCS on our installed customer base. The percentage increase in service revenue exceeds that of product revenue because service revenue is directly related to the installed base of product rather than the current year’s sales of product. Current year sales of product generate service revenue only after the date the unit is received by the customer.

 

Cost of Revenue, Gross Profit and Gross Margin

 

     Year Ended
December 31,
     Change  
     2011      2012      Amount      %  
     (In thousands, except percentages)  

Cost of revenue:

           

Products

   $ 16,442       $ 18,619       $   2,177         13.2%   

Services

     2,033         5,891           3,858         189.8%   
  

 

 

    

 

 

    

 

 

    

Total cost of revenue

   $ 18,475       $ 24,510       $ 6,035         32.7%   
  

 

 

    

 

 

    

 

 

    

 

     Year Ended
December 31,
       
     2011     2012     Change  
     Amount      Gross
Margin
    Amount      Gross
Margin
    Amount      Gross
Margin
 
     (In thousands, except percentages)  

Gross profit:

               

Products

   $ 63,321         79.4   $ 81,272         81.4   $ 17,951         2.0   

Services

     9,482         82.3     14,284         70.8     4,802         (11.5
  

 

 

      

 

 

      

 

 

    

Total gross profit

   $ 72,803         79.8   $ 95,556         79.6   $ 22,753         (0.2
  

 

 

      

 

 

      

 

 

    

 

The increase of 2.0 percentage points in products gross margin from the year ended December 31, 2011 to the year ended December 31, 2012 was primarily due to higher than historical gross margin in the six months ended December 31, 2012, related to higher than historical volumes coming from geographic regions with generally higher gross margins. The decrease of 11.5 percentage points in services gross margin was primarily a result of higher personnel and related costs for our service and support team, as we grew the team in anticipation of future growth.

 

Operating Expenses

 

     Year Ended
December  31,
     Change  
           2011                  2012            Amount      %  
     (In thousands, except percentages)  

Operating expenses:

           

Sales and marketing

   $   34,504       $ 51,323       $ 16,819         48.7

Research and development

     16,652         25,513         8,861         53.2

General and administrative

     3,110         10,225         7,115         228.8
  

 

 

    

 

 

    

 

 

    

Non-GAAP operating expenses excluding litigation

     54,266         87,061         32,795         60.4

Litigation

     9,524         95,515         85,991         N.M.   
  

 

 

    

 

 

    

 

 

    

Total operating expenses

   $ 63,790       $ 182,576       $ 118,786         186.2
  

 

 

    

 

 

    

 

 

    

 

Non-GAAP operating expenses, excluding litigation, is an important measure used by our management to evaluate our operating performance, develop future operating plans, and make strategic decisions related to the allocation of resources. In particular, the exclusion of litigation expenses facilitates comparison of our operating

 

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expenses on a period to period basis and with other companies. Accordingly, we believe the Non-GAAP operating expenses excluding litigation also may provide useful information to investors and others in understanding and evaluating our operating expenses in the same manner as our management.

 

Sales and Marketing

 

The increase in sales and marketing expenses was primarily attributable to a $13.0 million increase in personnel and related costs, which includes an $8.6 million increase in employee compensation, a $2.2 million increase in commission and bonus expenses, a $1.5 million increase in travel costs and a $0.6 million increase in stock-based compensation, as a result of an increase in sales and marketing headcount from 158 as of December 31, 2011 to 205 as of December 31, 2012. The change was also due to a $1.1 million increase in marketing and promotion costs related to trade shows and marketing development efforts, a $1.1 million increase in contractor expense and a $0.8 million increase in depreciation and allocated facilities and information technology infrastructure costs.

 

Research and Development

 

The increase in research and development expenses was primarily attributable to a $6.4 million increase in personnel and related costs, which includes a $5.7 million increase in employee compensation, a $0.4 million increase in bonuses and a $0.3 million increase in stock-based compensation, as a result of an increase in research and development headcount from 134 as of December 31, 2011 to 176 as of December 31, 2012 as we continued our efforts to develop new product and additional functionality for our existing products. The change was also due to a $1.3 million increase in depreciation and allocated facilities and information technology infrastructure expense.

 

General and Administrative

 

The increase in general and administrative expenses was primarily attributable to a $2.5 million increase in professional service fees related to outside audit, finance and accounting consulting, human resources and IT implementation services to support increased business activity. The change was also due to a $2.2 million increase in personnel and related costs, including bonuses and stock-based compensation, $0.9 million increase in depreciation and allocated facilities and information technology infrastructure expense, and a $0.6 million lease expense on the early termination of the lease on our former headquarters building. Our general and administrative headcount increased from 15 as of December 31, 2011 to 36 as of December 31, 2012.

 

Litigation

 

The increase of $86.0 million in litigation expenses was primarily attributable to litigation settlement expenses, including $75.0 million related to the Brocade litigation settlement, and a $10.1 million increase in professional legal service fees related to litigation defense costs primarily for the Brocade litigation. See the subsection titled “Basis of Presentation” for an explanation of why this expense was booked in the first quarter of 2012.

 

Interest Expense

 

     Year Ended
December 31,
 
         2011             2012      
     (In thousands)  

Interest expense

   $ (241   $ (135

 

Interest expense decreased by $0.1 million as a result of a $1.0 million decrease in the outstanding balance of a term loan between December 31, 2011 and 2012 due to scheduled principal repayments. This loan was paid in full in July 2013. During 2012, we drew down on a revolving line of credit periodically for short-term cash needs, but repaid each draw within a short period of time, thus incurring minimal interest expense.

 

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Interest Income and Other Income (Expense), Net

 

     Year Ended
December 31,
 
         2011             2012      
     (In thousands)  

Interest income and other income (expense), net

   $ (618   $ (2,237

 

Interest income and other income (expense), net changed by $1.6 million from 2011 to 2012 due to a $1.4 million increase in foreign currency exchange losses as a result of the weakening of the Japanese Yen against the U.S. Dollar and a $0.3 million increase in the non-cash expense related to a change in the value of then-outstanding convertible preferred stock warrants.

 

Provision for Income Taxes

 

     Year Ended
December 31,
 
         2011              2012      
     (In thousands)  

Provision for income taxes

   $ 850       $ 758   

 

The $0.1 million decrease in our provision for income taxes was primarily due to a lower provision for foreign income taxes.

 

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Quarterly Results of Operations

 

The following tables set forth our unaudited quarterly consolidated statement of operations data in dollars and as a percentage of our revenue for each of the last eight quarters in the period ended December 31, 2013. The unaudited quarterly consolidated statement of operations data below have been prepared on the same basis as the audited consolidated financial statements included elsewhere in this prospectus and, in our opinion, reflect all necessary adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of this information. The results of historical quarters are not necessarily indicative of the results of operations for a full year or any future period.

 

     Three Months Ended  
     Mar. 31,
2012
    Jun. 30,
2012
    Sep. 30,
2012
    Dec. 31,
2012
    Mar. 31,
2013
    Jun. 30,
2013
    Sep. 30,
2013
    Dec. 31,
2013
 
     (In thousands)  

Revenue:

                

Products

   $ 22,241      $ 23,143      $ 26,070      $ 28,437      $ 23,269      $ 23,064      $ 32,263      $ 33,449   

Services

     4,089        4,937        5,248        5,901        6,312        7,067        7,563        8,751   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     26,330        28,080        31,318        34,338        29,581        30,131        39,826        42,200   

Cost of revenue(1):

                

Products

     4,616        4,655        4,715        4,633        4,906        4,894        6,669        8,815   

Services

     1,057        1,525        1,646        1,663        1,698        2,020        2,065        2,329   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     5,673        6,180        6,361        6,296        6,604        6,914        8,734        11,144   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     20,657        21,900        24,957        28,042        22,977        23,217        31,092        31,056   

Operating expenses(1):

                

Sales and marketing

     10,743        12,908        12,634        15,038        15,589        15,723        18,276        21,168   

Research and development

     5,256        6,254        6,772        7,231        7,772        8,336        8,517        8,723   

General and administrative

     1,332        3,030        2,379        3,484        3,830        3,697        3,686        4,343   

Litigation

     80,463        6,602        6,040        2,410        3,404        4,800        1,683        1,638   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     97,794        28,794        27,825        28,163        30,595        32,556        32,162        35,872   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (77,137     (6,894     (2,868     (121     (7,618     (9,339     (1,070     (4,816

Other income (expense), net:

                

Interest expense

     (68     (23     (25     (19     (13     (33     (1,399     (50

Interest income and other income (expense), net

     (537     91        160        (1,951     (681     (683     (73     (681
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense), net

     (605     68        135        (1,970     (694     (716     (1,472     (731
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

     (77,742     (6,826     (2,733     (2,091     (8,312     (10,055     (2,542     (5,547

Provision for income taxes

     41        172        210        335        221        158        207        54   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (77,783   $ (6,998   $ (2,943   $ (2,426   $ (8,533   $ (10,213   $ (2,749   $ (5,601
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other Financial Data:

                

Adjusted EBITDA (loss)

   $ 3,746      $ 1,727      $ 5,255      $ 4,382      $ (2,425   $ (2,412   $ 1,963      $ (1,290
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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     Three Months Ended  
     Mar. 31,
2012
    Jun. 30,
2012
    Sep. 30,
2012
    Dec. 31,
2012
    Mar. 31,
2013
    Jun. 30,
2013
    Sep. 30,
2013
    Dec. 31,
2013
 
     (As a % of total revenue)  

Revenue:

                

Products

     84.5  %      82.4  %      83.2  %      82.8  %      78.7  %      76.5  %      81.0  %      79.3 

Services

     15.5  %      17.6  %      16.8  %      17.2  %      21.3  %      23.5  %      19.0  %      20.7 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     100.0  %      100.0  %      100.0  %      100.0  %      100.0  %      100.0  %      100.0  %      100.0 

Cost of revenue(1):

                

Products

     17.5  %      16.6  %      15.0  %      13.5  %      16.6  %      16.2  %      16.7  %      20.9 

Services

     4.0  %      5.4  %      5.3  %      4.8  %      5.7  %      6.7  %      5.2  %      5.5 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     21.5  %      22.0  %      20.3  %      18.3  %      22.3  %      22.9  %      21.9  %      26.4 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     78.5  %      78.0  %      79.7  %      81.7  %      77.7  %      77.1  %      78.1  %      73.6 

Operating expenses(1):

                

Sales and marketing

     40.8  %      46.0  %      40.3  %      43.8  %      52.7  %      52.2  %      45.9  %      50.2 

Research and development