10-K 1 a2016q4form10-k.htm 10-K Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 10-K
(Mark One)
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Fiscal Year Ended December 31, 2016
 
OR
 
[  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ________ to ________
 
Commission File Number 000-31523
 
IXIA
(Exact name of Registrant as specified in its charter)
 
California
95-4635982
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
26601 West Agoura Road, Calabasas, CA 91302
(Address of principal executive offices, including zip code)
 
Registrant’s telephone number, including area code: (818) 871-1800 
 
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange on Which Registered
Common Stock, without par value
The NASDAQ Stock Market LLC
 
Securities registered pursuant to Section 12(g) of the Act: None 
 
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [  ] No [X]
 
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes [  ] No [X]
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).
Yes [X] No [  ]
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
 
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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [X]
Accelerated filer [  ]
Non-accelerated filer [  ]
Smaller reporting company [  ]
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [  ] No [X]
 
The aggregate market value of the shares of the Registrant’s common stock held by nonaffiliates of the Registrant as of June 30, 2016, computed by reference to the closing sales price on the Nasdaq Global Select Market on that date, was approximately $618,688,890.
 
As of February 21, 2017, the number of shares of the Registrant's common stock outstanding was 82,867,065.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the Registrant’s Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held on June 2, 2017 are incorporated by reference into Part III of this Annual Report.

 




IXIA
 
FORM 10-K
 
TABLE OF CONTENTS
 
 
 
Page 
PART I
 
 
 
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Mine Safety Disclosures
 
 
 
PART II
 
 
 
Item 5.
Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Item 6.
Selected Financial Data
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
 
 
 
PART III
 
 
 
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accounting Fees and Services
 
 
 
PART IV
 
 
 
Item 15.
Exhibits, Financial Statement Schedules
 
 
 
SIGNATURES

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PART I
 
Item 1. Business
 
Overview
 
Ixia (the "Company," "we," "us," or "our") was incorporated in 1997 as a California corporation. We help customers validate the performance and security resilience of their applications and networks. Our test, visibility, and security products help organizations make their physical and virtual networks stronger. Enterprises, service providers, network equipment manufacturers, and governments worldwide rely on our solutions to validate new products before shipping and ensure ongoing operation of their networks with better visibility and security. Our product solutions consist of our high performance hardware platforms, software applications, and services, including warranty and maintenance offerings.
 
We expect that our customers, when asked, would agree that two things are true: applications need to perform even as their network edge has blurred, and security is critical in an environment of exponentially growing IT threats. We are committed to helping our customers' networks perform at their highest level so that our customers' end users get the best performing and most secure application experience available. Better performing applications means an improved end-user customer experience. Security resilience means ensuring network durability against ever-growing IT security threats.

We help applications perform better through an extensive array of test, security, and visibility solutions that validate, secure, and optimize networks and applications from engineering concept to live deployment. Our products uncover performance and security blind spots within networks and expose vulnerabilities.
 
We are headquartered in Calabasas, California with operations across the U.S. and in other parts of the world.  Our revenues are principally derived from shipments within the U.S. and to the Europe, Middle East and Africa ("EMEA"), and Asia Pacific regions. See Note 5 to the consolidated financial statements included in this Annual Report on Form 10-K (this “Form 10-K”) for entity-wide disclosures about products and services, geographic areas, and major customers.

We have entered into an Agreement and Plan of Merger, dated as of January 30, 2017 (the "Merger Agreement"), with Keysight Technologies, Inc. (“Keysight”) and, by a joinder dated February 2, 2017, Keysight Acquisition, Inc., a wholly owned subsidiary of Keysight (“Merger Sub”). Pursuant to the Merger Agreement, subject to the approval of the Merger Agreement and the principal terms of the Merger Agreement by our shareholders and the satisfaction of other conditions to the completion of the merger specified in the Merger Agreement, Merger Sub will be merged with and into Ixia, with Ixia surviving the merger as a wholly owned subsidiary of Keysight. See Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Business Overview” of this Form 10-K for additional information regarding the Merger Agreement.

Our Solutions
 
We are a leading provider of physical and virtual network application performance and security resilience solutions. Application performance and security resilience allow network operators to ensure that their priority network functions are validated, secured, and optimized through the network life cycle.
 
Our solutions help customers address three network goals:
 
Validate the network—test and confirm design in virtual and physical environments
Optimize the network—enhance application performance and visibility across the network
Secure the network—assess and monitor security threats in real-world scenarios
Enterprises, service providers, network equipment manufacturers, and governments worldwide rely on our solutions to deploy new technologies and achieve efficient, secure, ongoing operation of their networks. Our product solutions consist of our high performance hardware platforms, software applications, and services, including warranty and maintenance offerings.
 

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Our powerful and versatile solutions, expert global support, and professional services equip organizations to exceed their customer expectations and achieve better business outcomes. Our solutions provide organizations with a complete understanding of its user behavior, security vulnerabilities, network capacity, application performance, and information technology (“IT”) resiliency. From the research labs to the network cloud, Ixia solutions ensure application performance and security resilience across network and data center infrastructure. No matter what profession or position in the world, connecting to networked applications quickly and securely – from any location – is paramount to success. The convergence of new technologies is complicating the IT landscape – smartphone ubiquity, cloud proliferation, challenges of big data, demands of the social consumer, pervasive cyber threats – intensifying the challenge of constantly, securely, and quickly connecting users to their applications. The delivery of communications and entertainment applications and services is moving to an always-connected, always-on paradigm. Ixia solutions battle-test wired networks, wireless networks, and data center infrastructures, provide seamless access to network & application performance, and enable IT leaders to run highly resilient, high performing networks.
 
Our solutions are scalable, easy-to-use, and adaptable, automatically providing companies with comprehensive coverage of the latest applications and security attacks in order to optimize performance and protect against threats. Our goal is to enhance application performance and security resilience by providing comprehensive, easy-to-use, and automated solutions that empower our customers to drive their business forward by taking the guesswork out of network reliability and the application services.
 
Real-world test solutions must recreate the true behavior of network users, at massive scale, with increasing fidelity. Network testing solutions must be highly scalable and capable of generating large amounts of data at high speeds over increasingly complex configurations, and be up to date with the very latest applications and security attacks. Comprehensive, integrated testing must occur throughout network design, development, production, deployment, and operation stages. Because this testing and verification must take place across multiple layers of the network infrastructure and for all network protocols, network testing solutions are also required to be highly flexible, extensible, and modular. This rapid evolution of complex network technologies and protocols - which includes leading-edge technologies such as higher speed Ethernet, wireless, virtualization, software defined networks, and the latest Wi-Fi standards - has resulted in the need for an integrated platform solution that is easy to use, with minimal training and set-up.

Our network visibility solutions intelligently connect data centers and network infrastructures with monitoring solutions that ensure application performance and security resilience. Powered by an easy to use, drag-and-drop interface, our advanced packet processing technologies, including filtering, load balancing, packet shaping, session correlation, application intelligence, and de-duplication, improve the way our customers manage their data centers, prevent network application and service downtime, and maximize return on IT investment. Network visibility is the first step towards a successful security deployment. It is imperative that visibility solutions deliver 100% of the traffic at high speed with advanced processing to ensure effective application security and performance monitoring.

Integrating our technologies across our platforms to bring valuable solutions to market is a key element of our growth strategy. ThreatARMOR is an example of how our security expertise and IP from our test solutions drives value across our business. ThreatARMOR decreases the attack surface networks and reduces the load on security devices and resources. It further expands the security capabilities of our visibility architecture by leveraging our proprietary Application and Threat Intelligence ("ATI") technology to identify and block known bad traffic at line rate speeds before it can access the network. In addition, ThreatARMOR can identify and stop infected internal devices from communicating with known botnets.

By leveraging our security technologies across our portfolio, we deliver visibility solutions that enable a secure infrastructure and make security solutions more efficient and resilient. We believe that an effective visibility architecture should do more than just see the traffic--it also needs to help identify where you are vulnerable, reduce your attack surface, and provide intelligence.
 
Our systems provide our customers with the following key benefits:
 
Versatile High Performance. Our network test solutions generate and receive data traffic at full line rate – the maximum rate that data traffic can be transmitted over a network medium. Our systems provide accurate analysis across multiple layers of the overall network and of individual network components in real time. Our systems can be configured to either generate programmed packets of data or conduct complete sessions.
Our test systems can analyze each discrete packet of information, thereby allowing our customers to precisely measure the performance of their networks and individual network components. This precision allows customers to accurately measure critical quality of service parameters such as throughput, latency, loss, and jitter. It also verifies data integrity, packet sequencing throughout the network, and quality of service ("QoS").

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When used for realistic application sessions or conversations between network endpoints, our test systems emulate highly complex and specialized applications such as transferring electronic mail, browsing the Internet, conveying voice and video information, managing databases, and establishing wireless calls. This emulation allows our customers to accurately measure critical characteristics of their networks such as session setup rate, session tear down rate, and session capacity. By analyzing the content of these sessions, our customers can also accurately measure QoS and media quality.
Our network visibility solutions allow customers to dynamically aggregate, regenerate, distribute, filter, and condition packets from all parts of the network at full line rate. These high performance systems enable broader network visibility and enhance the performance of customers’ monitoring solutions while reducing costs.
Highly Scalable. Each of our network test interface cards provides one or more ports through which our systems generate and receive data traffic. Each physical port contains its own dedicated logic circuits, with substantial memory and compute resources. Our customers can easily scale the size of their test bed or the amount of data traffic generated by inserting additional interface cards. By connecting multiple chassis and synchronizing hundreds of ports to operate simultaneously, our customers can simulate extremely large networks. Our GPS-based components even allow our chassis to be distributed throughout the world, while maintaining the close time synchronization necessary for precision tests. We believe that our systems can offer our customers one of the highest port density and scalable space efficient systems available. In addition, our client-server architecture allows multiple users in the same or different geographic locations to simultaneously access and operate different ports contained in the same chassis to run independent tests. Customers using our high-density network visibility platform can easily scale their visibility needs through flexible port licensing and modular extensions that can grow with their expanding network monitoring needs.
Highly Modular Hardware Platform. We offer network test hardware platforms with interchangeable interfaces, using a common set of applications and Application Programing Interfaces ("APIs"). Our architectures enable the emulation of millions of network users on scalable platforms, with a mixture of both network and application layer traffic. These architectures offer our customers an integrated test environment that might otherwise require multiple products to cover the same test scenarios. We believe that our network test hardware platform solutions decrease the overall cost while increasing productivity and scalability, and reducing training requirements for our customers. Our network test hardware products consist of stackable and portable chassis which, depending on the chassis model, can be configured with a mix of interface cards. This modular design allows our customers to quickly and easily create realistic, customized test configurations. Our open architecture accelerates the integration of additional network technologies into existing systems through the addition of new interface cards and distributed software. Our modular approach to network visibility allows customers to increase port density, add higher speed links, and/or add advanced features – helping customers to future proof their network monitoring and visibility investments.
Flexible. Our customers can easily expand our systems to address changing technologies, protocols, and applications without changing system hardware or replacing interface cards. This protects and optimizes customers’ investments by eliminating the need for “forklift upgrades” or the purchase of additional niche products. Additionally, customers under our ATI subscription service receive automatic bi-weekly updates of the latest applications and attacks for use in their real-world testing scenarios.
Automation. Our systems make it easy to create automated tests and network monitoring rules that can run unattended. We offer our customers a growing library of automated tests and monitoring automation scripts that simplify and streamline the test and monitoring processes. The automated tests are repeatable and the results are presented in a structured format for easy analysis. Ixia offers “Click-Thru Automation” that records and repeats interactive operation, providing automation without programming. In addition, Ixia's Tool Command Language ("Tcl") API is a comprehensive programming interface to our hardware, as well as to our software applications. The Tcl API enables libraries of automated scripts to be quickly built with specificity to a customer's environment. We also offer a utility that exports configurations created in our graphical user interface ("GUI") as Tcl scripts. Our visibility solutions can be automated and integrated with monitoring tools using our RESTful API.


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Ease of Use. We have designed our systems so that users can install and operate them with minimal training and setup. Our network test systems are easy to use and offer our customers a wide range of readily accessible pre-designed test configurations. These tests include industry standard and use case-specific tests. Users can easily configure and operate our systems to generate and analyze data traffic over any combination of interface cards or ports through our graphical user interface. Once tests are designed in our GUIs, they can be saved for reuse or in Tcl script form for customization and even greater levels of automation. Our network visibility systems also offer customers best in class ease-of-use, with a point-and-click GUI that enables customers to quickly develop complex filtering and packet distribution algorithms with simple, but powerful, drop-down menus. These configurations can be saved for reuse and automated using our RESTful API.
Intelligent. Our products and solutions are designed with high processing capability and intelligence leveraging the deep technical prowess and engineering capabilities at Ixia. These intelligence capabilities manifest themselves in our products in the form of protocol awareness, application context and knowledge of security threat vectors. Ixia continues to be a leader in the market through innovation by making our products more application and security aware and intelligent through analytics so that our customers are presented with relevant and actionable information whether it be test results in a lab environment or resiliency reports for some network equipment or real-time application flow data being sent to a monitoring & security analysis tool. 
Our Business Strategy
 
Our goal is to enable seamless performance, resilience, and reliability in application and service delivery over networks by providing the most comprehensive, insightful, and easy-to-use test, security, and visibility solutions in the industry. Ixia has taken a number of significant actions to acquire technology and talent that has positioned the Company as a preeminent provider of network test, security, and visibility solutions. This has been accomplished by growing our portfolio of products and addressable markets through acquiring technologies, businesses, and assets; expanding our international presence, sales channels, and customer base; continuing to deliver high quality products and support to our customers; and developing our employees. Key elements of our strategy to achieve our objective include the following:

 Continue to Expand our Addressable Markets. We plan to further expand our addressable markets into growth areas for network and application security, next-generation networking technologies, monitoring network applications and services, and more.
Maintain Focus on Technology Leadership. We will continue to focus on research and development in order to maintain our technology leadership position, and to offer solutions that address new and evolving network technologies. We intend to maintain an active role in industry standards committees such as IEEE and the Internet Engineering Task Force ("IETF"), and to continue our active involvement in industry forums, associations and alliances such as the Ethernet Alliance, Metro Ethernet Forum, Open Networking Foundation ("ONF"), Wi-Fi Alliance, International Telecommunications Union ("ITU"), Small Cell Forum, Telecommunications Industry Association ("TIA") and 3GPP. We also plan to continue to work closely with some of our established customers who are developing emerging network technologies, as well as leading edge start-up companies, to enhance the performance and functionality of our existing systems and to design future products that specifically address our customers’ needs as they evolve.
Expand and Further Penetrate Customer Base. We plan to strengthen and further penetrate our existing customer relationships, and expand our reach into new enterprise, government, and service provider customers by:
Continuing to develop and offer new and innovative solutions that meet our existing and potential customers’ needs,
Expanding our sales and marketing efforts through direct channels and partner relationships to increase penetration in under-represented vertical and geographic market segments,
Building upon and further strengthening our reputation and brand name recognition, and
Continuing our focus on customer support by maintaining and expanding the capabilities of our highly qualified and specialized internal personnel.
Expand International Market Presence. We will further pursue sales in key international markets, including EMEA, and the Asia Pacific region. In order to pursue sales in these markets, we intend to develop and expand our relationships with key customers, partners, resellers and distributors, as well as expand our direct sales and marketing presence within these markets.

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License and Acquire New Products. We will continue our strategy of acquiring products in key technologies that expand our product offerings, address customer needs, and enhance the breadth of our evolving product portfolio. To expand our product portfolio, we may partner with industry leaders, acquire or license technology assets, or acquire other companies. 
We have throughout our existence made acquisitions that have expanded our product portfolio, grown our end customer base, and increased our overall total addressable market. Our acquisition history includes the following transactions:

In July 2011, we acquired VeriWave, Inc. (“VeriWave”), a performance testing company for wireless LAN ("WLAN") and Wi-Fi enabled smart devices. This acquisition expanded our portfolio of supported network media and addressed the need for an end-to-end solution that completely tests converged Wi-Fi, wired, 3G, and 4G/LTE ecosystems.
In June 2012, we acquired Anue Systems, Inc. (“Anue”). Anue's solutions provide visibility into live networks and the applications running within them in order to efficiently aggregate and filter traffic. With this acquisition, we expanded our addressable market, broadened our product portfolio, and expanded our customer base.
In August 2012, we acquired BreakingPoint Systems, Inc. (“BreakingPoint”). BreakingPoint is a leader in application and security assessment and testing, and its solutions provide global visibility into emerging threats and applications, along with advance insight into the resiliency of an organization’s network infrastructure. With this acquisition, we expanded our addressable market, broadened our product portfolio, and expanded our customer base.
In December 2013, we acquired Net Optics, Inc. (“Net Optics”). Net Optics is a leading provider of total application and network visibility solutions. The acquisition of Net Optics solidified our position as a market leader with a comprehensive product offering including network packet brokers, physical and virtual taps, and application aware capabilities. The acquisition expanded our product portfolio, strengthened our service provider and enterprise customer bases and broadened our sales channel and partner programs.
Customers
 
Today’s networks and data centers are continuously improving their performance and scale in order to accommodate the plethora of applications and services we now rely upon to do business, communicate, capture memories, plan, travel, and more. Applications drive network capacity, influence quality of experience, introduce potential vulnerabilities, and lead to more innovations. Every organization from device manufacturers, to service providers, to enterprise and government organizations, seeks to optimize networks and data centers in order to accelerate, secure, and scale the delivery of these applications.
 
Our solutions provide the insight needed for organizations to make real-time decisions that optimize performance, harden security and increase the scalability of networks facing constantly changing requirements. Our line of hardware, software, and other services cater to the needs of network equipment manufacturers ("NEMs"), service providers, and enterprise and government organizations. Our solutions provide an end-to-end approach for our customers to test devices and systems prior to deployment, validate the performance and security of networks and data centers after every change, and help them continuously monitor network application and security behavior to manage performance. 
 
We provide solutions and services to each of our customer segments, including those set forth below:
 
NEMs. NEMs provide voice, video, and data and service infrastructure equipment to customer network operators, service providers, and network users. Such users require high standards of functionality, performance, security, and reliability. To meet these higher standards, NEMs must ensure the quality of their products during development and manufacturing (prior to deployment). Failure to ensure the consistent functionality and performance of their products may result in the loss of customers, increased research and development costs, increased support costs, and losses resulting from the return of products. NEMs, for example, use our network test systems to run large-scale subscriber and service emulations, generating extreme traffic loads to verify the performance and capacity of their wired and wireless devices prior to deployment in production networks. Our systems are also used by NEMs in the sales and acceptance process to demonstrate to their customers (e.g., service providers and enterprises) how the NEMs’ products will operate under real-world conditions. In addition, our conformance test suites are used by NEMs to ensure that their devices conform to published standards – ensuring that they will be interoperable with other equipment. These equipment manufacturers are also, in many cases, large enterprises and therefore have the same challenges that can be met using our assessment and monitoring solutions within their own internal network.


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Service Providers. Service providers seek to deliver a growing variety of high quality, advanced network services ranging from traditional telecommunications and Internet services, to social networking, cloud storage, and entertainment streaming. Failure to provide a quality experience to the end user can be costly through high subscriber churn rates and reduced revenues. To ensure quality of experience and service assurance, service provider R&D and network engineering groups must verify the performance and functionality of staged networks during equipment selection and network design, prior to deployment and after any change to the production network. Service providers also use our network test systems to emulate millions of mobile subscribers to realistically predict end-user quality of experience delivered by providers’ infrastructure and services. Service providers must also ensure security for customers and their own networks, as the keepers of vast amounts of business and personal data. And finally, service providers depend on our monitoring solutions to filter application traffic in order to prioritize, de-duplicate, and optimize wired and wireless data streams.
Enterprises and Government. Enterprise and government organizations depend on their networks and data centers to get business done, and they devote enormous resources to ensure applications and services run optimally and securely. These customers rely on our solutions to help evaluate equipment during selection, optimize and harden their network designs in labs prior to roll-out, and once rolled out, continuously monitor the production network to ensure optimal performance and security of the contents flowing through it. Notably, organizations must always be vigilant against the impact of security threats to its business critical network. Using our solutions, they consistently ensure their network and data center are optimized and resilient. Our security solutions are also used by major organizations to train their staff on the new generation of “cyber warfare and mitigation techniques” to recognize and defend against massive cyber-attacks.
During the year ended December 31, 2016, we received orders from approximately 2,600 new and existing end customers. Based on product shipments for the year ended December 31, 2016, our significant customers by category included:
 
Leading NEMs such as Cisco Systems, Juniper Networks, and Alcatel-Lucent;
Voice, broadband and/or wireless service providers such as Verizon, AT&T, and NTT;
Enterprises such as Oracle, Kaiser Permanente, and Wells Fargo; and
Government contractors, departments and agencies such as Raytheon, Defense Information Systems Agency, and the U.S. Army. 
We do not have long-term or volume purchase contracts that commit our customers to future product purchases, and as a result our customers may reduce or discontinue purchasing from us at any time.
 
Backlog
 
Backlog consists of purchase orders that we have received and accepted for products and services. Our backlog includes orders for products scheduled to be shipped and for services scheduled to be delivered to our resellers and customers within 90 days. Purchase orders for products are generally shipped within 90 days after acceptance, unless a later shipment date is requested by the reseller or customer. Services are performed in accordance with our contractual commitments to our customers. Our backlog at December 31, 2016 was approximately $15.1 million, compared with a backlog of approximately $16.9 million at December 31, 2015.
 
We typically ship our products within the quarter in which the related product orders are received. A substantial portion of our orders is received during the last month of the quarter, and a significant percentage of those orders is received during the last week of that month.
 
Because our product shipments in any quarter may be affected by our customers’ rescheduling of product delivery dates and changes in and cancellations of orders by our customers (which changes and cancellations can usually be effected prior to shipment without significant penalty), and because a significant portion of our revenue in a quarter is attributable to product orders shipped in the same quarter during which they are received, we do not believe that the amount of our backlog, as of any particular date, is necessarily a meaningful indicator of our future business prospects or financial performance.
 

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Although it is generally our practice to ship and bill for products shortly following our acceptance of an order, we from time to time exercise discretion over the timing of certain product shipments, which can increase or decrease the amount of our backlog and affect the timing of revenue recognition for such shipments. In such cases, we may consider a number of factors, including the degree to which we have achieved our business objectives for the quarter, especially with respect to product orders received late in a quarter. We may also consider our manufacturing and operational capacity to fulfill product orders, delivery dates requested by our resellers and customers, our contractual obligations to our resellers and customers, and the creditworthiness of our resellers and customers. Our ability to ship products shortly following our acceptance of an order may also be adversely impacted by the time required to comply with applicable export laws and regulations.
 
Timing of revenue recognition for services may vary depending on the contractual service period or when the services are rendered.

Product Technology
 
The design of our products requires a combination of sophisticated technical competencies, including designs utilizing field programmable gate arrays ("FPGAs"), network processors ("NPs"), packet switching ASICS, embedded systems, high speed electrical and optical serial interfaces, high speed and low latency memory technology, large scale system software, and high speed packet and data processing software. FPGAs are integrated circuits that can be repeatedly reprogrammed to perform different sets of functions as required. NPs are special programmable integrated circuits optimized for networking applications. Many of our systems also require high-speed digital hardware design, software engineering and optical and mechanical engineering. We have built an organization of professional staff with skills in all of these areas. The integration of these technical competencies enables us to design and manufacture test systems which are highly scalable to meet the needs of our customers.
 
Complex Logic Design. Our systems use FPGAs that are programmed by the host computer and therefore can be reconfigured for different applications. Our newest products have high clock frequencies, which are the timing signals that synchronize all components within our system, and logic densities, which are the number of individual switching components, or gates, of more than four million gates per chip. Our customers may obtain updates and enhancements from our website, thereby allowing rapid updates of the system. Almost all of our logic chips are designed in the hardware description language including VHSIC Hardware Description Language and System Verilog, which are unique programming languages tailored to the development of logic chips. These languages enables the easy migration of the hardware design to application specific integrated circuits as volumes warrant. We develop code in a modular fashion for reuse in logic design, which comprises a critical portion of our intellectual property. This reusable technology allows us to reduce the time-to-market for our new and enhanced products.
 
Network Processor Technology. Our patented NP technology enables our products to emulate complex networks and data centers at a very high scale and analyze traffic on live networks in real time in order to take action against security threats or provide the user relevant analytics for network operations departments. The programmability of the NPs allows our customers to remain current with new networking technologies, security threats, and new application types by allowing customers to obtain frequent updates and enhancements from our website.

Application and Threat Intelligence ("ATI") Technology. We invest in security research to characterize the ever changing landscape of valid applications and harmful threats that exist on the Internet. This research enables us to produce a database of threat signatures, harmful IP addresses, and valid application signatures that is used across the product portfolio for network test, network security, and network visibility. This database is used by our test products to emulate threats and valid applications, used by our security products to block known threats, and used by our visibility products for application level visibility to network operations. Our NP technology embeds ATI technology. The security research team is continuously updating the database, and our customers are able to receive these updates via our available ATI subscription service as new threats emerge.
  
Software Technology. We devote substantial engineering resources to the development of software technology for use in our product lines on both physical appliances and as Virtual Editions to run on Virtual Machines using off-the-shelf compute platforms. We have developed software to control our systems, analyze data collected by our systems, process network traffic, and monitor, maintain, and self-test our hardware and field programmable gate array subsystems. A majority of our software technology and expertise is focused on the use of object-oriented development techniques to design software subsystems that can be reused across multiple product lines. These objects are client and server independent allowing for distributed network applications. This software architecture allows all of the software tools developed for our existing products to be utilized in all of our new products with very little modification. Another important component of our software technology is our graphical user interface design. Customer experience with our test and visibility products has enabled us to design a simple yet effective method to display complex configurations in clear and concise graphical user interfaces for intuitive use by engineers.
 

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Products and Services
 
Our product solutions consist of our hardware platforms, such as our chassis, interface cards and appliances, software application tools, and services, including our warranty and maintenance offerings and professional services. Our highly scalable and flexible products enable our customers to configure solutions based on their specific networks and use cases. For example, if our customer wants to analyze the performance of an Ethernet router, the customer could purchase our network test hardware platform, including a chassis and one or more Ethernet interface cards, and our IxNetwork software application.
 
Products
 
Sales of our network test hardware products typically include a chassis and one or more Ethernet interface cards. Our software applications and APIs allow our customers to create and manage integrated, easy-to-use automated test environments. Our hardware platform consists largely of interchangeable interface cards which fit into multi-slot chassis. Our chassis are metal cases that incorporate a computer, a power supply, and a backplane which connects the interface cards to the chassis. The interface cards generate, receive, and analyze a wide variety of traffic types at multiple network layers.
 
Our primary 12-slot network test chassis (e.g., XGS12) provides a high-density, highly-flexible test platform. Operating in conjunction with our software applications, our chassis provide the foundation for a complete, high-performance test environment. A wide array of interface cards is available for our primary chassis. The 12-slot Ixia chassis supports up to 192 1 Gigabit Ethernet (GE) ports, 192-10GE ports, 384-25GE ports, 120-40GE ports, 40-50GE ports, and 96-100GE ports. These interface cards provide the network interfaces and distributed processing resources needed for executing a broad range of data, signaling, voice, video, and application testing for layers 1-7 of the network stack. Each chassis supports an integrated test controller that manages all system and testing resources. Resource ownership down to a per-port level, coupled with hot-swappable interface modules, ensures a highly-flexible, multi-user testing environment. Backward compatibility is maintained with key existing Ixia interface cards and test applications to provide seamless migration from and integration with existing Ixia test installations.

We offer a number of interface cards that operate at speeds of up to 400 gigabit per second. Each one of our interface cards contains multiple independent traffic generation and analysis ports that operate at line rate. Each port on most interface cards has a unique transmit stream engine that is used to generate packets of information and a real-time receive analysis engine capable of analyzing the packets as they are received. The transmit stream engine generates millions of data packets or continuous test sequences at line rate that are transmitted through the network and received by the analysis engine. When data packets have been generated, the analysis engine then measures throughput, latency, loss, and jitter, and checks data integrity and packet sequence on a packet-by-packet basis. In addition, our systems measure the effectiveness of networks in prioritizing different types of traffic. Most of our current generation interface cards also include a microprocessor per port to generate and analyze sophisticated routing protocols, such as BGP and MPLS, as well as application traffic such as TCP/IP, HTTP, and SSL. Certain of our application and security load modules can recreate more than 35,000 attacks, including exploits, malware, denial of service (DoS), and mobile malware. These load modules provide application and threat assessment solutions at Internet-scale, and create massive-scale, high fidelity simulation and testing conditions for battle-testing infrastructures, devices, applications, and people.
 
We offer a comprehensive suite of software applications in conjunction with our network test hardware platforms to address specific technologies. These applications measure and analyze the performance, functionality, interoperability, service quality, and conformance of networks, network equipment and applications that run on these networks. These applications enable network equipment manufacturers, service providers, enterprises and governments to evaluate the performance of their equipment and networks during the design, manufacture and pre-deployment stages, as well as after the equipment is deployed in a network. Our technology-specific application test suites are targeted at a wide range of popular application and security performance and conformance requirements across various protocols, interfaces and types of devices. These include automated and targeted delivery, functionality and performance test for technologies and devices including storage, video, voice, intelligent networks, specific applications, routing, switching, Wi-Fi, broadband, wireless, software defined networks, and virtual networks and functions. All of these technologies are used in variety of situations including (but not limited to) R&D test environment, change management, and scenario planning for production networks.
 
We also develop virtual versions of our core network test products designed to test virtual assets and environments using trusted technologies that have been used for testing hardware-based network equipment for a decade. These products help accelerate the development of our customer’s virtual products and allow enterprises, service providers, and governments to quantify its benefits by using our trusted technologies.
 

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Our network visibility products improve the way our enterprise, service provider, and government customers manage their data centers, save valuable IT time, and maximize return on IT investments. Ixia network visibility solutions revolutionize the way customers monitor their network - enabling complete network visibility into physical and virtual networks, and optimizes monitoring tool performance whether out-of-band or in-line. Our network visibility platform ranges from network access test access point ("TAPs"), to solution-specific appliances for smaller implementations to a 100GE, high-density NEBS3 compliant chassis designed for large and complex data centers. These products help our customers monitor their rapidly growing number of 1GE, 10GE, 40GE, and 100GE ports with existing monitoring tools. Sales of our network visibility products typically consist of an integrated, purpose-built hardware appliance with proprietary software which includes patented filtering and content handling technology that ensures each monitoring tool gets exactly the right data needed for analysis, all powered by the easy to use, drag-and-drop management system.  We also offer advanced processing modules that easily slide into certain of our appliances for additional advanced intelligence and functionality including de-duplication, packet slicing, and time-stamping. Our latest advanced feature module is the Application and Threat Intelligence Processor ("ATIP") that delivers real-time application data to monitoring tools to allow customers to make better decisions with respect to identifying unknown network applications, and threats to network infrastructure from suspicious applications and locations.
 
In addition to our core network visibility functionality, we also have a number of available features that give customers greater flexibility and intelligence for their network visibility implementations. For example, we believe that an effective visibility architecture should do more than just see the traffic--it also needs to help identify where you are vulnerable, reduce your attack surface, and provide intelligence. Our Hawkeye solution quickly and effectively validates network performance, isolates problems, and proactively detects issues by running scheduled verification tests on any site using wireline or wireless connections. Using a combination of hardware and software agents called Performance Endpoints, Hawkeye simulates application traffic and sends key performance metrics to a central console for fast action. Our ThreatARMOR product expands the security capabilities of our visibility architecture by decreasing the attack surface of the network and reducing the load on security devices and resources. Customers can deploy our network visibility solutions not only out-of-band in physical networks, but in-line for security applications and in virtual environments with our in-line technologies and Phantom virtual TAP software application, respectively. Another example is the GTP Session Controller that intelligently manages high-scale, session-aware, mobility load balancing deployments. In addition, our ControlTower solution allows customers to deploy, manage, and maintain distributed implementations with ease.

Services
 
Our service revenues primarily consist of our technical support, warranty, and software maintenance services. We also offer training and professional services.
 
We offer technical support, warranty, and software maintenance services with the sale of our hardware and software products. Many of our products include up to one year of these services with the initial product purchase. Our customers may choose to extend the services for annual or multi-year periods. Our technical support services are delivered by our global team of technically knowledgeable and responsive customer service and support staff, and include assistance with the set-up, configuration, and operation of Ixia products. Our warranty and software maintenance services include the repair or replacement of defective product, bug fixes, and unspecified when and if available software upgrades.
 
Our technical support and software maintenance services also include our ATI subscription service for our application and security platforms, which provides a comprehensive suite of application protocols, threat intelligence, software updates, and responsive technical support. The ATI subscription service provides full access to the latest security attacks, global malicious site and geolocation data, and application updates for use in real-world test, visibility, security, and assessment scenarios. Our customers may choose to purchase the ATI subscription service for annual or multi-year periods.
 
Products in Development
 
We continue to develop our IP testing capabilities, and we intend to remain focused on improving our position in performance, security, monitoring, functional, interoperability, service quality, and conformance in several technology areas. Our product development teams have deep networking, applications, and security expertise and understand the incredibly diverse set of problems our customers need to solve today as well as new challenges customers will face as network technologies evolve. Our teams constantly work to improve current solutions as well as push forward into new areas relevant to the markets in which we compete. These technologies include a host of networking, application, and security technologies and protocols ranging from faster speeds like 400 GE and beyond to software defined networking and network functions virtualization, to old and new protocols that allow the data to traverse those environments.
 

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We may delay or cancel the introduction of new products to the market as a result of a number of factors, some of which are beyond our control. For more information regarding these factors, see “Business – Research and Development” and “Risk Factors – If we are unable to successfully develop or introduce new products to keep pace with the rapid technological changes that characterize our market, our results of operations will be significantly harmed.”
 
Competition
 
The market for providing network test and monitoring systems is highly competitive, and we expect this competition to continue in the future. We currently compete with network test and monitoring solution vendors such as Spirent Communications, Gigamon, and NetScout. We also compete either directly or indirectly with large Ethernet switch vendors and network management, analysis, compliance, and test tool vendors that offer point solutions that address a subset of the issues that we solve. Additionally, some of our significant customers have developed, or may develop, in-house products for their own use or for sale to others.
 
We believe that the principal competitive factors in our market include:

Breadth of product offerings and features on a single test or monitoring platform;
Timeliness of new product introductions;
Product quality, reliability and performance;
Price and overall cost of product ownership;
Ease of installation, integration and use;
Customer service and technical support; and
Company reputation and size.
We believe that we compete favorably in the key competitive factors that impact our markets. We intend to remain competitive through ongoing research and development efforts that enhance existing systems and result in the development of new products and features. We will also seek to expand our market presence through marketing and sales efforts.
 
We expect to continue to experience significant competition from our existing competitors, and from companies that may enter our existing or future markets. And, as we move into new market segments within the broader network test and monitoring arena, we will be challenged by new competitors. These companies may develop similar or substitute solutions that may be more cost-effective or provide better performance or functionality than our systems. Also, as we broaden our product offerings, we may move into new markets in which we will have to compete against companies already established in those markets. Some of our existing and potential competitors have longer operating histories, substantially greater financial, product development, marketing, service, support, technical and other resources, significantly greater name recognition, and a larger installed base of customers than we do. In addition, many of our competitors have well established relationships with our current and potential customers and have extensive knowledge of our industry. It is possible that new competitors or alliances among competitors will emerge and rapidly acquire market share. Moreover, our competitors may consolidate with each other, or with other companies, giving them even greater capabilities with which to compete against us.
 
To be successful, we must continue to respond promptly and effectively to the challenges of changing customer requirements, technological advances and competitors’ innovations. Accordingly, we cannot predict what our relative competitive position will be as the market evolves for network test and monitoring solutions.
 
Sales, Marketing and Technical Support
 
Sales. We use our global direct sales force to market and sell our products and solutions. In addition, we use distributors, value added resellers, system integrators, and other partners to complement our direct sales and marketing efforts for certain vertical and geographical markets. We depend on many of our distributors, resellers, and other partners to generate sales opportunities and manage the sales process. Our direct sales force maintains close contact with our customers and supports our distributors, resellers, and other partners. Another key component of our go-to-market strategy for certain products is strategic relationships with technical partners. These technical partners consist of network monitoring and management companies, including Computer Associates, Riverbed, Dynatrace, FireEye, Cisco, Imperva, Anritsu, and others, to complement their monitoring or security solutions. We work with technical partners in two main ways: (i) through customer referrals and recommendations and (ii) through automation integration/interoperability that provides a differentiated solution for our customers.

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Marketing. We have a number of ongoing programs to support the sale and distribution of our products and solutions and to inform existing and potential customers, partners and distributors about the capabilities and benefits of our systems. Our marketing efforts also include promoting our business by:

Sponsoring technical seminars and webinars that highlight our solutions;
Participating in industry trade shows and technical conferences;
Advertising in digital media publications and physical locations;
Writing and distribution of various forms of collateral, including brochures, white papers, solution briefs, and application notes;
Demonstrating the performance and scalability of our products at our executive briefing center proof-of-concept labs;
Communicating through our corporate website and various social media outlets, such as LinkedIn, Twitter, and our corporate blog; and
Writing articles for online and print trade journals.
Ixia Technical Support. Our global team of technical support and field engineers have a high level of networking and product expertise. We enable our customers to make the best use of our products to accomplish their goals, help answer questions and resolve issues they encounter, and minimize downtime. Customers can reach our technical support team by phone, email, or website. We have regional support offices in the United States, Europe, and multiple countries in Asia.
 
Support services our team provides for our customers include:

Assist new customers with product installation and licensing;
Provide configuration assistance and expert advice on best practices;
Investigate user issues and work to quickly resolve them;
Quickly respond to reported hardware failures and repair or replace as needed; and
Provide access to our self-service portal where customers can report new cases and access our extensive knowledge base articles.
We also offer premium support options for customers who require even higher levels of service. We have invested in developing our case management system, support phone system, and other tools to increase our global support capability thereby allowing us to respond quickly, route customers to the best support engineer, and effectively manage their requests to resolution.
 
Manufacturing and Supply Operations
 
Our manufacturing and supply operations consist primarily of new product introduction, test and manufacturing, test engineering, supply chain management, procurement, quality assurance, order management, final assembly, configuration testing, fulfillment, and logistics. We outsource the manufacture, assembly, and testing of printed circuit board assemblies, certain interface cards, and certain chassis to third party contract manufacturers and assembly companies, the most significant of which are located in Malaysia and Mexico. This manufacturing process enables us to operate without dedicating substantial space and personnel solely to manufacturing operations. As a result, we can leverage a significant portion of the working capital and capital expenditures that may be required for other operating needs.
 
We are dependent upon sole or limited source suppliers for some key components and parts used in our systems, including among others, field programmable gate arrays, memory devices, processors, oscillators, and optical modules. We and our contract manufacturers forecast consumption and purchase components through purchase orders. We have no guaranteed or long-term supply arrangements with our respective suppliers. In addition, the availability of many components is dependent in part on our ability and the ability of our contract manufacturers and assembly companies to provide suppliers with accurate forecasts of future requirements, as well as the global commodity market. Any extended interruption in the supply of any of the key components currently obtained from a sole or limited source, or delay in transitioning to a replacement supplier’s product or replacement component into our systems, could disrupt our operations and significantly harm our business in any given period.

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Lead times for materials and components ordered by us and by our contract manufacturers vary and depend on factors such as the specific supplier, purchase terms, global allocations, and demand for a component at a given time. We and our contract manufacturers acquire materials, complete standard subassemblies, and assemble fully-configured systems based on sales forecasts and historical purchasing patterns. If orders do not match forecasts or substantially deviate from historical patterns, we and our contract manufacturers and assembly companies may have excess or inadequate supply of materials and components.
 
Research and Development
 
We believe that research and development is critical to our business. Our development efforts include anticipating and addressing the network performance, security, and monitoring needs of network equipment manufacturer, service provider, enterprise and government customers, and focusing on emerging high growth network technologies.
 
Our future success depends on our ability to continue to enhance our existing products and to develop new products that address the needs of our customers. We closely monitor changing customer needs by communicating and working directly with our customers, partners, and distributors. We also receive input from our active participation in industry groups responsible for establishing technical standards.
 
Development schedules for technology products are inherently difficult to predict, and there can be no assurance that we will introduce any proposed new products in a timely fashion. Also, we cannot be certain that our product development efforts will result in commercially successful products or that our products will not contain software errors or other performance problems or be rendered obsolete by changing technology or new product announcements by other companies.
 
We plan to continue making significant investments in research and development, including investments in certain product initiatives. Our research and development expenses were $102.5 million in 2016, $113.4 million in 2015, and $115.2 million in 2014. These expenses included stock-based compensation of $6.5 million in 2016, $6.6 million in 2015, and $6.8 million in 2014.

Intellectual Property and Proprietary Rights
 
Our success and ability to compete are dependent in part upon our ability to establish, protect, and maintain our proprietary rights to our intellectual property. We currently rely on a combination of patent, trademark, trade secret, and copyright laws, and restrictions on disclosure and use, to establish, protect, and maintain our intellectual property rights. We have patent applications and existing patents in the United States, the European Union, and other jurisdictions. We cannot be certain that these applications will result in the issuance of any patents, or that any such patents, if they are issued, or our existing patents, will be upheld. We also cannot be certain that such patents, if issued, or our existing patents, will be effective in protecting our proprietary technology. We have registered the Ixia name, the Ixia logo and certain other trademarks in the United States, the European Union, and other jurisdictions, and have filed for registration of additional trademarks.
  
We generally enter into confidentiality agreements with our officers, employees, consultants, and vendors, and in many instances, our customers. We also generally limit access to and distribution of our source code and further limit the disclosure and use of other proprietary information. However, these measures provide only limited protection of our intellectual property rights. In addition, we may not have signed agreements containing adequate protective provisions in every case, and the contractual provisions that are in place may not provide us with adequate protection in all circumstances.
 
Despite our efforts to protect our intellectual property rights, unauthorized parties may attempt to copy or otherwise obtain or use technology or information such as trade secrets that we regard as confidential and proprietary. We cannot be certain that the steps taken by us to protect our intellectual property rights will be adequate to prevent misappropriation of our proprietary technology or that our competitors will not independently develop technologies that are similar or superior to our proprietary technology. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the United States. Any infringement or misappropriation of our intellectual property rights could result in significant litigation costs, and any failure to adequately protect our intellectual property rights could result in our competitors’ offering similar products, potentially resulting in loss of competitive advantage, loss of market share, and decreased revenues. Litigation may be necessary to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others. Litigation of this type could result in substantial costs and diversion of resources and could significantly harm our business.
 

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The telecommunication and data communications industries are characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement. From time to time, third parties may assert patent, copyright, trademark, and other intellectual property rights to technologies or related standards that are important to our business. We generally have not conducted searches to determine whether the technologies that we use infringe upon or misappropriate intellectual property rights held by third parties. Any claims asserting that any of our products or services infringe or misappropriate proprietary rights of third parties, if determined adversely to us, could significantly harm our business. See Part I, Item 1A of this Form 10-K for additional information regarding the risks associated with patents and other intellectual property.
 
Employees
 
As of December 31, 2016, we had 1,817 full time employees, 881 of whom were located in the U.S. We also from time to time hire temporary and part-time employees and independent contractors. Our future performance depends, to a significant degree, on our continued ability to attract and retain highly skilled and qualified technical, sales and marketing, and senior management personnel. Our employees are not represented by any labor unions, and we consider our relations with our employees to be good.
 
Available Information
 
Our website address is www.ixiacom.com. Information on our website does not constitute part of this report. We make available free of charge through a link provided at such website our Forms 10-K, 10-Q, and 8-K as well as any amendments thereto. Such reports are available as soon as reasonably practicable after they are filed with the Securities and Exchange Commission (the "SEC").
 
The public may read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website that contains reports, proxy and information statements, and other information regarding the Company that we file electronically with the SEC at www.sec.gov.

Item 1A. Risk Factors
 
The statements that are not historical facts contained in this Form 10-K are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements reflect the current belief, expectations, or intent of our management and are subject to and involve certain risks and uncertainties. Many of these risks and uncertainties are outside of our control and are difficult for us to forecast or mitigate. In addition to the risks described elsewhere in this Form 10-K and in certain of our other SEC filings, the following important factors, among others, could cause our actual results to differ materially from those expressed or implied by us in any forward-looking statements contained herein or made elsewhere by or on behalf of us.

Risks Relating to our Proposed Acquisition by Keysight Technologies, Inc.

Our business may be adversely affected by uncertainties while our proposed acquisition by Keysight Technologies, Inc. is pending.

As disclosed in this Form 10-K, including in Part II, Item 7 "Management’s Discussion and Analysis of Financial Condition and Results of Operations - Business Overview," we have entered into an Agreement and Plan of Merger, dated as of January 30, 2017 (the "Merger Agreement"), with Keysight Technologies, Inc. (“Keysight”) and, by a joinder dated February 2, 2017, Keysight Acquisition, Inc., a wholly owned subsidiary of Keysight (“Merger Sub”). Pursuant to the Merger Agreement, subject to the approval of the Merger Agreement and the principal terms of the Merger Agreement by our shareholders and the satisfaction of other conditions to the completion of the merger specified in the Merger Agreement, Merger Sub will be merged with and into Ixia (the "Merger"), with Ixia surviving the merger as a wholly owned subsidiary of Keysight.

Uncertainty about the effect of the Merger on our employees, customers, resellers, and suppliers may have an adverse effect on our business and operations that may be material to us. Our employees may experience uncertainty about their roles following the Merger, and there can be no assurance we will be able to retain or attract key talent, including senior leaders, to the same extent that we have previously been able to retain and attract such talent. Any loss of employees, inability to attract employees, or distraction to employees resulting from the pending Merger could have a material adverse effect on our business and operations. In addition, we have diverted, and will continue to divert, significant management resources towards the completion of the Merger, which could materially and adversely affect our business and operations.


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Our suppliers and customers may also experience uncertainty associated with the Merger, including with respect to possible changes in our future business and business relationships. Any such uncertainty may cause suppliers or customers to refrain from or change the way they engage in business with us, which could result in a material and adverse effect on our business, operations, and financial position.

Our business may be adversely impacted by the terms and conditions of the Merger Agreement.

Certain covenants in the Merger Agreement limit our ability, until the Merger becomes effective or the Merger Agreement is terminated in accordance with the terms thereof, to make significant changes to our business or pursue otherwise attractive business opportunities without the consent of Keysight. Such restrictions can affect our ability to enter into contracts, acquire or dispose of assets, incur indebtedness, or make capital expenditures. These restrictions may prevent us from taking actions with respect to our business that we may consider advantageous and result in our inability to respond effectively to competitive pressures and industry developments, and could adversely affect and harm our business and operations.
 
Litigation against us and/or our directors and officers challenging the Merger may delay or prevent the completion of the Merger.

On February 23, 2017, a putative class action lawsuit was commenced against the Company, its directors, Keysight, and Merger Sub in the U.S. District Court for the Central District of California. The complaint alleges, among other things, that the Company and its directors violated Section 14(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Rule 14a-9 promulgated thereunder, and that the directors, Keysight, and Merger Sub violated Section 20(a) of the Exchange Act. The complaint seeks relief that includes, among other things, an order enjoining the proposed Merger or, if the Merger is consummated, an order rescinding the Merger. For additional information concerning this lawsuit, see Note 15 to the consolidated financial statements included in this Form 10-K.

Ixia and/or its directors and officers may potentially be named as defendants in additional class action lawsuits filed on behalf of shareholders challenging the Merger and potentially seeking to enjoin consummation of the Merger on the terms and conditions set forth in the Merger Agreement.

There can be no assurance that the Company and the other defendants in the existing class action lawsuit and any additional class action lawsuits will be successful in their defenses. An unfavorable outcome in any such lawsuit could prevent or delay the consummation of the Merger and, regardless of the outcome, may result in substantial costs to the Company and may adversely affect our business and operations.

Any failure to complete the Merger could adversely affect our future business, results of operations, financial condition, and stock price.

Completion of the Merger is subject to the satisfaction or waiver of specified closing conditions that are set forth in the Merger Agreement, including conditions that are beyond our control. There is no assurance that the Merger will occur. If the Merger is not completed, our future business may be adversely affected and would be subject to a number of material risks, including the following:

we will have paid significant transaction costs and, in certain circumstances, a termination fee to Keysight of $59.7 million;
the attention of management will have been diverted to the Merger rather than to operations and the pursuit of other opportunities;
the potential loss of key personnel as personnel may experience uncertainty about their future with the combined company, and our potential inability to attract talent while the Merger is pending;
we will have been subject to certain restrictions on the conduct of our business, which may have prevented us from making certain acquisitions or dispositions or pursuing other business opportunities; and
the trading price of our common stock may decline to the extent that the market price reflects a market assumption that the Merger will be completed.

Failure to complete the Merger may also result in negative publicity, litigation against the Company and/or its directors and officers, and a negative impression of the Company in the investment community. The occurrence of these events, individually or in the aggregate, could have a material adverse effect on our business, results of operations, financial condition, and stock price.


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Risks Relating to our Business

Our business may be adversely affected by unfavorable general economic and market conditions.
 
Our business is subject to the effects of general global and regional economic conditions, including those in the United States and, in particular, market conditions in the communications and networking industries. In the past, our operating results have been adversely affected as a result of unfavorable economic conditions and reduced or deferred capital spending in the United States, Europe, Asia, and other parts of the world.
 
Global and regional economic conditions continue to be volatile and uncertain. If global and/or regional economic and market conditions, or economic conditions in key markets, remain uncertain or deteriorate further, we may experience material adverse impacts on our business. Unfavorable and/or uncertain economic and market conditions may result in lower capital spending by our customers on network test and monitoring solutions, and therefore demand for our products could decline, adversely impacting our revenue and our ability to accurately forecast the future demand and revenue trends for our products and services. Challenging economic and market conditions may also impair the ability of our customers to pay for the products and services they have purchased.
 
In addition, prolonged unfavorable economic conditions and market turbulence may also negatively impact our contract manufacturers’ and suppliers’ capability to timely supply and manufacture our products, thereby impairing our ability to meet our contractual obligations to our customers. These effects, as well as any other currently unforeseeable effects, are difficult to forecast and mitigate. As a result, we may experience material adverse impacts on our business, operating results, financial condition, and stock price.
 
Acquisitions that we may undertake could be difficult to integrate, disrupt our business, dilute shareholder value, and significantly harm our operating results.
 
Acquisitions are inherently risky and no assurance can be given that any future acquisitions will be successful or will not materially and adversely affect our business, operating results, or financial condition. We expect to continue to review opportunities to acquire other businesses or technologies that would add to our existing product line, complement and enhance our current products, expand the breadth of our markets, enhance our technical capabilities, or otherwise offer growth opportunities. If we make any further acquisitions, we could issue stock that would dilute existing shareholders’ percentage ownership, and we could incur substantial debt or assume substantial liabilities. Acquisitions involve numerous risks, including the following:

problems or delays in assimilating or transitioning to Ixia the acquired operations, systems, processes, controls, technologies, products, or personnel;
loss of acquired customer accounts;
unanticipated costs associated with the acquisition;
our failure to identify in the due diligence process significant issues with product quality or development and liabilities related to operational issues, intellectual property infringement or tax or other regulatory matters;
multiple and overlapping product lines as a result of our acquisitions that are offered, priced and supported differently, which could cause customer confusion and delays in orders;
higher than anticipated costs in continuing support and development of acquired products;
diversion of management’s attention from our core business and the challenges of managing larger and more widespread operations resulting from acquisitions;
adverse effects on existing business relationships of Ixia or the acquired business with suppliers, licensors, contract manufacturers, customers, resellers, and industry experts;
significant impairment, exit and/or restructuring charges if the products or technologies acquired in an acquisition do not meet our sales expectations or are unsuccessful;
insufficient revenues to offset increased expenses associated with acquisitions;
risks associated with entering markets in which we have no or limited prior experience; and
potential loss of the acquired organization’s or our own key employees.


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Mergers and acquisitions are inherently risky and subject to many factors outside of our control, and we cannot be certain that we would be successful in overcoming problems in connection with our past or future acquisitions. Our inability to do so could significantly harm our business, revenues and results of operations. See Note 2 to the consolidated financial statements included in this Form 10-K.

Competition in our market could significantly harm our results of operations.
 
The market for our products is highly competitive. We currently compete with network test and monitoring solution vendors such as Spirent Communications and Gigamon. We also compete either directly or indirectly with large Ethernet switch vendors and network management, analysis, compliance, and test tool vendors that offer point solutions that address a subset of the issues that we solve. Additionally, some of our significant customers have developed, or may develop, in-house products for their own use or for sale to others. For example, Cisco Systems, our largest customer, has used internally developed test products for a number of years. Although Cisco Systems has in the past accounted for a significant portion of our revenues, we cannot be certain that it will continue to do so.
 
As we broaden our product offerings, we may move into new markets and face additional competition. Moreover, our competitors may have more experience operating in these new markets and be better established with the customers in these new markets.
 
Some of our competitors and potential competitors have greater brand name recognition and greater financial, technical, marketing, sales, and distribution capabilities than we do. Moreover, our competitors may consolidate with each other, or with other companies, giving them an even greater capability to compete against us.
 
Increased competition in the network test and monitoring markets could result in increased pressure on us to reduce prices and could result in a reduction in our revenues and/or a decrease in our profit margins, each of which could significantly harm our results of operations. In addition, increased competition could prevent us from increasing our market share, or cause us to lose our existing market share, either of which would harm our revenues and profitability.
 
We cannot predict whether our current or future competitors will develop or market technologies and products that offer higher performance or more features, or that are more cost-effective than our current or future products. To remain competitive, we must continue to develop cost-effective products and product enhancements which offer higher performance and more functionality. Our failure to do so will harm our revenues and results of operations.

If we are unable to successfully develop or introduce new products to keep pace with the rapid technological changes that characterize our market, our revenues and results of operations will be significantly harmed.
 
The market for our products is characterized by:
rapid technological change such as the recent advancements of IP-based networks and wireless technologies;
frequent new product introductions such as higher speed and more complex routers;
evolving industry standards;
changing customer needs such as the increase in advanced IP services agreed to between service providers and their customers;
short product life cycles as a result of rapid changes in our customers’ products; and
new paradigms like virtualization, software defined networks, and cloud computing.
Our performance will depend on our successful development and introductions, and on market acceptance, of new and enhanced products that address new technologies and changes in customer requirements. If we experience any delay in the development or introduction of new products or enhancements to our existing products, our revenues and operating results may suffer. For instance, undetected software or hardware errors, which frequently occur when new products are first introduced, could result in the delay or loss of market acceptance of our products and the loss of credibility with our customers. In addition, if we are not able to develop or license, or acquire from third parties, the underlying core technologies necessary to create new products and enhancements, our existing products are likely to become technologically obsolete over time, and our revenues and operating results will suffer. If the rate of development of new technologies and transmission protocols by our customers is delayed, the growth of the market for our products, and therefore our revenues and operating results, may be harmed.

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Our ability to successfully introduce new products in a timely fashion will depend on multiple factors, including our ability to:
anticipate technological changes and industry trends;
properly identify customer needs;
innovate, develop and license or acquire new technologies and applications;
hire and retain necessary technical personnel;
successfully commercialize new technologies in a timely manner;
timely obtain key components for the manufacture of new products;
manufacture and deliver our products in sufficient volumes and on time;
price our products competitively;
provide high quality, timely technical support; and
differentiate our offerings from our competitors’ offerings.
The development of new, technologically advanced products is a complex and uncertain process requiring high levels of innovation and highly skilled engineering and development personnel, as well as the accurate anticipation of technology and market trends. We cannot be certain that we will be able to identify, develop, manufacture, market, or support new or enhanced products successfully, if at all, or on a timely or cost-effective basis. Further, we cannot be certain that any new products will gain market acceptance or that we will be able to respond effectively to technological changes, emerging industry standards or product announcements by our competitors. If we fail to respond to technological changes and the needs of our markets, our revenues, results of operations and competitive position will suffer.
 
We depend on sales of a narrow range of products and therefore if the markets for those products contract or do not grow and customers do not purchase our products, our revenues and results of operations would be significantly harmed.
 
Our business and products are concentrated in the markets for systems that analyze and measure the performance of wired and wireless IP-based networks, and systems that provide network visibility into physical and virtual networks and optimize monitoring tool performance. These markets continue to evolve, and there is uncertainty regarding the future size and scope of these markets. If these markets contract, fail to grow, or grow more slowly than we expect, our revenues and results of operations would be significantly harmed. Our performance will depend on increased sales of our existing systems into our markets and the successful development, introduction and market acceptance of new and enhanced products in those markets. We cannot be certain that we will be successful in increasing these sales or in developing and introducing new products. Our failure to do so would significantly harm our revenues and results of operations.
 
Because we depend on a limited number of customers and on a limited customer base for a significant portion of our revenues, any cancellation, reduction, or delay in purchases by one or more of these customers, and any failure by us to maintain, expand, and diversify our customer base, could significantly harm our revenues and results of operations.
 
Historically, a limited number of customers has accounted for a significant portion of our total revenues. We expect that some customer concentration will continue for the foreseeable future and that our operating results will continue to depend to a significant extent upon revenues from a limited number of customers. Our dependence on large orders from a limited number of customers makes our relationships with these customers critical to the success of our business. We cannot be certain that we will be able to retain our largest customers, that we will be able to increase sales to our other existing customers, or that we will be able to attract additional customers. From time to time, we have experienced delays and reductions in orders from some of our major customers. In addition, our customers have sought price reductions or other concessions from us and will likely continue to do so. We typically do not have long-term or volume purchase contracts with our customers, and our customers can stop purchasing our products at any time without penalty, and they are free to purchase products from our competitors. The loss of one or more of our largest customers, any reduction or delay in sales to one of these customers, our inability to successfully develop and maintain relationships with existing and new large customers, or requirements that we make price reductions or other concessions, could significantly harm our revenues and results of operations.


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Historically, a large percentage of our total revenues have been generated from sales to network equipment manufacturers. Our growth depends, in part, on our ability to diversify our customer base by increasing sales to service provider, enterprise, and government customers. To effectively compete for the business of these customers, we must develop new products and enhancements to existing products and expand our direct and indirect sales, marketing, and customer service capabilities, which will result in increases in operating costs. If we cannot offset these increases in costs with an increase in our revenues, our operating results may be adversely affected. Some of our existing and potential competitors have existing relationships with many service providers, enterprise, and government customers. We cannot be certain that we will be successful in increasing our sales presence in these customer markets. Any failure by us to diversify our customer base and to increase sales in these markets would adversely affect our growth.
 
If we are unable to expand and maintain our sales and distribution channels or are unable to successfully manage our expanded sales organization, our revenues and results of operations will be harmed.
 
Historically, we have relied primarily on a direct sales organization, supported by distributors, resellers and other partners, to sell our products. We may not be able to successfully expand our sales and distribution channels, and the cost of any expansion may exceed the revenues that we generate as a result of the expansion. To the extent that we are successful in expanding our sales and distribution channels, we cannot be certain that we will be able to compete successfully against the significantly larger and better-funded sales and marketing operations of many of our current or potential competitors. In some cases, we may grant exclusive rights to certain distributors to market our products in their specified territories. Our distributors may not market our products effectively or devote the resources necessary to provide us with effective sales, marketing, and technical support. In the past, we have had distributors who entered bankruptcy or who performed poorly and were therefore terminated as distributors of our products. Moreover, if we terminate a distribution relationship for performance-related or other reasons, we may be subject to wrongful termination claims which may result in material litigation and could adversely impact our profitability. Our inability to effectively manage our current and any expansion of our sales organization, or to maintain existing or establish new relationships with successful distributors and partners, would harm our business, revenues, and results of operations.

Our large customers have substantial negotiating leverage, which may require that we agree to terms and conditions that may have an adverse effect on our business.
 
Large network equipment manufacturers and service providers have substantial purchasing power and leverage in negotiating contractual arrangements with us. These customers may require us to develop additional features, reduce our prices or grant other concessions. As we seek to sell more products to these large customers, we may be required to agree to such terms and conditions. These terms may affect the amounts and timing of revenue recognition and our profit margins, which may adversely affect our profitability and financial condition in the affected periods.

We cannot assure investors that we will not have future material weaknesses.
 
Our management identified, and we disclosed in our 2015 Form 10-K, a control deficiency in our financial reporting process that, as of December 31, 2015, constituted a material weakness in our internal control over financial reporting. This material weakness, which related to revenue recognition, also existed at December 31, 2014. In 2016, we remediated this material weakness. There can be no assurance, however, that we will be able to prevent this previous material weakness from re-occurring in the future.
 
Further, there can be no assurance that we will not suffer from other material weaknesses in the future. Our internal control over financial reporting was ineffective as of December 31, 2015 and 2014. If we fail to maintain effective internal controls over financial reporting in the future, such failure could result in a material misstatement of our annual or quarterly financial statements that would not be prevented or detected on a timely basis and which could cause investors and other users of our financial statements to lose confidence in our financial statements, limit our ability to raise capital, and have a negative effect on the trading price of our common stock. Additionally, failing to maintain effective internal controls over financial reporting may also negatively impact our operating results and financial condition, impair our ability to timely file our periodic and other reports with the SEC, require us to restate our previously filed financial statements to correct errors in them, adversely affect shareholders' confidence, subject us to additional litigation and regulatory actions, consume a significant amount of management's time, and cause us to incur substantial additional costs in future periods relating to the implementation of remedial measures.


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Our quarterly and annual operating results have historically fluctuated or may fluctuate significantly in the future as a result of new product introductions, changes in judgments or estimates, and/or other factors, which could cause our stock price to decline significantly.
 
Our quarterly and annual operating results are difficult to predict and have fluctuated, and may continue to fluctuate, significantly due to a variety of factors, many of which are outside of our control. Some of the factors that could cause our quarterly and annual operating results to fluctuate include the other risks discussed in this “Risk Factors” section. We may experience a shortfall or delay in generating or recognizing revenues for a number of reasons. Orders on hand at the beginning of a quarter and orders generated in a quarter do not always result in the shipment of products and the recognition of revenues for that quarter. For example, the deferral or cancellation of, or failure to ship, an order by the end of the quarter in which it was made, or our inability to recognize revenue for products shipped in a quarter in which they occurred due to nonstandard terms in our sales arrangements, may adversely affect our operating results for that quarter. Our agreements with customers typically provide that the customer may delay scheduled delivery dates and cancel orders prior to shipment without significant penalty. Because we incur operating expenses based on anticipated revenues and a high percentage of our expenses are fixed in the short term, any delay in generating or recognizing forecasted revenues could significantly harm our results of operations.
 
In addition, a significant portion of our orders generated and product shipments in each quarter occurs near the end of the quarter. Since individual orders can represent a meaningful percentage of our revenues and net income in any quarter, the deferral or cancellation of, or failure to ship, an order in a quarter in which it was made, may result in a revenue and net income shortfall, which could cause us to fail to meet securities analysts’ expectations, our business plan projections, or financial guidance provided by us. Revenue and net income shortfall of this type, in any given quarter, may also increase the amount of our revenues and net income in future periods.
 
Our operating results may also vary as a result of the timing of new product releases. The introduction of a new product in any quarter may cause an increase in revenues in that quarter that may not be sustainable in subsequent quarters. Conversely, a delay in introducing a new product in a quarter may result in a decrease in revenues in that quarter and lost sales. Our results may also fluctuate based on the mix of products and services (i.e., hardware, software, subscription, and extended warranty and maintenance services) ordered in a particular quarter.
 
Further, actual events, circumstances, outcomes, and amounts differing from judgments, assumptions, and estimates used in determining the values of certain assets (including the amounts of related valuation allowances), liabilities and other items reflected in our consolidated financial statements could significantly harm our results of operations.
 
The factors described above are difficult to forecast and mitigate. As a consequence, operating results for a particular period are difficult to predict, and therefore, prior results are not necessarily indicative of results to be expected in future periods. Any of the foregoing factors, or any other factors discussed elsewhere herein, could have a material adverse effect on our business, results of operations, and financial condition and could adversely affect our stock price.
 
We expect our gross margins to vary over time and our recent level of gross margins may not be sustainable, which may have a material adverse effect on our future profitability.
 
Our recent level of gross margins may not be sustainable and may be adversely affected by numerous factors, including:
increased price competition;
changes in customer, geographic or product mix (such as the mix of software versus hardware product sales);
new product introductions by us and by our competitors;
changes in shipment volume;
excess or obsolete inventory costs;
increased industry consolidation among our customers, which may lead to decreased demand for, and downward pricing pressure on, our products; and
increases in labor costs.
Each of the above factors may be exacerbated by a decrease in demand for our established products and our transition to our next-generation products. Our failure to sustain our recent level of gross margins due to these or other factors may have a material adverse effect on our results of operations.
 

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The loss of any of our key personnel could significantly harm our business, results of operations, and competitive position.
 
In order to compete, we must attract, retain, and motivate executives and other key employees. Hiring and retaining qualified executives, scientists, engineers, technical staff, and sales representatives are critical to our business, and competition for experienced employees in our industry can be intense. To help attract, retain, and motivate qualified employees, we use share-based incentive awards such as employee stock options and restricted stock units. If the value of such stock awards does not appreciate as measured by the performance of the price of our common stock, or if our share-based compensation otherwise ceases to be viewed as a valuable benefit, our ability to attract, retain, and motivate employees could be weakened, which could harm our results of operations.
 
Moreover, companies in our industry whose employees accept positions with competitors frequently claim that those competitors have engaged in unfair hiring practices. We may be subject to such claims as we seek to retain or hire qualified personnel, some of whom may currently be working for our competitors. Some of these claims may result in material litigation. We could incur substantial costs in defending ourselves against these claims, regardless of their merits. Such claims could also discourage potential employees who currently work for our competitors from joining us.

Any loss of the services of executives and key employees and the inability to attract or retain qualified executives and key employees may adversely affect our ability to achieve our business objectives, including without limitation our ability to successfully market and sell our products and services, our ability to develop new products and product enhancements, our ability to support our products, and our ability to pursue strategic business growth and development objectives.

For information regarding certain personnel risks relating to our proposed acquisition by Keysight, see “Our business may be adversely affected by uncertainties while our proposed acquisition by Keysight Technologies, Inc. is pending” above.

Some key components in our products come from sole or limited sources of supply, which exposes us to potential supply shortages that could disrupt the manufacture and sale of our products.
 
We and our contract manufacturers currently purchase a number of key components used to manufacture our products from sole or limited sources of supply for which alternative sources may not be available. From time to time, we have experienced shortages of key components, including chips, oscillators, memory devices, and optical modules. We and our contract manufacturers have no guaranteed or long-term supply arrangements for these or other components, including field programmable gate arrays ("FPGAs") and network processors, which are integrated circuits that can be repeatedly reprogrammed to perform different sets of functions as required. Financial or other difficulties faced by our suppliers, or significant changes in market demand for necessary components, could limit the availability to us and our contract manufacturers of these components. Any interruption or delay in the supply of any of these components could significantly harm our ability to meet scheduled product deliveries to our customers and cause us to lose sales.
 
In addition, the purchase of these components on a sole or limited source basis subjects us to risks of price increases and potential quality assurance problems. Consolidation involving suppliers could further reduce the number of alternatives available to us and affect the availability and cost of components. An increase in the cost of components could make our products less competitive and result in lower gross margins.
 
There are limited substitute supplies available for many of these components, including FPGAs. All of these components are critical to the production of our products, and competition exists with other manufacturers for these key components. In the event that we can no longer obtain materials from a sole source supplier, we might not be able to qualify or identify alternative suppliers in a timely fashion, or at all. Any extended interruption in the supply of any of the key components currently obtained from a sole or limited source, or delay in transitioning to a replacement supplier’s product or replacement component into our systems, could disrupt our operations and significantly harm our business in any given period.
 

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Failure by our contract manufacturers to provide us with adequate supplies of high quality products could harm our revenues, results of operations, competitive position, and reputation.
 
We currently rely on a limited number of contract manufacturers to manufacture and assemble our products. We may experience delays in receiving product shipments from contract manufacturers or other problems, such as inferior quality and insufficient quantity of product. We cannot be certain that we will be able to effectively manage our contract manufacturers or that these manufacturers will meet our future requirements for timely delivery of products of sufficient quality and quantity. We intend to introduce new products and product enhancements, which will require that we rapidly achieve adequate production volumes by effectively coordinating with our suppliers and contract manufacturers. The inability of our contract manufacturers to provide us with adequate supplies of high-quality products or the loss of any of our contract manufacturers would cause a delay in our ability to fulfill customer orders while we obtain a replacement manufacturer and would harm our revenues, results of operations, competitive position, and reputation.
 
If we fail to accurately forecast our manufacturing requirements, we could incur additional costs and experience manufacturing delays.
 
We provide our contract manufacturers with rolling forecasts based on anticipated product orders to determine our manufacturing requirements. Some of the components used in our products have significant lead times or lead times which may unexpectedly increase depending on factors such as the specific supplier, contract terms, and the demand for components at a given time. Because of these long lead times, we are often required to forecast and order products before we know what our specific manufacturing requirements will be. If we overestimate our product orders, our contract manufacturers may have excess inventory of completed products which we would be obligated to purchase. This will lead to increased costs and the risk of obsolescence. If we underestimate our product orders, our contract manufacturers may have inadequate inventory, which could result in delays in shipments, the loss or deferral of revenues and/or higher costs of sales. Costs are also added to our products when we are required to expedite delivery of our products to customers or of components with long lead times to our contract manufacturers. We cannot be certain that we will be able to accurately forecast our product orders and therefore may in the future carry excess or obsolete inventory, be unable to fulfill customer demand, or both, thereby harming our revenues, results of operations, and customer relationships.

Continued growth will strain our operations and require us to incur costs to maintain and upgrade our management and operational resources.
 
We have experienced growth in our operations, including number of employees, sales, products, facility locations, and customers, including as a result of our prior acquisitions, and expect to continue to experience growth in the future. Unless we manage our past and future growth effectively, we may have difficulty in operating our business. As a result, we may inaccurately forecast sales and materials requirements, fail to integrate new personnel, or fail to maintain adequate internal controls or systems, which may result in fluctuations in our operating results and cause the price of our stock to decline. We may continue to expand our operations to enhance our product development efforts and broaden our sales reach, which may place a significant strain on our management and operational resources. In order to manage our growth effectively, we must improve and implement our operational systems, procedures, and controls on a timely basis. If we cannot manage growth effectively, our profitability could be significantly harmed.

Changes in industry and market conditions could lead to charges related to discontinuances of certain of our products and asset impairments.
 
In response to changes in industry and market conditions, we may be required to strategically realign our resources by restructuring our operations and/or our product offerings. Any decision to limit investment in or dispose of a product offering may result in the recording of special charges to earnings, such as inventory, fixed asset, and technology-related write-offs and charges relating to consolidation of excess facilities, which could adversely impact our business, results of operations, and financial position.
 

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International activity may increase our cost of doing business or disrupt our business.
 
We plan to continue to maintain or expand our international operations and sales activities. Operating internationally involves inherent risks that we may not be able to control, including:
difficulties in recruiting, hiring, training, and retaining international personnel;
increased complexity and costs of managing international operations;
growing demand for and cost of technical personnel;
changing governmental laws and regulations, including those related to income taxes, the UK Anti-Bribery Act, and the Foreign Corrupt Practices Act;
increased exposure to foreign currency exchange rate fluctuations;
political and economic instability, including military conflict and social unrest;
commercial laws and business practices that favor local competition;
differing labor and employment laws;
supporting multiple languages;
reduced or limited protections of intellectual property rights;
more complicated logistical and distribution arrangements; and
longer accounts receivable cycles and difficulties in collecting receivables.

The above risks associated with our international operations and sales activities can restrict or adversely affect our ability to sell in international markets, disrupt our business, and subject us to additional costs of doing business.
 
Our reported financial results could suffer if there is an impairment of goodwill or acquired intangible assets.
 
We are required to (i) test annually, and review when circumstances warrant, the value of our goodwill associated with acquisitions, and (ii) test the value of our acquisition-related intangible assets when circumstances warrant determining if an impairment has occurred. If such assets are deemed impaired, an impairment loss equal to the amount by which the applicable carrying amount exceeds (i) the implied fair value of the goodwill or (ii) the estimated fair value of acquired intangible assets would be recognized. This would result in an incremental charge for that quarter which would adversely impact our earnings for the period in which the impairment was determined to have occurred. For example, such impairment could occur if the market value of our common stock falls below the carrying value of our net assets for a sustained period. Economic downturns in the past have contributed to extreme price and volume fluctuations in global stock markets that have reduced the market price of many technology company stocks, including ours. Such declines in our stock price or the failure of our stock price to recover from these declines, as well as any marked decline in our level of revenues or profit margins, increase the risk that goodwill may become impaired in future periods. We cannot accurately predict the amount and timing of any impairment of our goodwill or acquired intangible assets.
 
Legal proceedings may harm our business, results of operations, and financial condition.
 
We are a party to lawsuits and other legal proceedings in the normal course of our business. Litigation and other legal proceedings can be expensive, lengthy, and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. We cannot provide assurance that we will not be a party to additional legal proceedings in the future. To the extent legal proceedings continue for long time periods or are adversely resolved, our business, results of operations, and financial position could be significantly harmed. For additional information regarding legal matters in which we are involved, see Item 3, “Legal Proceedings,” contained in Part I of this Form 10-K and Note 10 to the consolidated financial statements included in this Form 10-K.
 

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Claims that we infringe third-party intellectual property rights could result in significant expenses or restrictions on our ability to sell our products.
 
From time to time, other parties may assert patent, copyright, trademark, and other intellectual property rights to technologies and items that are important to our business. We cannot provide assurance that others will not claim that we have infringed upon or misappropriated their intellectual property rights or that we do not in fact infringe upon or misappropriate those intellectual property rights. We have not generally conducted searches to determine whether the technology we have in our products infringes or misappropriates intellectual property rights held by third parties.
 
Any claims asserting that any of our products or services infringe or misappropriate proprietary rights of third parties, if determined adversely to us, could significantly affect our ability to conduct business and harm our results of operations. Any such claims, with or without merit, could:
be time-consuming;
result in costly and protracted litigation;
divert the efforts of our technical and management personnel;
require us to modify the products or services at issue or to develop alternative technology, thereby causing delivery delays and the loss or deferral of revenues;
require us to cease selling the products or services at issue;
require us to pay substantial damage awards;
expose us to indemnity claims from our customers;
damage our reputation; or
require us to enter into royalty or licensing agreements which, if required, may not be available on terms acceptable to us, if at all.
In the event any such claim against us was successful, and we could not obtain a license to the relevant technology on acceptable terms, license a substitute technology, or redesign our products or services to avoid infringement or misappropriation, our revenues, results of operations, and competitive position could be harmed.
 
The inability to successfully defend claims from taxing authorities or the adoption of new tax legislation could adversely affect our operating results and financial position.
 
We conduct business in many countries, which requires us to interpret the income tax laws and rulings in each of those jurisdictions. Due to the complexity of tax laws in those jurisdictions as well as the subjectivity of factual interpretations, our estimates of income tax liabilities may differ from actual payments or assessments. Claims from tax authorities related to these differences could have an adverse impact on our results of operations, financial condition, and cash flows. In addition, legislative bodies in the various countries in which we do business may from time to time adopt new tax legislation that could have a material adverse effect on our results of operations, financial condition, and cash flows.

To the extent that our customers consolidate, they may reduce purchases of our products and demand more favorable terms and conditions from us, which would harm our revenues and profitability.
 
Consolidation of our customers could reduce the number of customers to whom our products could be sold. These merged customers could obtain products from a source other than us or demand more favorable terms and conditions from us, which would harm our revenues and profitability. In addition, our significant customers may merge with or acquire our competitors and discontinue their relationships with us.
 
Restructuring our workforce can be disruptive and harm our operating results and financial condition.
 
We have in the past restructured or made other adjustments to our workforce in response to the economic environment, performance issues, acquisitions, and other internal and external considerations. Restructurings can among other things result in a temporary lack of focus and reduced productivity. These effects could recur in connection with future acquisitions and other restructurings and, as a result, our operating results and financial condition could be negatively affected.

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Our products may contain defects which may cause us to incur significant costs, divert our attention from product development efforts, and result in a loss of customers.
 
Our existing products and any new or enhanced products we introduce may contain undetected software or hardware defects when they are first introduced or as new versions are released. These problems may cause us to incur significant damages or warranty and repair costs, divert the attention of our engineering personnel from our product development efforts, and cause significant customer relation problems or loss of customers and reputation, all of which would harm our results of operations. A successful claim against us for an amount exceeding the coverage limit on our product liability insurance policy would force us to use our own resources, to the extent available, to pay the claim, which could result in an increase in our expenses and a reduction of our working capital available for other uses, thereby harming our profitability and capital resources.
 
Our failure to protect our intellectual property may significantly harm our results of operations and reputation.
 
Our success and ability to compete is dependent in part on our ability to establish, protect, and maintain our proprietary rights to our intellectual property. We currently rely on a combination of patent, trade secret, trademark, and copyright laws, and restrictions on disclosure and use, to establish, protect, and maintain our intellectual property rights. To date, we have relied primarily on trade secret laws to protect our proprietary processes and know-how. We also have patent applications and existing patents in the United States and other jurisdictions. We cannot be certain that any of these applications will be approved or that any such patents, if issued, or our existing patents, will be upheld. We also cannot be certain that our existing patents and any such additional patents, if issued, will be effective in protecting our proprietary technology.
  
We generally enter into assignment of rights and confidentiality agreements with our officers, employees, and consultants. We also generally limit access to and distribution of our source code and further limit the disclosure and use of our other proprietary information. However, these measures provide only limited protection of our intellectual property rights. In addition, we may not have signed agreements containing adequate protective provisions in every case, and the contractual provisions that are in place may not provide us with adequate protection in all circumstances. Any infringement or misappropriation of our intellectual property rights could result in significant litigation costs, and any failure to adequately protect our intellectual property rights could result in our competitors’ offering similar products, potentially resulting in loss of one or more competitive advantages, loss of market share, and decreased revenues.
 
Despite our efforts to protect our intellectual property rights, existing trade secret, copyright, patent, and trademark laws afford us only limited protection. In addition, the laws of some foreign countries do not protect our intellectual property rights to the same extent as do the laws of the United States. Accordingly, we may not be able to prevent misappropriation of our proprietary technologies or deter others from developing similar technologies. Others may attempt to copy or reverse engineer aspects of our products or obtain and use information that we regard as proprietary. Further, monitoring the unauthorized use of our products and our intellectual property rights is difficult. Litigation may be necessary to enforce our intellectual property rights or determine the validity and scope of the proprietary rights of others. Litigation of this type could result in substantial costs and diversion of resources and could significantly harm our results of operations and reputation.

We have outstanding debt under our Credit Facility and may incur additional debt in the future, which could adversely affect our financial condition, liquidity, and results of operations.
 
On March 2, 2015, we entered into an amended and restated credit agreement establishing a senior secured credit facility (the “Credit Facility”) with certain institutional lenders. The amended and restated credit agreement, as amended to date, provides for a (i) term loan in the aggregate principal amount of $40 million, which was advanced to us on March 3, 2015, and (ii) revolving credit facility in the amount of $150 million. For additional information regarding our Credit Facility, see Note 3 to our consolidated financial statements included in this Form 10-K.


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While no amounts are currently outstanding under the revolving credit facility, we may in the future borrow amounts under the revolving credit facility or any other credit facilities that we may obtain and use the proceeds to fund working capital needs and capital expenditures and use for other general corporate purposes, including acquisitions and stock repurchases. Increases in our aggregate levels of debt may adversely affect our operating results and financial condition by, among other things:
increasing our vulnerability to downturns in our business, competitive pressures, and adverse economic and industry conditions;
requiring the dedication of an increased portion of our expected cash from operations to service our indebtedness, thereby reducing the amount of expected cash flow available for other purposes; and
limiting our flexibility in planning for, or reacting to, changes in our business and our industry.

In addition, servicing our existing debt or increases in our aggregate levels of debt will depend on our future performance, which is subject to economic, financial, competitive, and other factors, many of which are beyond our control. Our business may not continue to generate cash flow from operations in the future sufficient to service our existing and any new indebtedness and to make necessary capital expenditures. If we are unable to generate sufficient cash flow, we may be required to adopt one or more alternatives, such as restructuring debt, obtaining additional equity capital on terms that may be onerous or highly dilutive, or selling assets. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default under current and any future debt obligations. As a result, our business and financial condition could be materially and adversely affected.
 
If we fail to comply with certain covenants under our Credit Facility, any borrowings must be repaid, we may be prevented from further borrowing and/or the Credit Facility may be terminated by the lenders.
 
Our Credit Facility imposes restrictions on us, including restrictions on our ability to create liens on our assets and the ability of certain of our subsidiaries to incur indebtedness, and requires us to maintain compliance with specified financial ratios. The financial covenants in the related credit agreement require us to maintain a minimum consolidated fixed charge coverage ratio and a maximum consolidated total leverage ratio. The credit agreement that provides for our Credit Facility also requires us, among other things, to timely deliver certain financial statements to the lenders. Our failure to comply with such covenants or any other breach of the credit agreement could cause a default under the credit agreement. We may then be required to repay borrowings under the Credit Facility with capital from other sources. We could also be blocked from borrowing or obtaining letters of credit under the Credit Facility, and the credit agreement could be terminated by the lenders. Under these circumstances, other sources of capital may not be available or may be available only on unfavorable terms. In the event of a default, it is possible that our assets and certain of our subsidiaries’ assets may be attached or seized by the lenders. Any failure by us to comply with the covenants or other provisions of the credit agreement or any difficulty in securing any required future financing and any such seizure or attachment of assets could have a material adverse effect on our business and financial condition.
 
The issuance of shares of our common stock in any equity offering by the Company or upon any conversion of any convertible debt that we may issue in the future would dilute the ownership interest of our existing shareholders.
 
The issuance of shares of our common stock in any equity financing by us or upon conversion of any convertible debt we may issue in the future would dilute the ownership interests of our existing shareholders. Any sales in the public market of our common stock issuable in any such financing or upon any such conversion could adversely affect prevailing market prices of our common stock. In addition, the existence of any convertible debt, if issued in the future, may encourage short selling by market participants because the conversion of that convertible debt could depress the price of our common stock.
 
Our investment portfolio may become impaired by deterioration of the financial markets.
 
We follow an established investment policy and set of objectives designed to preserve principal and liquidity, to generate a market return given the policy’s guidelines and to avoid certain investment concentrations. The policy also sets forth credit quality standards and limits our exposure to any one non-government issuer. Our investment portfolio as of December 31, 2016 consisted of money market funds and U.S. Treasury, government agency, and corporate debt securities.
 
These investments are classified as available-for-sale and are recorded on our consolidated balance sheets at fair value. Although our investment portfolio’s amortized cost approximated fair value as of December 31, 2016, we cannot predict future market conditions or market liquidity, or the future value of our investments. As a result, we can provide no assurance that our investment portfolio will not be impaired in the future and that any such impairment will not materially and adversely impact our financial condition, results of operations, and cash flows.

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Our business is subject to changing regulation that has resulted in increased costs and may continue to result in additional costs in the future.
 
We are subject to laws, rules, and regulations of federal and state regulatory authorities, including the Nasdaq and financial market entities charged with the protection of investors and the oversight of companies whose securities are publicly traded. In recent years, these entities, including the Public Company Accounting Oversight Board, the SEC and the Nasdaq, have issued new requirements and regulations and continue to develop additional regulations and requirements partly in response to laws enacted by Congress, most notably the Sarbanes-Oxley Act of 2002 (“SOX”) and, more recently, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). Our efforts to comply with these requirements and regulations have resulted in, and are likely to continue to result in, increased general and administrative expenses and a diversion of substantial management time and attention from revenue-generating activities to compliance activities.
 
In particular, our efforts to comply with Section 404 of SOX and the related regulations regarding our required assessment of our internal control over financial reporting and our independent registered public accounting firm’s audit of the effectiveness of our internal control over financial reporting, have required, and continue to require, the commitment of significant financial and managerial resources. To the extent that we identify areas of our disclosures controls and procedures and/or internal controls requiring improvement, we may have to incur additional costs and divert management’s time and attention.

Because these laws, regulations and standards are subject to varying interpretations, their application in practice may evolve over time as new guidance becomes available. This evolution may result in continuing uncertainty regarding compliance matters and additional costs necessitated by ongoing revisions to our disclosure and governance practices.
 
We are also subject to laws, rules, and regulations of authorities in other countries where we do business, and these laws, rules, and regulations are also subject to change and uncertainty regarding their application and interpretation. The growth of our operations, both domestically and internationally, has resulted in and is likely to continue to result in increased expense, resources, and time spent on matters relating to compliance, including monitoring and training activities.
 
Compliance with SEC rules relating to “conflict minerals” may require us and our suppliers to incur substantial expense and may limit the supply and increase the costs of certain metals and minerals used in the manufacturing of our products.
 
In 2012, the SEC adopted disclosure requirements under Section 1502 of the Dodd-Frank Act regarding the source of certain conflict minerals for issuers for which such conflict minerals are necessary to the functionality or production of a product manufactured, or contracted to be manufactured, by that issuer, which are mined from the Democratic Republic of Congo (“DRC”) and adjoining countries. The metals covered by the rules include tin, tantalum, tungsten, and gold, commonly referred to as “3TG.” Because Ixia contracts to manufacture products which may contain tin, tantalum, tungsten, or gold, we are required under these rules to determine whether those minerals are necessary to the functionality or production of our products and, if so, the rules require us to conduct a reasonable country of origin inquiry to determine if we know or have reason to believe any of the minerals used in the production process may have originated from the DRC or an adjoining country (collectively referred to as “covered countries”). The time required to be spent by our management and the management of our suppliers in this endeavor could be significant. There may be material costs associated with complying with the disclosure requirements, such as costs related to the due diligence process of determining the source of certain minerals used in our products, as well as costs of possible changes to products, processes, or sources of supply as a consequence of such verification activities. There can be no assurance that these costs will not have an adverse effect on our business, financial condition, or results of operations.
 
The implementation of these requirements could affect the sourcing and availability of products we purchase from our suppliers and contract manufacturers. This may also reduce the number of suppliers who provide products containing "conflict free" metals (i.e., metals that are not sourced in covered countries), and may affect our ability to obtain products in sufficient quantities, in a timely manner, or at competitive prices. Our material sourcing is broad based and multi-tiered, and we may not be able to easily verify the origins for all metals used in our products. We may also encounter challenges to satisfy those customers who require that all of the components of our products be certified as conflict-free, which could place us at a competitive disadvantage if we are unable to do so.
 

28


If we fail to maintain our relationships with industry experts, our products may lose industry and market recognition and sales could decline.
 
Our relationships with industry experts, in particular in the field of performance analysis and measurement of networks and network equipment, are critical for maintaining our industry credibility and for developing new products. These experts have established standard testing methodologies that evaluate new network equipment products and technologies. We provide these experts and their testing labs with our products and engineering assistance to perform tests on these new network equipment products and technologies. These industry experts refer to our products in their publications which has given our products industry recognition. In addition, these labs offer us the opportunity to test our products on the newest network equipment and technologies, thereby assisting us in developing new products that are designed to meet evolving technological needs. We cannot be certain that we will be able to maintain our relationships with industry experts or that our competitors will not maintain similar or superior relationships with industry experts. If we are unable to maintain our relationships with industry experts, or if competitors have superior relationships with them, our products may lose industry and market recognition which could harm our reputation and competitive position and cause our sales to decline.
 
Man-made problems such as cybersecurity attacks, computer viruses, or terrorism may disrupt our operations and harm our business, reputation, and operating results.
 
Our daily business operations require us to retain sensitive data such as intellectual property, proprietary business information, confidential employee information, and data related to customers, suppliers, and business partners within our networking infrastructure. The ongoing maintenance and security of this information is pertinent to the success of our business operations and our strategic goals, and organizations like ours are susceptible to multiple variations of attacks on our networks on a daily basis.

Despite our implementation of network security measures, our network may be vulnerable to cybersecurity attacks, computer viruses, break-ins, and similar disruptions. Cybersecurity attacks, in particular, are evolving and include, but are not limited to, malicious software, attempts to gain unauthorized access to data, and other electronic security breaches that could lead to disruptions in systems, unauthorized release of confidential or otherwise protected information and corruption of data. Any such event could, among other negative consequences, disrupt our operations, harm our reputation and customer relationships, result in claims and litigation against us, and impose on us the costs of investigation, notification, and remediation. Accordingly, any such event could have a material adverse effect on our business, operating results, and financial condition.
 
Our networking infrastructure and related assets may be subject to unauthorized access by hackers, employee errors, or other unforeseen activities. Such issues could result in the disruption of business processes, network degradation, and system downtime, along with the potential that a third party will exploit our critical assets such as intellectual property, proprietary business information, and data related to our customers, suppliers, and business partners. To the extent that such disruptions occur, they may cause delays in the manufacture or shipment of our products and the cancellation of customer orders and, as a result, our business operating results and financial condition could be materially and adversely affected resulting in a possible loss of business or brand reputation.
 
In addition, the effects of war or acts of terrorism could have a material adverse effect on our business, operating results, and financial condition. The continued threat of terrorism and heightened security and military action in response to this threat, or any future acts of terrorism, may cause further disruption to the economy and create further uncertainties in the economy. Energy shortages, such as gas or electricity shortages, could have similar negative impacts. To the extent that such disruptions or uncertainties result in delays or cancellations of customer orders or the manufacture or shipment of our products, our business, operating results, and financial condition could be materially and adversely affected.
  
Our business and operations are subject to the risks of earthquakes, floods, hurricanes, and other natural disasters.
 
Our operations could be subject to natural disasters and other business disruptions, which could adversely affect our business and financial results. A number of our facilities and those of our suppliers, our contract manufacturers, and our customers are located in areas that have been affected by natural disasters such as ice and snow storms, earthquakes, floods, or hurricanes in the past. For example, currently, our corporate headquarters and many of our customers are located in California. California historically has been vulnerable to natural disasters and other risks, such as earthquakes, fires, and floods, which at times have disrupted the local economy and posed physical risks to our property. To mitigate some of this risk, certain of our U.S. and international locations are insured up to certain levels against losses and interruptions caused by earthquakes, floods, and/or other natural disasters. However, there can be no guarantee that such insurance may be adequate in the event of a natural disaster, and a significant natural disaster could have a material adverse impact on our business, operating results, and financial condition.


29


Our use of open source software in our products could adversely affect our ability to sell our products and subject us to possible litigation.
 
Many of our products contain software modules licensed to us by third-party authors under “open source” licenses. If we combine our proprietary software with open source software in a certain manner and then distribute the combined software, we could, under certain open source licenses, be required to license that combined software under the terms of that open source license as well as release the source code of the combined software to third parties. This could allow third parties to use our proprietary software at no charge, could enable our competitors to create similar products with lower development effort and time, and ultimately could result in a loss of product sales and lower revenues for us.
 
Although we attempt to monitor our use of open source software to avoid subjecting our products to conditions we do not intend, we cannot assure you that our processes for controlling our use of open source software in our products will be effective. Further, there have been claims against companies that distribute or use open source software in their products and services, asserting that open source software infringes the claimants’ intellectual property rights. We could be subject to lawsuits by parties claiming infringement of intellectual property rights in what we believe to be licensed open source software. If we are held to have breached the terms of an open source software license, we could be required to: (i) seek licenses from third parties to continue offering our products; (ii) re-engineer our products; (iii) discontinue the sale of our products if re-engineering could not be accomplished in a timely manner; (iv) allow third parties to use our products at no charge under the terms of that open source software license; or (v) make generally available, in source code form, our proprietary software; any of which could adversely affect our business, operating results, and financial condition.
 
In addition to risks related to license requirements, use of open source software can lead to greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or assurance of title or controls on origin of the software. Many of the risks associated with the use of open source software, such as the lack of warranties or assurances of title, cannot be eliminated, and could, if not properly addressed, adversely affect our business.

Provisions of our articles of incorporation and bylaws may make it difficult for a third party to acquire us, despite the possible benefits to our shareholders.
 
Our Board of Directors has the authority to issue up to 1,000,000 shares of preferred stock and to determine the price, rights, preferences, privileges, and restrictions, including voting rights, of those shares without any further vote or action by the shareholders. The rights of the holders of our common stock are subject to, and may be adversely affected by, the rights of the holders of any preferred stock that we may issue. The issuance of preferred stock could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock. Furthermore, some provisions of our articles of incorporation and bylaws could delay or make more difficult a merger, tender offer, or proxy contest involving us. Our articles of incorporation include provisions that limit the persons who may call special meetings of shareholders and establish advance notice requirements for nominations for election to our Board of Directors and/or for proposing matters that can be acted on by shareholders at shareholder meetings. These and other provisions of our articles of incorporation and bylaws may have the effect of delaying, deferring, or preventing a change in our control despite possible benefits to our shareholders, may discourage bids at a premium over the market price of our common stock and may harm the market price of our common stock and the voting and other rights of our shareholders.
 
Our stock price may continue to be volatile.
 
The trading price of our common stock has fluctuated substantially in recent years. The trading price may be subject to future fluctuations in response to, among other events and factors: (i)  the global economic environment; (ii) variations in our quarterly operating results; (iii) the gain, loss or timing of significant orders; (iv) changes in earnings estimates by analysts who cover our stock or the stock of our competitors; (v) changes in our revenue and/or earnings guidance as periodically announced in our earnings calls or press releases; (vi) announcements of technological innovations and new products by us or our competitors; (vii) changes in domestic and international economic, political, and business conditions; (viii) consolidation and general conditions in our industry; (ix) the announcement of significant transactions, such as the recent announcement of the proposed acquisition of Ixia or any future proposed business acquisitions by us; and (x) changes in our executive management team. In addition, the stock market in general has experienced extreme price and volume fluctuations that have affected the market prices for many companies in our industry that have been unrelated to the operating performance of these companies. These market fluctuations have affected and may continue to affect the market price of our common stock.


30



Item 1B. Unresolved Staff Comments
 
Not applicable.
 
Item 2. Properties
 
As of December 31, 2016, we leased and owned properties totaling approximately 432,000 square feet, of which approximately 1,000 square feet is owned. Our corporate headquarters is located in Calabasas, California, where we currently lease approximately 116,000 square feet of space which houses research and development, sales and marketing, finance and administration, and certain manufacturing operations. This lease terminates on May 31, 2023, with no extension options. We also lease office space for sales, support, marketing, operations, and/or administration in the United Kingdom, Ireland, Germany, France, Finland, Sweden, Canada, South Korea, Japan, China, Singapore, India, Malaysia, United Arab Emirates, Russia, Spain, Brazil, and Israel and in various states throughout the United States. Additionally, we lease research and development facilities in Romania, India, and Canada. We believe that our existing properties, including both owned and leased sites, will be adequate to meet our needs for the next 12 months, or that we will be able to obtain additional space when and as needed on acceptable terms.
 
From time to time we consider various alternatives related to our long-term facility needs. While we believe our existing facilities are adequate to meet our needs for the next 12 months, it may become necessary to lease or acquire additional or alternative space to accommodate future business needs.
 
Item 3. Legal Proceedings
 
For information on legal proceedings, see Note 10 to the consolidated financial statements included in this Form 10-K, which information is incorporated herein by reference. For information regarding a pending class action lawsuit relating to our proposed acquisition by Keysight, see "Litigation Relating to our Pending Acquisition by Keysight" in Note 15 to the consolidated financial statements included in this Form 10-K, which information is incorporated herein by reference.
 
Item 4. Mine Safety Disclosures
 
Not applicable.

31



PART II
 
Item 5.     Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
 
(a)
Market Price, Dividends and Related Matters

Our common stock is traded on the Nasdaq Global Select Market under the symbol “XXIA.” The following table sets forth the high and low sales prices of our common stock as reported on the Nasdaq Global Select Market for the following time periods.
 
 
High
 
Low
2016
 
 
 
Fourth quarter
$
17.00

 
$
11.45

Third quarter
12.56

 
9.40

Second quarter
12.46

 
9.10

First quarter
12.63

 
8.50

2015
 
 
 
Fourth quarter
$
15.50

 
$
12.34

Third quarter
16.05

 
12.08

Second quarter
13.51

 
11.45

First quarter
12.54

 
9.84

 
As of February 21, 2017, there were approximately 13 registered shareholders of record.
 
We have never declared or paid cash dividends on our common stock and do not anticipate paying any dividends in the foreseeable future. In addition, the terms of our credit facility, as amended, limits our ability to pay cash dividends on our capital stock.
 

32


The following graph compares the cumulative total return on our common stock with the cumulative total returns of the Nasdaq Composite Index and the Nasdaq Telecommunications Index for the five-year period commencing December 31, 2011. We are one of the companies that make up the Nasdaq Telecommunications Index. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common stock and in each of the indices on December 31, 2011, and their relative performance is tracked through December 31, 2016. These indices are included only for comparative purposes as required by the rules of the SEC and do not necessarily reflect management’s opinion that such indices are an appropriate measure of the relative performance of the our common stock. The stock price performance shown on the graph below is not necessarily indicative of future price performance. This graph shall not be deemed "filed" for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities under that Section and shall not be deemed to be incorporated by reference into any filing of Ixia under the Securities Act of 1933, as amended, or the Exchange Act.

chart2016.jpg

 
12/31/2011

 
12/31/2012

 
12/31/2013

 
12/31/2014

 
12/31/2015

 
12/31/2016

Ixia
$
100.00

 
$
161.56

 
$
126.64

 
$
107.04

 
$
118.27

 
$
153.19

NASDAQ Composite
$
100.00

 
$
116.41

 
$
165.47

 
$
188.69

 
$
200.32

 
$
216.54

NASDAQ Telecommunications
$
100.00

 
$
102.78

 
$
143.40

 
$
149.42

 
$
144.02

 
$
153.88


(b)
Use of Proceeds
None.
(c)
Issuer Purchases of Equity Securities

33


On February 23, 2016, we announced a share repurchase program authorizing the repurchase of up to $25 million of our common stock. The program expired on February 22, 2017.

For the year ended December 31, 2016, we repurchased 707,332 shares of our common stock pursuant to the program. As of December 31, 2016, a total of approximately $18.2 million (exclusive of brokers' commissions) remained available for future repurchases under the program.

Under the program, we were authorized, from time to time and subject to general business and market conditions, alternative investment opportunities, and other factors, repurchase our shares in open market purchases, in privately negotiated transactions, and/or through other means, including pursuant to trading plans intended to comply with Rule 10b5-1 under the Exchange Act.

The following table summarizes our stock repurchase activity for the three months ended December 31, 2016:
Period
 
Total Number of Shares Purchased
 
Average Price Paid Per Share (1)
 
Total Number of
Shares Purchased
as Part of Publicly
Announced Program
 
Approximate Dollar
Value of Shares
that may yet be
Purchased under
the Program
October 1, 2016 - October 31, 2016
 

 
$

 

 
$
18,161,932

November 1, 2016 - November 30, 2016
 

 

 

 
18,161,932

December 1, 2016 - December 31, 2016
 

 

 

 
18,161,932

 
 

 
 
 

 
 


34



Item 6. Selected Financial Data
 
The following selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the notes to those consolidated financial statements included in this Form 10-K. The consolidated statement of operations data set forth below for the years ended December 31, 2016, 2015, and 2014 and the consolidated balance sheet data as of December 31, 2016 and 2015 are derived from our audited consolidated financial statements included elsewhere in this Form 10-K. The consolidated statements of operations data set forth below for the years ended December 31, 2013, and 2012 and the consolidated balance sheet data as of December 31, 2014, 2013 and 2012 are prepared on a consistent basis with the consolidated financial statements presented herein and have been derived from our audited consolidated financial statements that are not included in this Form 10-K.
 
2016
 
2015
 
2014
 
2013(3)
 
2012(4)
Consolidated Statement of Operations Data (in thousands, except per share data):
 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
Products
$
311,203

 
$
361,923

 
$
325,455

 
$
352,712

 
$
330,315

Services
173,642

 
155,014

 
139,003

 
114,544

 
83,119

Total revenues
484,845


516,937

 
464,458

 
467,256

 
413,434

 
 
 
 
 
 
 
 
 
 
Costs and operating expenses: (1)
 
 
 
 
 
 
 
 
 
Cost of revenues – products (2)
87,528

 
97,415

 
98,815

 
89,136

 
71,668

Cost of revenues – services
16,041

 
16,443

 
16,166

 
13,867

 
10,493

Research and development
102,534

 
113,443

 
115,156

 
117,502

 
98,169

Sales and marketing
161,604

 
155,211

 
151,765

 
137,724

 
117,214

General and administrative
58,975

 
68,925

 
66,475

 
47,158

 
45,607

Amortization of intangible assets
39,099

 
42,315

 
46,901

 
40,805

 
30,018

Acquisition and other related
785

 
656

 
3,277

 
6,920

 
11,861

Restructuring(5)
(130
)
 
(517
)
 
10,310

 
1,840

 
4,077

Total costs and operating expenses
466,436


493,891

 
508,865

 
454,952

 
389,107

Income (loss) from operations
18,409

 
23,046

 
(44,407
)
 
12,304

 
24,327

Interest income and other, net(6)
310

 
(372
)
 
(24
)
 
6,269

 
2,255

Interest expense(7)
(1,930
)
 
(8,331
)
 
(8,266
)
 
(7,771
)
 
(7,215
)
Income (loss) before income taxes
16,789


14,343

 
(52,697
)
 
10,802

 
19,367

Income tax expense (benefit)(8)
50,700

 
8,392

 
(11,105
)
 
(1,068
)
 
(26,093
)
Net (loss) income
$
(33,911
)

$
5,951

 
$
(41,592
)
 
$
11,870

 
$
45,460

(Loss) earnings per share:
 
 
 
 
 
 
 
 
 
Basic
$
(0.42
)
 
$
0.07

 
$
(0.54
)
 
$
0.16

 
$
0.63

Diluted
$
(0.42
)
 
$
0.07

 
$
(0.54
)
 
$
0.15

 
$
0.59

Weighted average number of common and common equivalent shares outstanding:
 
 
 
 
 
 
 
 
 
Basic
81,470

 
79,633

 
77,629

 
75,757

 
72,183

Diluted
81,470

 
81,459

 
77,629

 
77,513

 
84,505

 
2016(8)
 
2015
 
2014
 
2013(3)
 
2012(4)(8)
Consolidated Balance Sheet Data (in thousands):
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
71,759

 
$
52,472

 
$
46,394

 
$
34,189

 
$
47,508

Short-term investments in marketable securities
71,251

 
14,504

 
79,760

 
51,507

 
126,851

Working capital
134,834

 
69,725

 
(44,758
)
 
128,960

 
227,309

Long-term investments in marketable securities

 

 

 

 
3,119

Total assets
757,567

 
779,877

 
868,791

 
885,403

 
815,729

Convertible senior notes(7)

 

 
198,880

 
197,680

 
196,480

Term loan
33,586

 
37,532

 

 

 

Total liabilities
246,030

 
260,866

 
387,700

 
386,291

 
368,231

Total shareholders’ equity
511,537

 
519,011

 
481,091

 
499,112

 
447,498



35



 
(1)
Stock-based compensation included in:
Cost of revenues – products
$
280

 
$
315

 
$
331

 
$
550

 
$
423

Cost of revenues – services
108

 
120

 
126

 
209

 
162

Research and development
6,489

 
6,625

 
6,843

 
8,065

 
6,242

Sales and marketing
5,944

 
4,730

 
5,624

 
7,367

 
5,352

General and administrative
5,886

 
7,186

 
3,595

 
4,571

 
7,462

 
(2)
Cost of revenues – products excludes amortization of intangible assets related to purchased technology of $25.3 million, $25.7 million, $28.9 million, $26.0 million, and $20.3 million for the years ended December 31, 2016, 2015, 20142013, and 2012, respectively, which is included in Amortization of intangible assets.
(3)
During the year ended December 31, 2013, we completed the acquisition of Net Optics, Inc. for approximately $187.4 million
(4)
During the year ended December 31, 2012, we completed the acquisitions of Anue, Inc. and BreakingPoint Systems, Inc. for approximately $152.4 million and $163.7 million, respectively.
(5)
In each of 2012 and 2014, our management approved, committed to, and initiated a plan to restructure our operations in light of our acquisitions of BreakingPoint, Inc. in 2012 and Net Optics, Inc. in 2013, respectively. In 2013, management approved, committed to, and initiated a plan to restructure certain operations related to our network test products. In 2014, management approved, committed to, and initiated a plan to restructure our operations to better align our operating costs with our business opportunities.
(6)
In 2013, we recorded realized gains of $2.9 million related to the sale of previously written down auction rate and corporate debt securities.
(7)
In December 2010, we issued $200 million in aggregate principal amount of 3.00% convertible senior notes that matured on December 15, 2015. The interest was payable semi-annually on June 15 and December 15 of each year, beginning on June 15, 2011. During each of 2012, 2013, and 2014, we made interest payments of $6.0 million. During 2015, we made interest payments of $4.9 million. In July 2015, we repurchased $65 million in aggregate principal amount of these notes, and in December 2015, the remaining outstanding notes in the aggregate principal amount of $135 million matured, and we repaid them in full.
(8)
In 2012, we released $34.8 million of our valuation allowance previously established against our U.S. deferred tax assets. The 2012 partial releases related primarily to the net deferred tax liabilities recorded as part of the Anue and BreakingPoint acquisitions. In 2016, our income tax expense includes a $42.9 million charge related to the establishment of a valuation allowance against our remaining net deferred tax assets in the U.S.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors, many of which are outside of our control and are difficult for us to forecast or mitigate. The factors that could cause our actual results to differ materially from those expressed or implied by us in any forward-looking statements contained herein or made elsewhere by or on behalf of us include the risks described elsewhere in this Form 10-K and in certain of our other SEC filings.
 
The consolidated results of operations for the years ended December 31, 2016, 2015, and 2014 are not necessarily indicative of the results that may be expected for any future period. The following discussion should be read in conjunction with the consolidated financial statements and the notes thereto included in Part IV, Item 15 of this Form 10-K and in conjunction with the “Risk Factors” included in Part I, Item 1A of this Form 10-K.
 

36



Business Overview
 
Ixia was incorporated in 1997 as a California corporation. We help customers validate the performance and security resilience of their applications and networks. Our test, visibility, and security products help organizations make their, and their customers physical and virtual networks stronger. Enterprises, service providers, network equipment manufacturers, and governments worldwide rely on our solutions to validate new products before shipping and secure ongoing operation of their networks with better visibility and security. Our product solutions consist of our high performance hardware platforms, software applications, and services, including warranty and maintenance offerings.

Pending Acquisition. We have entered into an Agreement and Plan of Merger, dated as of January 30, 2017 (the "Merger Agreement"), with Keysight Technologies, Inc. (“Keysight”) and, by a joinder dated February 2, 2017, Keysight Acquisition, Inc., a wholly owned subsidiary of Keysight (“Merger Sub”). Pursuant to the Merger Agreement, subject to the approval of the Merger Agreement and the principal terms of the Merger Agreement by our shareholders and the satisfaction of other conditions to the completion of the merger specified in the Merger Agreement, Merger Sub will be merged with and into Ixia (the "Merger"), with Ixia surviving the Merger as a wholly owned subsidiary of Keysight.

At the effective time of the Merger, each share of our common stock that is issued and outstanding immediately prior to the Merger will be converted into the right to receive $19.65 in cash, without interest (“Per Share Merger Consideration”), subject to any applicable tax withholding, other than shares owned by Keysight or Merger Sub, or by any subsidiary of Keysight, Merger Sub, or us (which will be canceled with no consideration paid or payable therefor), or any shares with respect to which dissenters’ rights under California law have been properly exercised and not withdrawn. Options, whether vested or unvested, to acquire our common stock that are outstanding immediately prior to the consummation of the Merger will, at the effective time, become fully vested (to the extent not then vested) and will be canceled in exchange for the right to receive an amount in cash equal to the excess, if any, of the Per Share Merger Consideration over the exercise price per share of such options, less any applicable taxes required to be withheld. Each restricted stock unit covering shares of our common stock that is outstanding immediately prior to the consummation of the Merger will, at the effective time, become fully vested and will be cancelled in exchange for the right to receive an amount in cash equal to the Per Share Merger Consideration (with any restricted stock units subject to performance-based vesting conditions to be deemed earned at target performance levels), subject to any applicable tax withholding.

Each of Keysight's, Merger Sub's, and our obligation to consummate the Merger is subject to customary closing conditions, including (i) the approval of the Merger Agreement and the principal terms of the Merger by the affirmative vote of the holders of a majority of the total number of shares of our common stock outstanding; (ii) the expiration or termination of any waiting period (and any extension thereof) under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended; (iii) the receipt of necessary approvals from certain foreign antitrust authorities; (iv) the absence of an order, judgment, injunction, or law prohibiting the consummation of the Merger; (v) the accuracy of the representations and warranties of the other party or parties contained in the Merger Agreement (subject to certain qualifications set forth in the Merger Agreement); and (vi) the other party’s or parties' compliance with or performance in all material respects of its or their pre-closing covenants and agreements contained in the Merger Agreement. Consummation of the Merger is not subject to a financing condition.

Subject to certain limitations set forth in the Merger Agreement, Keysight, Merger Sub, and we have each agreed to use reasonable best efforts to (i) consummate the Merger and the other transactions contemplated by the Merger Agreement, (ii) obtain from any governmental authority any consent, approval, authorization, waiver, or order required to be obtained or made by any party to the Merger Agreement and avoid any legal proceedings by any governmental authority, and (iii) make all necessary filings, and thereafter make any other required submissions, with respect to the Merger Agreement required under applicable law, including any applicable antitrust laws.

The Merger Agreement contains certain termination rights of Keysight and us, and provides that we will be required to pay Keysight a termination fee of approximately $59.7 million upon termination of the Merger Agreement under certain circumstances, including, but not limited to, if we accept a superior acquisition proposal. In addition, if we validly terminate the Merger Agreement for Keysight’s failure to close when required to do so pursuant to the Merger Agreement, Keysight will be required to pay us a termination fee of $500 million. Either Keysight or Ixia may terminate the Merger Agreement if the Merger is not consummated by the “end date” of the Merger Agreement, which is 5:00 p.m. (Eastern Time) on October 30, 2017, subject to certain limitations.

Additional information regarding the Merger Agreement is contained in our Current Report on Form 8-K filed with the SEC on February 1, 2017, including in the copy of the Merger Agreement that is attached thereto as Exhibit 2.1.
 

37



Overview. Our cash, cash equivalents, and marketable securities, in the aggregate, increased by $76.0 million to $143.0 million at December 31, 2016 from $67.0 million at December 31, 2015. This increase was primarily due to net cash provided by our operating activities of $81.2 million and $15.5 million in proceeds received from the exercises of share-based awards, partially offset by the use of $8.7 million for capital expenditures, $6.9 million for the repurchase of stock under our share repurchase program that expired on February 22, 2017, and $3.5 million for the repayment of debt. During 2016, total revenues declined primarily as a result of lower sales of certain Network Test Solutions products to our NEM customers, partially offset by growth in our service revenues.

Senior Secured Revolving Credit Facility. On March 2, 2015, we entered into an amended and restated credit agreement (as amended to date, the “Credit Agreement”) with certain institutional lenders, which amended and restated our prior 2012 credit agreement, as amended. The Credit Agreement originally provided for (i) a term loan (the “Term Loan”) in the aggregate principal amount of $40 million and (ii) revolving credit facility (the “Revolving Credit Facility” and, together with the Term Loan, the “Credit Facility”) in an aggregate amount of up to $60 million, with sub-limits of $25 million for the issuance of standby letters of credit and $15 million for swingline loans. On September 30, 2015, we entered into an amendment to the Credit Agreement which, among other modifications, increased the commitments under the Revolving Credit Facility to an aggregate amount of up to $75 million.

On January 25, 2016, we entered into an amendment to the Credit Agreement which, among other modifications, increased the commitments under the Revolving Credit Facility to an aggregate amount of up to $150 million and extended the maturity date of the Revolving Credit Facility from February 15, 2018 to February 15, 2020. The maturity date of the Term Loan is February 15, 2018. The aggregate amount available under the Revolving Credit Facility is, upon our request and subject to the receipt of increased commitments from the lenders under the Credit Agreement or additional lenders, subject to increase by an aggregate amount of up to $100 million.

We are permitted to prepay outstanding loans under the Credit Facility at any time without premium or penalty. We may re-borrow amounts under the Revolving Credit Facility, but we may not re-borrow amounts that we repay or prepay under the Term Loan.

Restructuring Activities. During the third quarter of 2014, our management approved, committed to, and implemented a company-wide initiative (the “2014 Corporate Restructuring”) to restructure our operations to better align our operating costs with our business opportunities. The restructuring included a reduction in force of approximately 96 positions across multiple business functions, which represented approximately 5.0% of our worldwide work force at that time. In connection with the 2014 Corporate Restructuring, we have recorded a total of approximately $6.1 million in restructuring costs related to employee termination benefits and exiting certain of our facilities in India and Romania, all of which is included within the Restructuring line item in the consolidated statements of operations included in this Form 10-K. The 2014 Corporate Restructuring was substantially completed in the fourth quarter of 2014 and was estimated to provide future cost savings of approximately $17 million on an annualized basis, with the cost savings principally driven by a reduction in headcount-related costs, and to a lesser extent, facilities-related savings.

During the first quarter of 2014, our management approved, committed to, and initiated a plan to restructure our operations following our December 5, 2013 acquisition of Net Optics (the “Net Optics Restructuring”). The Net Optics Restructuring included a net reduction in force of approximately 45 positions (primarily impacting our research and development team in Israel and Santa Clara, California), which represented approximately 2.3% of our worldwide work force at that time. In connection with the Net Optics Restructuring, we have recorded a total of approximately $3.5 million in restructuring costs related to employee termination benefits and the termination of a subsidiary's facility lease in Israel, all of which was included within the Restructuring line item in the consolidated statements of operations included in this Form 10-K. The Net Optics Restructuring was substantially completed during the second quarter of 2014. Significant future costs savings were not expected as the restructuring was executed in conjunction with the acquisition of Net Optics.

Revenues. Our revenues are principally derived from the sale and support of our network test and network visibility solutions.
 
Sales of our network test hardware products primarily consist of the sale of traffic generation and analysis hardware platforms containing multi-slot chassis and interface cards. Our primary network test hardware platform is enabled by our operating system software that is essential to the functionality of the hardware platform. Sales of our network visibility hardware products typically include the sale of an integrated, purpose-built hardware appliance with essential, proprietary software. Our software products primarily consist of a comprehensive suite of technology-specific applications for certain of our network test hardware platforms. Our software products are typically installed on and work with our hardware products to further enhance the core functionality of the overall network test system, although some of our software products can be operated independently from our network test platforms.

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Our service revenues primarily consist of technical support, warranty, and software maintenance services revenues related to our network test and visibility hardware and software products. Most of our products include up to one year of these services with the initial product purchase, and our customers may separately purchase extended services for annual or multi-year periods. Our technical support, warranty, and software maintenance services include assistance with the set-up, configuration, and operation of our products, repair or replacement of defective products, bug fixes, and unspecified when and if available software upgrades. For certain network test products, our technical support and software maintenance service revenues also include revenues from the sale of our Application and Threat Intelligence ("ATI") subscription service, which provides a comprehensive suite of application protocols, software updates, and technical support. The ATI subscription service provides full access to the latest security attacks and application updates for our customers' use in real-world test and assessment scenarios. Our customers may purchase the ATI subscription service for annual or multi-year periods. Service revenues also include training and other professional services revenues.
 
During the three years ended December 31, 2016, our network test Ethernet interface cards, including our 1 Gigabit Ethernet, 10 Gigabit Ethernet, and high speed Ethernet interface cards, represented the majority of our product revenues. During 2016, our 10 Gigabit Ethernet interface cards continued to be our strongest seller, but we also saw a significant increase in demand for our high speed Ethernet cards as a result of the shipment of newer technologies and network infrastructure upgrades. Over the longer term, while we expect the sale of our network test Ethernet interface cards to continue to represent a significant amount of our revenues, we also expect to see some decline in such revenues as a percentage of total revenues as we expect the sales of our network visibility and other network test solutions to increase.
 
We have historically generated a significant portion of our revenues from sales to network equipment manufacturers, but this percentage has been declining over the past several years. While we expect that we will continue to have some customer concentration with network equipment manufacturers, we expect to continue to see revenues from sales to network equipment manufacturers to decline as a percentage of total revenues, given that we expect to sell our products to a wider variety and increasing number of service providers, enterprise, and government customers. To the extent that we develop a broader and more diverse customer base, our reliance on any one customer or customer type should diminish. No one customer accounted for 10% or more of our total revenues in 2016, 2015, or 2014.

From a geographic perspective, we generated revenues from shipments to international locations of $211.6 million, or 43.6%, of our total revenues in 2016, $199.1 million, or 38.5%, of our total revenues in 2015, and $189.3 million, or 40.8% of our total revenues in 2014.
 
Stock-Based Compensation. Share-based payments, including grants of stock options, restricted stock units and employee stock purchase rights, are required to be recognized as expense in our financial statements based on the estimated fair values for accounting purposes on the grant date. For the years ended December 31, 2016, 2015, and 2014, stock-based compensation was $18.7 million, $19.0 million, and $16.5 million, respectively. Our stock-based compensation was relatively unchanged for the year ended December 31, 2016 as compared to 2015. Our stock-based compensation expense increased for the year ended December 31, 2015 as compared to 2014 primarily due to the recognition of expense in 2015 related to certain performance based awards granted to executives with no such comparable expense in 2014. The aggregate balance of gross unrecognized stock-based compensation to be expensed in the years 2017 through 2021 related to share-based awards unvested as of December 31, 2016 is approximately $19.7 million. To the extent that we grant share-based awards, future expense may increase by the additional unearned compensation resulting from those grants. We anticipate that we will continue to grant additional share-based awards in the future as part of our long-term incentive compensation programs. The impact of future grants cannot be estimated at this time because it will depend on a number of factors, including the amount of share-based awards granted and the then current fair values of such awards for accounting purposes.
 
Cost of Revenues. Our cost of revenues related to the sale of our hardware and software products includes materials, payments to third-party contract manufacturers, royalties, and salaries and other expenses related to our manufacturing and supply operations personnel. We outsource the majority of our manufacturing operations; accordingly, a significant portion of our cost of revenues related to our products consists of payments to our contract manufacturers. Cost of revenues related to the provision of services includes salaries and other expenses associated with technical support services, professional services, and extended warranty and maintenance services. Cost of revenues does not include the amortization of purchased technology related to our acquisitions of certain businesses, product lines, and technologies of $25.3 million, $25.7 million, and $28.9 million for the years ended December 31, 2016, 2015, and 2014, respectively, which are included within our Amortization of intangible assets line item in our consolidated statements of operations included in this Form 10-K.
 

39



Our cost of revenues as a percentage of total revenues is primarily affected by the following factors:
our pricing policies and those of our competitors;
the pricing we are able to obtain from our component suppliers and contract manufacturers;
the mix of customers and sales channels through which our products are sold;
the mix of our products sold, such as the mix of software versus hardware product sales and the mix of product versus services sales;
new product introductions by us and by our competitors;
demand for and quality of our products; and
shipment volume.

In the near term, although we anticipate that our cost of revenues as a percentage of total revenues will remain relatively flat, we expect to continue to experience pricing pressure on larger transactions and from larger customers as a result of competition.
 
Operating Expenses. Our operating expenses are generally recognized when incurred and consist of research and development expenses, sales and marketing expenses, general and administrative expenses, amortization of intangible assets, acquisition and other related costs, and restructuring expenses.

Research and development expenses consist primarily of salaries and other personnel costs related to the design, development, testing, and enhancement of our products. We expense our research and development costs as they are incurred. We also capitalize and depreciate over a five-year period costs of our products used for internal purposes. We plan to continue to strategically invest in research and development and new products and technology, as we believe that such investment is critical to attaining our strategic objectives and will further differentiate us in the marketplace.
Sales and marketing expenses consist primarily of compensation and related costs for personnel engaged in direct sales, sales support, and marketing functions, as well as tradeshow, promotional, and advertising expenditures. We also capitalize and depreciate over a two-year period costs of our products used for sales and marketing activities, including product demonstrations for potential customers.
General and administrative expenses consist primarily of salaries and related expenses for certain executive, finance, legal, human resources, information technology, and administrative personnel, as well as professional fees (e.g., legal and accounting), facility costs related to our corporate headquarters, insurance costs, and other general corporate expenses. General and administrative expenses also include costs related to internal and other investigations, shareholder litigation, and related matters.
Amortization of intangible assets consists of the recognition of the purchase price of various intangible assets over their estimated useful lives. The future amortization expense of acquired intangible assets depends on a number of factors, including the extent to which we acquire additional businesses, technologies, and product lines or are required to record impairment charges related to our acquired intangible assets. See Note 8 to the consolidated financial statements included in this Form 10-K.
Acquisition and other related costs are expensed as incurred and consist primarily of transaction and integration related costs such as success-based banking fees, professional fees for legal, accounting, tax, due diligence, valuation and other related services, change in control payments, amortization of deferred compensation, consulting fees, regulatory costs, certain employee, facility and infrastructure transition costs, and other acquisition related expenses. We expect our acquisition and other related expenses to fluctuate over time based on the timing of our acquisitions and related integration activities.
Restructuring expenses consist primarily of employee severance costs and other related charges, as well as facility-related charges to exit certain locations. See Note 4 to the consolidated financial statements included in this Form 10-K.
Interest income and other, net represents interest on cash and a variety of securities, including money market funds, U.S. government and government agency debt securities, and corporate debt securities, realized gains/losses on the sale of investment securities, certain foreign currency gains and losses, and other non-operating items.
 

40



Interest expense consists of interest on our convertible senior notes, which were issued in December 2010 and repaid in 2015, interest on our Term Loan, amortization of debt issuance costs, and commitment fees on the unused portion of prior and current revolving credit facilities. See Note 3 to the consolidated financial statements included in this Form 10-K.
 
Income tax expense (benefit) is determined based on the amount of earnings and enacted federal, state, and foreign tax rates, adjusted for allowable credits and deductions, and for other effects of equity compensation plans. Our income tax provision may be significantly affected by changes to our estimates for tax in jurisdictions in which we operate and other estimates utilized in determining the global effective tax rate. Such changes could have a substantial impact on the income tax provision. Our income tax provision could also be significantly impacted by estimates surrounding our uncertain tax positions and the recording of valuation allowances against certain deferred tax assets, and changes to these valuation allowances. We reevaluate the judgments surrounding our estimates and make adjustments, as appropriate, each reporting period.

Our effective tax rate differs from the federal statutory rate due to state taxes, significant permanent differences, federal and foreign tax rate differences, inter-company royalties, research and development tax credits, and in 2016, charges to income tax expense related to the establishment of a valuation allowance against our remaining net U.S. deferred tax assets. Significant permanent differences arise due to stock-based compensation expenses that are not expected to generate a tax deduction, such as stock-based compensation expenses on grants to employees at foreign locations, offset by tax benefits from disqualifying dispositions. For additional information, see Note 9 to the consolidated financial statements included in this Form 10-K.

Realization of our deferred tax assets is dependent primarily on the generation of future taxable income. In considering the need for a valuation allowance we consider our historical, as well as future, projected taxable income along with other objectively verifiable evidence. Objectively verifiable evidence includes our realization of tax attributes, utilization of both tax credits and net operating loss carryforwards during the year.

Prior to the fourth quarter of 2016, we maintained a valuation allowance against our net U.S. deferred tax assets of $1.1 million related to our realized capital loss carryforwards. In the fourth quarter of 2016, we evaluated the need for a valuation allowance against our remaining net deferred tax assets in the U.S. and concluded that a full valuation allowance was warranted due to the realization of a three-year cumulative pre-tax book loss in the U.S. As a result, a non-cash income tax charge of $42.9 million was recorded as of December 31, 2016 to establish a valuation allowance against our remaining net deferred tax assets in the U.S. We also maintain a valuation allowance in the amount of $1.0 million against our Australian deferred tax assets related to net operating loss carryforwards that are not expected to be realized. The release of these valuation allowances, or a portion thereof, in future periods would have a favorable impact on our effective tax rate. We will continue to monitor the need for a valuation allowance each reporting period, and at this time, it is uncertain when and if such a release of these valuation allowances may occur.


41



Critical Accounting Policies and Estimates
 
Management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, allowance for doubtful accounts, write-downs for obsolete inventory, income taxes, acquisition purchase price allocation, impairments of long-lived assets, goodwill and marketable securities, stock-based compensation, and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ materially from these estimates.
 
We apply the following critical accounting policies in the preparation of our consolidated financial statements:

Revenue Recognition Policy. We exercise significant judgment and use estimates in connection with the determination of the amount of revenue that is recognized in each accounting period and the allocation of those amounts to either product or services revenue. We recognize our revenue in accordance with authoritative guidance on both hardware and software revenue recognition. For our hardware and software products and related services, we recognize revenue based on the following four criteria: whether (i) evidence of an arrangement exists, which is typically in the form of a customer purchase order; (ii) delivery has occurred (i.e., risks and rewards of ownership have passed to the customer); (iii) the sales price is fixed or determinable; and (iv) collectability is deemed reasonably assured (or probable for software-related deliverables). Provided that the above criteria are met, revenue from hardware and software product sales is typically recognized upon shipment, and service revenues are recognized as the services are provided or completed. Our service revenues from our initial and separately purchased technical support, warranty, and software maintenance arrangements are recognized on a straight-line basis over the applicable contractual period.
Our systems are typically fully functional at the time of shipment and do not require us to perform any significant production, modification, customization, or installation after shipment. If our arrangements include acceptance provisions based on customer specified criteria for which we cannot reliably demonstrate that the delivered product meets all the specified criteria, revenue is deferred until the earlier of the receipt of written customer acceptance or the expiration of the acceptance period. In addition, our arrangements generally do not include any provisions for cancellation, termination, or refunds.
When sales arrangements involve a combination of hardware and software elements, we use a two-step process to allocate value to each element in the arrangement. First, we allocate the total arrangement fee to the separate non-software deliverables (e.g., chassis, interface cards, and software post contract customer support and maintenance (“PCS”) related to our operating system software that is essential to the functionality of our hardware platform) and the software-related deliverables as a group (e.g., application software and software PCS) based on a relative selling price (“RSP”) method applied to all elements in the arrangement using the selling price hierarchy, which is described below. Then, we allocate the value assigned to the software group for the software-related deliverables to each software element based on the residual method, whereby value is allocated first to the undelivered elements based on vendor specific objective evidence (“VSOE”), typically PCS, and the residual portion of the value is then allocated to the delivered elements (typically the software products) and recognized as revenue, provided all other revenue recognition criteria discussed above have been met.
Under the RSP method, the selling price to be used in the allocation of the total arrangement fee to each of the elements, or deliverables, is based on a selling price hierarchy, where the selling price for each element is based on (i) VSOE, if available; (ii) third-party evidence (“TPE”), if available and VSOE is not available; or (iii) the best estimate of selling price (“BESP”), if neither VSOE nor TPE are available.
The allocation of value to each deliverable in a multiple element arrangement is completed at the inception of an arrangement, which is typically the receipt of a customer purchase order. While changes in the allocation of the estimated selling price between the units of accounting will not affect the amount of total revenue recognized for a particular sales arrangement, any material changes in these allocations could impact the timing of revenue recognition, which could affect our results of operations.

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The allocated value of each non-software deliverable is then recognized as revenue when each element is delivered, provided all of the other revenue recognition criteria discussed above have been met. For software deliverables, the total software group allocation (or total arrangement consideration for customer orders that include only software products and related services) is assigned to each deliverable based on VSOE in accordance with software revenue recognition guidance as described under step two of the allocation process above. We determine VSOE of fair value based on a bell-shaped curve approach, considering the actual sales prices charged to customers when the same element is sold separately, provided it is substantive. As we do not sell our software products without technical support, warranty, and software maintenance services, we are unable to establish VSOE for our software products, and therefore use the residual method under the software revenue recognition guidance to allocate the software group (or arrangement) value to each software deliverable. Under the residual method, the software group (or arrangement) value is allocated first to the undelivered elements, typically technical support, warranty, and software maintenance services based on VSOE, and the residual portion of the value is then allocated to the delivered elements (typically the software products) and recognized as revenue, provided all other revenue recognition criteria discussed above have been met. If VSOE cannot be established for an undelivered element within the software group (or arrangement), we defer the entire value allocated to the software group (or arrangement) until the earlier of (i) delivery of all elements (other than technical support, warranty, and software maintenance services) or (ii) establishment of VSOE of the undelivered element(s). If the only undelivered element(s) relates to a service for which VSOE has not been established, the entire allocated value of the software group (or arrangement) is recognized as revenue over the longer of the service or contractual period of the technical support, warranty, and software PCS. Refer to Note 1, Significant Accounting Policies, for further detail regarding the allocation of value and revenue recognition timing on multiple element revenue arrangements.
VSOE of fair value typically only exists for our technical support, warranty, and software maintenance services (“Support”). VSOE of fair value is established using the bell-shaped curve approach for a subgroup when a substantial majority (generally greater than 75%) of the transactions are priced within a reasonably narrow range (generally plus or minus 15% from the list price, which approximates the median). On a regular basis, we separately sell Support upon the expiration of the initial contractual periods included in an initial sales arrangement (“Support Renewals”). The population of Support Renewals is used in the bell-shaped curve approach to establish VSOE of fair value of Support and consists of actual sales prices charged to customers for Support Renewals, and includes only Support Renewals sold separately on a stand-alone basis. We review these standalone sales of our Support Renewals for VSOE of fair value of Support on a quarterly basis (“VSOE Analysis”). Our pricing for Support Renewal transactions is generally based on a percentage of our list price for the product for which the Support Renewal is being purchased. When pricing conditions vary significantly, we further stratify the population of stand-alone sales of our Support Renewals based on Support Renewal pricing conditions and separately analyze these subgroups of Support Renewal transactions. Our Support Renewal pricing conditions consist of the underlying product type, product family, customer type, and the geographic region in which the sale is made.
Our pricing practices may be required to be modified as our business and offerings evolve over time, which could result in changes in selling prices, including both VSOE and BESP, in subsequent periods. In determining BESP, we apply significant judgment as we weigh a variety of factors, based on the facts and circumstances of the arrangement. The facts and circumstances we may consider include, but are not limited to, prices charged for similar offerings, if any, our historical pricing practices as well as the nature and complexity of different technologies being licensed and geographies.
We use distributors and resellers to complement our direct sales and marketing efforts in certain markets and/or for certain products. Due to the broad range of features and options available with our hardware and software products, distributors and resellers generally do not stock our products and typically place orders with us after receiving an order from an end customer. These distributors and resellers receive business terms of sale similar to those received by our other customers; and payment to Ixia is not contingent on sell-through to and receipt of payment from the end customer. As such, for sales to distributors and resellers, we recognize revenue when the risks and rewards of ownership have transferred to the distributor or reseller provided that the other revenue recognition criteria noted above have been met.

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Acquisition Purchase Price Allocation. When we acquire a business, product line, or rights to a product or technology, we allocate the purchase price to the various tangible and intangible assets acquired and the liabilities assumed based on their estimated fair values. Determining the fair value of certain assets and liabilities acquired is subjective in nature and often involves the use of significant estimates and assumptions, some of which may be based in part on historical experience and information obtained from the management of the acquired business, and are inherently uncertain. Many of the estimates and assumptions used to determine fair values, such as those for purchased technologies and customer relationships, are made based on forecasted information and discount rates. To assist in the purchase price allocation process as well as the determination of estimated useful lives of acquired intangible assets, we may obtain appraisals from valuation specialists. Unanticipated events and circumstances may occur which may affect the accuracy or validity of such estimates and assumptions.
Write-Down of Excess or Obsolete Inventory. We write down inventory for estimated obsolescence, excessive quantities, or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon market and economic conditions, technology changes, new product introductions, and changes in strategic business direction, and requires estimates that may include elements that are uncertain. If actual future demand is less favorable than our initial estimate, additional inventory write-downs may be required and would be reflected in cost of goods sold in the period the revision is made. Once written down, the inventory reserves are not reversed until the inventory is disposed of or sold.
Income Taxes. We operate in numerous states and countries through our various subsidiaries, and must allocate our income, expenses, and earnings under the various laws and regulations of each of these taxing jurisdictions.  Accordingly, our provision for income taxes represents our total estimate of the liability that we have incurred in doing business each year in all of our locations. Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases and are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered. In determining whether we need to record a valuation allowance against our deferred tax assets, management must make a number of estimates, assumptions, and judgments, including estimates of future earnings and taxable income. We establish a valuation allowance to reduce deferred tax assets to the amount we believe is more likely than not to be realized. The determination to record or release valuation allowances requires significant judgment. In the fourth quarter of 2016, we concluded that it is more likely than not that all of our net deferred tax assets in the U.S. may not be realized. Our conclusion was due to the realization of a three year cumulative pre-tax book loss in the U.S.
Annually, we file tax returns that represent our filing positions with each jurisdiction and settle our tax return liabilities. Each jurisdiction has the right to audit those returns and may take different positions with respect to income and expense allocations and taxable earnings determinations. We may provide for estimated liabilities in our consolidated financial statements associated with uncertain tax return filing positions that are subject to audit by various tax authorities. Because the determinations of our annual provisions are subject to assumptions, judgments, and estimates, it is likely that actual results may vary from those recognized in our consolidated financial statements. As a result, additions to, or reductions of, income tax expense will occur each year for prior reporting periods as our estimates or judgments change, or as actual tax returns and tax audits are settled. We recognize any such prior year adjustments in the discrete quarterly period in which it is determined.
Goodwill. We record goodwill as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the acquired net tangible and intangible assets. We evaluate the recoverability of our goodwill on an annual basis or if events or changes in circumstances indicate that impairment in the value of goodwill recorded on our balance sheet may exist. We have determined that we have one reporting unit for goodwill impairment testing purposes. The fair value of the Company’s reporting unit is determined using the market capitalization of Ixia, which considers the observed market price of the Company’s publicly-traded equity securities on the impairment test date. The fair value of the Company’s reporting unit is then compared to the carrying amount of the Company’s reporting unit under “step 1” of the impairment testing model. If the carrying value of the reporting unit exceeds its fair value, then the fair value of goodwill is determined and compared to its carrying value under “step 2.” Impairment losses are recorded to the extent that the carrying value of the goodwill exceeds its estimated fair value. Currently, management believes that it is not at risk of failing the “step 1” impairment test because the Company’s market capitalization is significantly in excess of the carrying value of the reporting unit.  We completed our annual goodwill impairment test of our single reporting unit as of December 31, 2016 and determined that there was no impairment.  

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Long-lived Asset Valuation (Intangible Assets and Property, Plant and Equipment). We test long-lived assets or asset groups for recoverability when events or changes in circumstances indicate that their carrying amounts may not be recoverable. Circumstances which could trigger a review include, but are not limited to: significant decreases in the market price of the asset; significant adverse changes in the business climate or legal factors; accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the asset; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset; and a current expectation that the asset will more likely than not be sold or disposed of significantly before the end of its estimated useful life. When such events or changes in circumstances occur, we assess recoverability by determining whether the carrying value of such assets will be recovered through the undiscounted expected future cash flows. If the future undiscounted cash flows are less than the carrying amount of these assets, we recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets. Fair value is determined using a discounted cash flow analysis that involves the use of significant estimates and assumptions, some of which may be based in part on historical experience, forecasted information, and discount rates. No such impairment charges were recorded during the years ended December 31, 2016, 2015, and 2014.
Stock-Based Compensation. Share-based payments, including grants of stock options, restricted stock units, and employee stock purchase rights, are recognized based on the estimated fair values for accounting purposes on the grant date. We use the Black-Scholes option pricing model to estimate the fair value for accounting purposes of stock options and employee stock purchase rights. We use the grant date closing share sales price of a share of our common stock to estimate the fair value for accounting purposes of restricted stock units. The determination of the fair value of share-based awards utilizing the Black-Scholes model is affected by our stock price and a number of assumptions, including expected volatility, expected life, and risk-free interest rate. The expected life and expected volatility are estimated based on historical data. The risk-free interest rate assumption is based on observed interest rates appropriate for the lives of our share-based awards. Stock-based compensation expense recognized in our consolidated financial statements is based on awards that are ultimately expected to vest. The amount of stock-based compensation expense is reduced for estimated forfeitures based on historical experience as well as future expectations. We recognize stock-based compensation expense based on the graded, or accelerated multiple-option, approach over the vesting period.
Impairment of Marketable Securities. We regularly review our investment portfolio to determine if any security is other-than-temporarily impaired, which would require us to record an impairment charge in the period any such determination is made. In making this judgment, we evaluate, among other things, the duration and extent to which the fair value of a security is less than its cost and our intent and ability to sell, or whether we will more likely than not be required to sell, the security before recovery of its amortized cost basis. We have evaluated our investments as of December 31, 2016 and have determined that no investments with unrealized losses are other-than-temporarily impaired.
Contingencies and Litigation. We evaluate contingent liabilities, including threatened or pending litigation, and record accruals when the loss is deemed probable and the liability can reasonably be estimated. We make these assessments based on the facts and circumstances of each situation and in some instances following consultation with outside legal counsel.


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Results of Operations
 
The following table sets forth certain statement of operations data as a percentage of total revenues for the periods indicated:
 
 
2016
 
2015
 
2014
Revenues:
 
 
 
 
 
Products
64.2
 %
 
70.0
 %
 
70.1
 %
Services
35.8

 
30.0

 
29.9

Total revenues
100.00

 
100.0

 
100.0

Costs and operating expenses: (1)
 
 
 
 
 
Cost of revenues – products (2)
18.1

 
18.8

 
21.3

Cost of revenues – services
3.3

 
3.2

 
3.5

Research and development
21.1

 
21.9

 
24.8

Sales and marketing
33.3

 
30.0

 
32.7

General and administrative
12.2

 
13.3

 
14.3

Amortization of intangible assets
8.1

 
8.2

 
10.1

Acquisition and other related costs
0.2

 
0.1

 
0.7

Restructuring
0.0

 
(0.1
)
 
2.2

Total costs and operating expenses
96.2

 
95.5

 
109.6

Income (loss) from operations
3.8

 
4.5

 
(9.6
)
Interest income and other, net
0.1

 
(0.1
)
 

Interest expense
(0.4
)
 
(1.6
)
 
(1.8
)
Income (loss) before income taxes
3.5

 
2.8

 
(11.4
)
Income tax expense (benefit)
10.5

 
1.6

 
(2.4
)
Net (loss) income
(7.0
)%
 
1.2
 %
 
(9.0
)%
 
(1)
Stock-based compensation included in:
Cost of revenues – products
 
0.1
%
 
0.1
%
 
0.1
%
Cost of revenues – services
 
0.0

 
0.0

 
0.0

Research and development
 
1.3

 
1.3

 
1.5

Sales and marketing
 
1.2

 
0.9

 
1.2

General and administrative
 
1.2

 
1.4

 
0.8

 
(2)
Cost of revenues – products excludes amortization of intangible assets related to purchased technology, as a percentage of total revenues, of 5.2%5.0%, and 6.2% for the years ended December 31, 2016, 2015, and 2014, respectively, which is included in Amortization of intangible assets.


46



Comparison of the Years Ended December 31, 2016 and 2015
 
Revenues. During the year ended December 31, 2016, total revenues decreased 6.2% to $484.8 million from the $516.9 million recorded in the year ended December 31, 2015.

The following table presents revenue by product line (in thousands):
 
Year ended December 31,
 
2016
 
2015
Product revenues
$
223,945

 
$
271,247

Service revenues
125,612

 
115,367

Total Network Test Solutions
349,557

 
386,614

 
 
 
 
Product revenues
87,258

 
90,676

Service revenues
48,030

 
39,647

Total Network Visibility Solutions
135,288

 
130,323

Total Revenues
$
484,845

 
$
516,937

 
During the year ended December 31, 2016, revenues from our Network Test Solutions product line decreased 9.6% to $349.6 million compared to $386.6 million recorded in the year ended December 31, 2015. The year-over-year decrease in revenue for Network Test Solutions was principally driven by a decrease in product revenues, which was primarily due to a lower volume of shipments of our 1 Gigabit ("1G") and 10 Gigabit ("10G") Ethernet interface cards, partially offset by higher revenues recognized on technical support, warranty, and software maintenance services.
 
During the year ended December 31, 2016, revenues from our Network Visibility Solutions product line increased 3.8% to $135.3 million compared to $130.3 million recorded in the year ended December 31, 2015. The year-over-year increase in revenues for Network Visibility Solutions was driven primarily by an increase in revenues recognized on our technical support, warranty, and software maintenance services contracts.
 
Cost of Revenues. As a percentage of total revenues, our total cost of revenues decreased to 21.4% in the year ended December 31, 2016 from 22.0% in the year ended December 31, 2015. This percentage decrease was primarily due to the mix of product and service revenues, as a higher percentage of our revenues came from sales of services, which have lower direct costs associated with them.
 
Cost of revenues does not include the amortization of purchased technology related to our acquisitions of certain businesses, product lines, and technologies of $25.3 million and $25.7 million for the years ended December 31, 2016 and 2015, respectively, which are included within the Amortization of intangible assets line item in our consolidated statements of operations included in this Form 10-K.
 
Research and Development. During the year ended December 31, 2016, research and development expenses decreased 9.6% to $102.5 million from $113.4 million in the year ended December 31, 2015. This decrease was primarily due to lower bonus accruals in 2016.
 
Sales and Marketing. During the year ended December 31, 2016, sales and marketing expenses increased 4.1% to $161.6 million from $155.2 million in the year ended December 31, 2015. This increase was primarily due to higher salaries due, in part to an increase in headcount in sales and marketing personnel, and higher stock-based compensation, consulting, and online marketing expenses. These year-over-year increases were partially offset by lower bonus accruals and commission expense due, in part, to lower sales in 2016.

General and Administrative. During the year ended December 31, 2016, general and administrative expenses decreased 14.4% to $59.0 million from $68.9 million in the year ended December 31, 2015. This decrease was primarily due to lower bonus accruals in the current year, and to a lesser extent, lower professional fees and stock-based compensation expenses.

Amortization of Intangible Assets. During the year ended December 31, 2016, amortization of intangible assets decreased 7.6% to $39.1 million from $42.3 million in the year ended December 31, 2015. These decreases were primarily due to the completion of amortization periods for certain previously acquired intangible assets.


47



Acquisition and Other Related Costs. During the year ended December 31, 2016, acquisition and other related costs increased 19.7% to $785,000 compared to $656,000 in the year ended December 31, 2015. Acquisition and other related costs incurred in the year ended December 31, 2016 consisted primarily of professional fees incurred in connection with our evaluation of an unsolicited proposal to acquire the Company and our exploration of strategic alternatives available to us, which resulted in our pending acquisition by Keysight Technologies, Inc. Acquisition and other related costs incurred in the year ended December 31, 2015 primarily related to the final resolution and settlement of integration-related liabilities incurred in connection with the December 2013 acquisition of Net Optics.

Restructuring. During the years ended December 31, 2016 and 2015, we recorded net restructuring credits of approximately $130,000 and $517,000, respectively. The credits recorded in the Restructuring line item primarily relate to the settlement of previously accrued lease obligations on favorable terms, while restructuring credits recorded in the year ended December 31, 2015 also include the receipt of insurance settlement proceeds for costs previously charged to the Restructuring line item in our consolidated statements of operations.
 
Interest Income and Other, Net. Interest income and other, net was income of approximately $310,000 in the year ended December 31, 2016 compared to an expense of approximately $372,000 in the year ended December 31, 2015. The increase in income was primarily the result of lower foreign currency translation and transaction losses during 2016.
 
Interest expense. Interest expense, including the amortization of debt issuance costs, was $1.9 million and $8.3 million for the years ended December 31, 2016 and 2015, respectively. The decrease was primarily due to the 2015 repayment of our previously outstanding convertible senior notes, on which we incurred $4.9 million in interest expense and $1.3 million for the amortization and write-off of debt issuance costs in the prior year period.
 
Income Tax Expense. Income tax expense was $50.7 million, or an effective rate of 302.0%, in 2016 compared to income tax expense of $8.4 million, or an effective rate of 58.5%, in 2015. Our effective income tax rate is higher than our statutory rate primarily due to unrecognized tax benefits, non-deductible stock-based compensation, and intercompany activity such as inter-company royalties and transfers. Additionally, for the year ended December 31, 2016, we recorded a non-cash charge to income tax expense totaling $42.9 million to provide for a full valuation allowance against our net deferred tax assets in the U.S.
 
Comparison of the Years Ended December 31, 2015 and 2014
 
Revenues. During the year ended December 31, 2015, total revenues increased 11.3% to $516.9 million from the $464.5 million recorded in the year ended December 31, 2014.
 
The following table presents revenue by product line (in thousands):
 
Year ended December 31,
 
2015
 
2014
Product revenues
$
271,247

 
$
238,282

Service revenues
115,367

 
107,391

Total Network Test Solutions
386,614

 
345,673

 
 
 
 
Product revenues
90,676

 
87,173

Service revenues
39,647

 
31,612

Total Network Visibility Solutions
130,323

 
118,785

Total Revenues
$
516,937

 
$
464,458

 
During the year ended December 31, 2015, revenues from our Network Test Solutions product line increased 11.8% to $386.6 million from $345.7 million in the year ended December 31, 2014. The year-over-year increase in revenue for Network Test Solutions was principally driven by an increase in product revenues, which was primarily due to a higher volume of shipments of our high speed Ethernet interface cards, and to a lesser extent, higher revenues recognized on technical support, warranty, and software maintenance services.
 
During the year ended December 31, 2015, revenues from our Network Visibility Solutions product line increased 9.7% to $130.3 million compared to $118.8 million in the year ended December 31, 2014. The year-over-year increase in revenue for Network Visibility Solutions was driven primarily by an increase in revenues recognized on technical support, warranty, and software maintenance services.

48



 
Cost of Revenues. As a percentage of total revenues, our total cost of revenues decreased to 22.0% in the year ended December 31, 2015 from 24.8% in year ended December 31, 2014. This percentage decrease was primarily due to the realization of higher gross margins on certain of our products in 2015, and to a lesser extent, incremental operating leverage associated with higher revenues and relatively fixed indirect costs.

Cost of revenues does not include the amortization of purchased technology related to our acquisitions of certain businesses, product lines, and technologies of $25.7 million and $28.9 million for the years ended December 31, 2015 and 2014, respectively, which are included within our Amortization of intangible assets line item in our consolidated statements of operations included in this Form 10-K.
 
Research and Development Expenses. During the year ended December 31, 2015, research and development expenses decreased 1.5% to $113.4 million from $115.2 million in the year ended December 31, 2014. This decrease was primarily due to decreases in salaries and facilities costs due, in part, to cost reductions as a result of our 2014 restructuring activities, and decreases in consulting and outside services costs. These year-over-year decreases were partially offset by an increase in bonus accruals.
 
Sales and Marketing Expenses. During the year ended December 31, 2015, sales and marketing expenses increased 2.3% to $155.2 million from $151.8 million in the year ended December 31, 2014. This increase was primarily due to higher commissions and increases in bonus accruals. These year-over-year increases were partially offset by lower salaries and facilities expenses due, in part, to cost reductions as a result of our 2014 restructuring activities.
 
General and Administrative Expenses. During the year ended December 31, 2015, general and administrative expenses increased 3.7% to $68.9 million from $66.5 million in the year ended December 31, 2014. This increase was primarily due to higher stock-based compensation and bonus accruals, partially offset by lower legal fees due to a reduction in costs associated with our 2014 internal investigations and the securities class action and derivative actions then pending against us and certain of our current and former officers and directors.

Amortization of Intangible Assets. During the year ended December 31, 2015, amortization of intangible assets decreased 9.8% to $42.3 million from $46.9 million in the year ended December 31, 2014. This decrease was primarily due to the completion of amortization periods for certain previously acquired intangible assets.

Acquisition and Other Related Costs. During the year ended December 31, 2015, acquisition and other related costs decreased 80.0% to $656,000 from $3.3 million in the year ended December 31, 2014. During the years ended December 31, 2015 and 2014, acquisition and other related costs were primarily related to the 2013 acquisition of Net Optics and primarily consisted of: transaction and integration-related costs such as professional fees for legal, accounting, and tax services; integration-related consulting fees; certain employee, facility, and infrastructure costs; and other acquisition-related costs.

Restructuring. Restructuring costs for the year ended December 31, 2015 were a net credit of approximately $517,000 compared to costs of $10.3 million for the year ended December 31, 2014. Restructuring credits recorded in the year ended December 31, 2015 were primarily related to the receipt of insurance settlement proceeds for costs previously charged to the Restructuring line item in our consolidated statements of operations, and the impact of a favorable lease buyout. Restructuring costs incurred in the year ended December 31, 2014 were primarily related to our 2014 Corporate Restructuring and the Net Optics Restructuring, and lease termination costs.
 
Interest Income and Other, Net. Interest income and other, net was an expense of approximately $372,000 in the year ended December 31, 2015 compared to an expense of approximately $24,000 in the year ended December 31, 2014. This increase in expense was primarily due to higher foreign currency translation losses incurred during 2015 compared to 2014.
 
Interest expense. Interest expense, including the amortization of debt issuance costs, was $8.3 million for each of the years ended December 31, 2015 and 2014. Increases in 2015 in interest expense as a result of our Term Loan and amortization of debt issuance costs related to our credit facility were offset by lower interest expense related to our convertible senior notes as a result of the repurchase (prior to maturity) of a portion of the of our then outstanding notes in July 2015.
 
Income Tax Expense. Income tax expense was $8.4 million, or an effective rate of 58.5%, in 2015 as compared to an income tax benefit of $11.1 million, or an effective rate of 21.1%, in 2014. Our effective income tax rate in 2015 was higher than our statutory rate primarily due to increases in unrecognized tax benefits, non-deductible stock-based compensation and intercompany activity such as inter-company royalties and transfers.


49



Liquidity and Capital Resources
 
Our cash, cash equivalents, and marketable securities increased by $76.0 million to $143.0 million at December 31, 2016 from the $67.0 million reported at December 31, 2015. This increase was primarily due to net cash provided by our operating activities of $81.2 million and $15.5 million in proceeds received from the exercises of share-based awards, partially offset by the use of $8.7 million for capital expenditures, $6.9 million for the repurchase of stock under our share repurchase program, and $3.5 million for the repayment of debt.
 
Our cash, cash equivalents, and marketable securities in the aggregate decreased by $59.2 million to $67.0 million at December 31, 2015 from the $126.2 million reported at December 31, 2014, primarily due to the use of approximately $201.7 million to repay our debt obligations and $8.4 million for capital expenditures, offset partially by net cash provided by our operating activities of $98.8 million, cash of $38.7 million (net of debt issuance costs) received from the March 2015 funding of our Term Loan, and $13.7 million of proceeds received from the exercises of share-based awards.

Of our cash, cash equivalents, and investments in the aggregate, $33.6 million and $21.5 million were held outside of the United States in various foreign subsidiaries as of December 31, 2016 and December 31, 2015, respectively. Cumulative undistributed earnings of foreign subsidiaries for which no deferred income taxes have been provided approximated $124.4 million and $100.5 million at December 31, 2016 and 2015, respectively. Under current tax laws and regulations, if our cash, cash equivalents, or investments associated with the subsidiaries’ undistributed earnings were to be repatriated in the form of dividends or deemed distributions, we would be subject to additional U.S. income taxes and foreign withholding taxes. We consider these funds to be indefinitely reinvested in our foreign operations and do not intend to repatriate them. Determination of the amount of unrecognized deferred income tax liability related to these earnings is not practicable. We had no exposure to European sovereign debt as of December 31, 2016 and 2015.
 
The following table sets forth our summary cash flows for the years ended December 31, 2016, 2015, and 2014 (in thousands):
 
 
Year Ended December 31,
 
2016
 
2015
 
2014
Cash provided by operating activities
$
81,176

 
$
98,804

 
$
38,071

Cash (used in) provided by investing activities
(66,542
)
 
55,837

 
(34,916
)
Cash provided by (used in) financing activities
4,653

 
(148,563
)
 
9,050

 
Cash Flows from Operating Activities
 
Operating cash inflows are principally provided by cash collections on sales to our customers. Our primary uses of cash from operating activities are for personnel-related expenditures, product costs, and facility-related payments. Going forward, our cash flows from operating activities will be impacted by (i) the extent to which we grow our customer sales; (ii) the extent to which we increase our headcount and enhance our infrastructure to generate additional business, develop new products and features, and support our growth; (iii) our working capital management; and (iv) interest paid to service our debt (See Note 3 to the consolidated financial statements included in this Form 10-K).
 
Net cash provided by operating activities was $81.2 million for the year ended December 31, 2016 compared to $98.8 million for the year ended December 31, 2015. This decrease in cash flow generated from operations compared to the prior year was primarily driven by the impact of changes in net working capital. Changes in accrued expenses had a negative impact on cash flows from operations in 2016 due to the payment of certain accrued expenses, primarily bonuses, that were accrued for in the prior year. This negative impact on cash flows was partially offset by a positive impact on cash flows in 2016 from decreases in accounts receivable as a result of increased cash collections during 2016.
 

50



Net cash provided by operating activities was $98.8 million for the year ended December 31, 2015 compared to $38.1 million for the year ended December 31, 2014. This increase in cash flow generated from operations was primarily driven by net earnings of $6.0 million for the year ended December 31, 2015 compared to net loss of $41.6 million for the year ended December 31, 2014. That change was primarily a result of higher revenues in the year ended December 31, 2015, and a positive impact on cash from net working capital changes of $14.1 million. The positive impact on cash from net working capital changes was primarily a result of increases in accrued expenses and other liabilities, due primarily to higher bonus and income tax accruals, and decreases in our inventory balances due to more efficient inventory management, partially offset by a negative impact on cash from an increase in accounts receivable driven by higher sales in 2015 and the timing of cash collections.
 
Cash Flows from Investing Activities
 
Our cash inflow from investing activities principally relates to proceeds from the sale and maturities of our investments in marketable securities. Our primary uses of cash from investing activities are for purchases of marketable securities investments and capital expenditures to support our growth, and in past years, we have used cash for the purchase of product, technology and/or business acquisitions. Going forward, we expect our cash flows from investing activities to fluctuate based on the timing of our sales, maturities and purchases of marketable securities, and the number of product, technology and/or business acquisitions, if any, that we close.

Net cash used in investing activities was $66.5 million for the year ended December 31, 2016, and net cash provided by investing activities was $55.8 million for the year ended December 31, 2015. Net cash used in investing activities during the year ended December 31, 2016 was primarily due to the use of $56.7 million for net purchases of marketable securities and $8.7 million for purchases of property and equipment. Net cash provided by investing activities for the year ended December 31, 2015 was primarily due to the net proceeds of $65.1 million from the net sale of marketable securities to help fund the repayment of our convertible senior notes, partially offset by $8.4 million for purchases of property and equipment.
 
Net cash provided by investing activities was $55.8 million for the year ended December 31, 2015, and net cash used in investing activities was $34.9 million for the year ended December 31, 2014. The increase in net cash provided by investing activities in the year ended December 31, 2015 as compared to the prior year period was primarily due to the sale of marketable securities to help fund the repayment of our convertible senior notes in 2015.

Cash Flows from Financing Activities

Net cash provided by financing activities was $4.7 million for the year ended December 31, 2016 compared to net cash used in financing activities of $148.6 million for the year ended December 31, 2015. Net cash provided by financing activities during the year ended December 31, 2016 was primarily due to $15.5 million of proceeds received from the exercises of share-based awards, partially offset by the use of $6.9 million for the repurchase of common stock and $3.5 million for debt repayments under our Term Loan. Net cash used by financing activities during the year ended December 31, 2015 was primarily related to the July 2015 repurchase of certain of our outstanding convertible senior notes and the December 2015 repayment at maturity of our remaining outstanding convertible senior notes, and periodic repayments of our Term Loan, partially offset by borrowings under our Term Loan, net of deferred issuance costs, and proceeds received from the exercises of stock options and employee stock purchase plan options.
 
Net cash used in financing activities was $148.6 million for the year ended December 31, 2015, and net cash provided by financing activities was $9.1 million for the year ended December 31, 2014. This increase in cash used in financing activities was due to the 2015 repurchase of our previously outstanding convertible senior notes. The $9.1 million in cash provided by financing activities in 2014 was primarily due to proceeds received from the exercises of stock options and employee stock purchase plan options.

Prior to 2010, cash inflows from financing activities were principally related to proceeds from the exercises of stock options and employee stock purchase plan options. In December 2010, we raised $194 million in net proceeds from the issuance of $200 million in aggregate principal amount of convertible senior notes, which, to the extent they remained outstanding, matured and were repaid on December 15, 2015. On March 2, 2015, we entered into our Credit Agreement that provides for the Term Loan in the amount of $40 million and the Revolving Credit Facility currently in the maximum aggregate amount of $150 million. The original $60 million maximum amount of the Revolving Credit Facility was increased to $75 million in September 2015 and to the current amount of $150 million in January 2016. The maturity date of the Term Loan is February 15, 2018. The maturity date of the Revolving Credit Facility was extended in January 2016 from February 15, 2018 to February 15, 2020. The Revolving Credit Facility may, upon our request and subject to the receipt of increased commitments from existing lenders or additional lenders, be increased by the aggregate amount of up to $100 million.


51



The Term Loan requires quarterly repayments of principal of $1.0 million in the first quarter of 2017, and $1.5 million in each of the three quarters thereafter. The remaining principal balance of the Term Loan will be due and payable on February 15, 2018. We are permitted to prepay outstanding loans under the Credit Facility at any time without premium or penalty. We may re-borrow amounts under the Revolving Credit Facility, but we may not re-borrow amounts that we repay or prepay under the Term Loan. For additional information regarding the Term Loan and the Revolving Credit Facility, see Note 3 to the consolidated financial statements included in this Form 10-K.

Going forward, we expect our cash flows from financing activities to fluctuate based on (i) the number of exercises of share-based awards, which is partially dependent on the performance of our stock price, and (ii) the utilization of our Revolving Credit Facility. If deemed appropriate and approved by our Board of Directors, we may from time to time raise capital through debt or equity financings; refinance our existing debt under the Credit Agreement; and/or initiate additional stock buyback programs.

We believe that our existing balances of cash, cash equivalents, and investments, cash flows expected to be generated from our operations, and amounts available under our Credit Agreement will be sufficient to fund our operating needs, capital, investing and other commitments and contingencies for the next 12 months. We also may seek additional sources of capital as necessary or appropriate to fund acquisitions or to otherwise finance our growth or operations; there can be no assurance that such funds, if needed, will be available on favorable terms, if at all. Our access to the capital markets to raise funds, through the sale of equity or debt securities, is subject to various limitations, including conditions in U.S. capital markets.

Share Repurchase Program

On February 23, 2016, we announced that our Board of Directors had authorized a share repurchase program (the "Program") under which we were authorized, over the 12 months following the announcement, to acquire up to $25 million of our common stock. Under the Program, which expired on February 22, 2017, we were authorized, from time to time and subject to general business and market conditions, alternative investment opportunities, and other factors, to repurchase shares in open market purchases, in privately negotiated transactions, and/or through other means, including pursuant to trading plans intended to comply with Rule 10b5-1 under the Exchange Act. Repurchases under the Program were funded using our available cash and cash equivalents, including cash available under our Revolving Credit Facility. During the year ended December 31, 2016, we repurchased 707,332 shares of common stock for approximately $6.9 million. All of the repurchased shares remain authorized, but are no longer issued and outstanding. As of December 31, 2016, $18.1 million remained available for share repurchases under the Program.

Contractual Obligations 
 
Our significant financial commitments at December 31, 2016 are as follows (in thousands):

 
Total
 
Less than
1 year
 
1-3 years
 
3-5 years
 
More than 5 years
 
(in thousands)
Operating leases (1)
$
54,107

 
$
11,849

 
$
20,657

 
$
13,319

 
$
8,282

Purchase obligations (2)
42,135

 
42,135

 

 

 

Term Loan (Principal and Interest) (3)
36,235

 
6,351

 
29,884

 

 

Total
$
132,477


$
60,335


$
50,541


$
13,319


$
8,282

 
(1)
Minimum lease payments have not been reduced by minimum sublease rentals of $43,000 due in the future under non-cancelable subleases. See Note 10 to the consolidated financial statements included in this Form 10-K.

(2)
Purchase obligations in the table above consist of purchase orders issued to certain of our contract manufacturers in the normal course of business to purchase specified quantities of our hardware products. It is not our intent, nor is it reasonably likely, that we would cancel these executed purchase orders.

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(3)
In March 2015, we entered into an amended and restated credit agreement which provides for a term loan in the aggregate principal amount of $40 million. The Term Loan requires quarterly repayments of principal on the last day of the eleven fiscal quarters commencing with the fiscal quarter ended June 30, 2015. The first four payments were in the amount of $500,000 each, the following four payments are in the amount of $1.0 million each, and the subsequent three payments will be in the amount of $1.5 million each. The remaining principal balance of the Term Loan will be due and payable on the maturity date, which is February 15, 2018. See Note 3 to the consolidated financial statements included in this Form 10-K. The term loan obligations in the table above assume an interest rate of 2.61% in future years.

Recent Accounting Pronouncements
 
Information regarding new accounting pronouncements is included in Note 1 to the consolidated financial statements included in this Form 10-K.
 
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
 
Interest Rate Sensitivity
 
Investment Activities
 
We maintain a portfolio of cash equivalents and investments in a variety of fixed and variable rate securities, including U.S. government and federal agency securities, corporate debt securities, and money market funds. The primary objective of our investment activities is to maintain the safety of principal and preserve liquidity while maximizing yields without significantly increasing risk. We do not enter into investments for trading or speculative purposes. Fixed-rate securities are subject to market risk so changes in prevailing interest rates may adversely impact their fair market value should interest rates rise. While we do not intend to sell these fixed rate securities prior to maturity based on a sudden change in market interest rates, should we choose to sell these securities in the future, our consolidated operating results or cash flows may be adversely affected. A smaller portion of our cash equivalents and investment portfolio consists of variable interest rate securities. Accordingly, we also have interest rate risk with these variable rate securities as the income produced may decrease if interest rates fall. We do not use derivatives or similar instruments to manage our interest rate risk. Due to the high investment quality and relatively short duration of these investments, we do not believe that they present any material exposure to changes in fair market value as a result of changes in interest rates.
 
Senior Secured Revolving Credit Facility 
 
On March 2, 2015, we entered into a credit agreement with certain institutional lenders under which we secured a term loan in the aggregate principal amount of $40 million (the “Term Loan”) and that, as amended to date, provides for a revolving credit facility for an aggregate loan amount of up to $150 million (the “Revolving Credit Facility”). As of December 31, 2016, there was $35 million outstanding under the Term Loan and no amounts outstanding under our Revolving Credit Facility.

The interest rates for both the Term Loan and the Revolving Credit Facility range from 2.0% to 3.0% above the Eurodollar rate for Eurodollar-based borrowings and from 1.0% to 2.0% above the defined base rate for base rate borrowings, in each case depending on the Company’s leverage ratio. Interest is payable quarterly. As of December 31, 2016, the interest rate applicable to the amount outstanding under the Term Loan was 2.61%.

Because of the floating rate of interest on our Term Loan, our earnings and cash flows from operations may be exposed to changes in interest rates. If the interest rate on our borrowings increased by 100 basis points (1%) and our outstanding borrowings remained constant at $35 million, our annual interest expense would increase by approximately $350,000.
 
Exchange Rate Sensitivity
 
The majority of our revenue and expenses are denominated in U.S. dollars. However, since we have sales, research and development, and other operations outside of the United States, we do incur operating expenses in foreign currencies, primarily in Japanese Yen, Romanian Lei, Indian Rupees, Chinese Yuan, Canadian Dollars, Euros, and British Pounds. If these currencies strengthen against the U.S. dollar, our costs reported in U.S. dollars will increase, which would adversely affect our operating expenses.


53



Approximately 28% of our operating expenses, excluding stock-based compensation and amortization of intangible assets, are exposed to foreign currency movements, and historically, we have not entered into foreign currency forward contracts to hedge our operating expense exposure to foreign currencies, but we may do so in the future. We estimate that the impact of changes in foreign currency rates in 2016 on our operating expenses, excluding stock-based compensation and amortization of intangible assets, was approximately 1.50%.
 
The fair value of our foreign currency forward contracts is sensitive to changes in foreign currency exchange rates. When possible, we use foreign currency forward contracts to minimize the short-term impact of currency fluctuations on foreign currency receivables that are denominated in Japanese Yen, Euros, and British Pounds. Our foreign currency forward contracts typically have maturities of one to four months. We do not enter into foreign exchange forward contracts for speculative or trading purposes. Due to the relatively short duration of these forward contracts, we do not believe that they present any material exposure to changes in fair market value as a result of changes in foreign currency exchange rates. Additionally, these contracts are intended to offset exchange losses and gains on underlying exposures in foreign currency receivables. During the years ended December 31, 2016, 2015, and 2014, the net impact from changes to foreign currency exchange rates related to forward contracts was not material.
 
As of December 31, 2016, we held four open foreign currency forward contracts with a notional value of $3.9 million and a net fair value of approximately $7,000. As of December 31, 2015, we held three open foreign currency forward contracts with a notional value of $4.8 million and a net fair value of approximately $15,000.
  
Item 8. Financial Statements and Supplementary Data
 
Our financial statements and supplementary data required by this Item are provided in the consolidated financial statements of the Company included in this Form 10-K as listed in Item 15(a) of this Form 10-K.
 
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
None. 

Item 9A. Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures

Our management (with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”)) evaluated the effectiveness, as of the end of the period covered by this Form 10-K, of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on such evaluation, our CEO and CFO have concluded that, as of December 31, 2016 (i.e., the end of the period covered by this Form 10-K), such disclosure controls and procedures were effective to ensure that the information required to be disclosed in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and (ii) accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed by, or under the supervision of, our CEO and CFO, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our consolidated financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, our internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.


54



Our management (with the participation of our CEO and CFO) conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2016 based on the framework in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on its evaluation under the framework in Internal Control - Integrated Framework (2013), our management concluded that our internal control over financial reporting was effective as of December 31, 2016.

The effectiveness of our internal control over financial reporting as of December 31, 2016 has been audited by Deloitte & Touche LLP, our independent registered public accounting firm, as stated in its report which is included elsewhere herein.

Changes in Internal Control Over Financial Reporting

During the quarter ended December 31, 2016, changes to our internal control over financial reporting that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting were:

Multiple-Element Arrangements. We completed the design and implementation of controls related to the identification of deliverables and allocation of consideration in multiple-element arrangements, and completed the testing of these controls to ensure their operating effectiveness.

Controls over Information Used in Controls. We completed the design and implementation of controls over the completeness and accuracy of information used in the execution of internal controls within the revenue recognition process, and completed the testing of these controls to ensure their operating effectiveness.

Item 9B. Other Information
 
None.

55




REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Shareholders of Ixia
Calabasas, California

 
We have audited the internal control over financial reporting of Ixia and subsidiaries (the "Company") as of December 31, 2016, based on the criteria established in the Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2016 of the Company and our report dated March 1, 2017 expressed an unqualified opinion on those financial statements.



/s/ DELOITTE & TOUCHE LLP

Los Angeles, California
March 1, 2017

56



PART III
 
Item 10. Directors, Executive Officers and Corporate Governance
 
Certain information required by this Item is incorporated herein by reference to information appearing in our definitive Proxy Statement for our Annual Meeting of Shareholders to be held in 2017, which information will appear under the captions entitled “Proposal 1 - Election of Directors – Nominees,” “Proposal 1 – Election of Directors - Information Regarding our Board of Directors and its Committees,” “Executive Officers,” and “Section 16(a) Beneficial Ownership Reporting Compliance.” The Proxy Statement will be filed with the SEC within 120 days after our last fiscal year-end which was December 31, 2016.
 
The Registrant has adopted a Code of Ethics for its Chief Executive and Senior Financial Officers, a copy of which is included as Exhibit 14.1 to Annual Report on Form 10-K for fiscal year-ended December 31, 2003.
 
Item 11. Executive Compensation
 
The information required by this Item is incorporated herein by reference to information appearing in our definitive Proxy Statement for our Annual Meeting of Shareholders to be held in 2017, which information will appear under the captions “Proposal 1 - Election of Directors - Compensation of Directors,” “Executive Compensation and Other Information” (other than under the subcaption “Equity Compensation Plan Information”), and “Compensation Committee Report.”  The Proxy Statement will be filed with the SEC within 120 days after our last fiscal year-end which was December 31, 2016.
 
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 
 
The information required by this Item is incorporated herein by reference to information appearing in our definitive Proxy Statement for our Annual Meeting of Shareholders to be held on 2017, which information will appear under the captions “Common Stock Ownership of Principal Shareholders and Management” and “Executive Compensation and Other Information - Equity Compensation Plan Information.” The Proxy Statement will be filed with the SEC within 120 days after our last fiscal year-end which was December 31, 2016.
 
Item 13. Certain Relationships and Related Transactions, and Director Independence
 
Any information required by this Item is incorporated herein by reference to information appearing in our definitive Proxy Statement for our Annual Meeting of Shareholders to be held on 2017, which information will appear under the captions “Certain Relationships and Related Transactions,” and “Proposal 1 – Election of Directors – Information Regarding our Board of Directors and its Committees.” The Proxy Statement will be filed with the SEC within 120 days after our last fiscal year-end which was December 31, 2016.
 
Item 14. Principal Accounting Fees and Services
 
The information required by this Item is incorporated herein by reference to information appearing in our definitive Proxy Statement for our Annual Meeting of Shareholders to be held on 2017, which information will appear under the captions “Proposal 3 - Ratification of Appointment of Independent Registered Public Accounting Firm.” The Proxy Statement will be filed with the SEC within 120 days after our last fiscal year-end which was December 31, 2016.

57



PART IV
 
Item 15. Exhibits, Financial Statement Schedules
 
(a)
The following documents are filed as part of this Report:

(1)
Consolidated Financial Statements

The consolidated financial statements listed in the accompanying Index to Consolidated Financial Statements are filed as part of this report.
 
(2)
Financial Statement Schedule

The financial statement schedules have been omitted because they are not applicable or the information required to be set forth therein is included in the consolidated financial statements or notes thereto.
 
(3)
Exhibits
2.1
Agreement and Plan of Merger, dated as of January 30, 2017, by and between Ixia and Keysight Technologies, Inc. (1)
 
 
 
2.4.1
Joinder Agreement, dated as of February 2, 2017, executed by Keysight Acquisition, Inc. and acknowledged by the Company and Keysight Technologies, Inc.
 
 
 
3.1
Amended and Restated Articles of Incorporation, as amended (2)
 
 
 
3.2
Bylaws, as amended (3)
 
 
 
10.1
Amended and Restated Credit Agreement dated as of March 2, 2015, by and among the Company, as the Borrower, Anue Systems, Inc., BreakingPoint Systems, Inc., Catapult Communications Corporation, Net Optics, Inc., Net Optics IL, LLC, and VeriWave, Inc., as the Guarantors, Silicon Valley Bank, as Administrative Agent, Swingline Lender, and Letter of Credit Issuer, and the Other Lenders Parties Thereto (4)
 
 
 
10.1.1
Corrective Amendment to Credit Agreement effective as of March 20, 2015 between the Company and Silicon Valley Bank, as Administrative Agent (5)
 
 
 
10.1.2
Second Amendment to Amended and Restated Credit Agreement dated as of September 30, 2015, by and among the Company, as the Borrower, Anue Systems, Inc., BreakingPoint Systems, Inc., Catapult Communications Corporation, Net Optics, Inc., Net Optics IL LLC, and VeriWave, Inc., as the Guarantors, Silicon Valley Bank, as Administrative Agent, and the Lenders Party Thereto (6)
 
 
 
10.1.3
Third Amendment to Amended and Restated Credit Agreement dated as of January 25, 2016, by and among the Company, as the Borrower, Anue Systems, Inc., BreakingPoint Systems, Inc., Catapult Communications Corporation, Net Optics, Inc., Net Optics IL LLC, and VeriWave, Inc., as the Guarantors, Silicon Valley Bank, as Administrative Agent, and the Lenders Party Thereto (7)
 
 
 
10.2*
Ixia 2010 Employee Stock Purchase Plan, as amended (8), including Amendment No. 2 dated May 9, 2013 (9) and Amendment No. 3 dated June 19, 2013 (10)
 
 
 
10.3*
Officer Severance Plan (11), including Amendment dated December 31, 2008 (12), Amendment No. 2 dated March 22, 2011 (13), Amendment No. 3 dated December 21, 2012 (14) , and Amendment No. 4 dated January 29, 2017 (15)
 
 
 
10.4*
Ixia Officer Severance Plan (As Amended and Restated effective February 12, 2016) (16), including Amendment No. 1 dated January 29, 2017 (17)
 
 
 

58



10.5*
Form of Indemnity Agreement between Ixia and its directors and executive officers (adopted January 29, 2017) (18)
 
 
 
10.6
Office Lease Agreement dated September 14, 2007 between MS LPC Malibu Property Holdings, LLC and the Company (19)
 
 
 
10.6.1
First Amendment to Office Lease dated February 11, 2010, between MS LPC Malibu Property Holdings, LLC and the Company (20)
 
 
 
10.6.2
Second Amendment to Office Lease dated November 15, 2010, between MS LPC Malibu Property Holdings, LLC and the Company (21)
 
 
 
10.6.3
Third Amendment to Office Lease dated January 10, 2012 between MS LPC Malibu Property Holdings, LLC and the Company (22)
 
 
 
10.6.4
Fourth Amendment to Office Lease dated June 1, 2012 between MS LPC Malibu Property Holdings, LLC and the Company (23)
 
 
 
10.6.5
Fifth Amendment to Office Lease dated November 1, 2012 between MS LPC Malibu Property Holdings, LLC and the Company (24)
 
 
 
10.6.6
Sixth Amendment to Office Lease dated June 18, 2013 between MS LPC Malibu Property Holdings, LLC and the Company (25)
 
 
 
10.7*
Compensation of Named Executive Officers as of December 31, 2016
 
 
 
10.8*
Summary of Compensation for the Company’s Non-Employee Directors effective April 1, 2013 (26)
 
 
 
10.9*
Ixia 2016 Senior Officer Bonus Plan (27)
 
 
 
10.10*
Amended and Restated Ixia 2008 Equity Incentive Plan, including Amended and Restated First Amendment dated as of May 4, 2011 and Second Amendment dated as of April 8, 2011 (28)
 
 
 
10.11*
Second Amended and Restated Ixia 2008 Equity Incentive Plan (29)
 
 
 
10.11.1*
Form of 2016-2017 Performance-Based Restricted Stock Unit Award Agreement under the Second Amended and Restated Ixia 2008 Equity Incentive Plan (30)
 
 
 
10.12*
Employment Offer Letter Agreement dated as of August 8, 2014 and effective as of August 13, 2014 between the Company and Bethany Mayer, as amended (31)
 
 
 
10.13*
Letter Agreement effective August 4, 2014 between the Company and Brent Novak (32)
 
 
 
10.14*
Employment Agreement entered into as of May 4, 2012 between the Company, as assignee of Anue Systems, Inc., and Alexander J. Pepe (33)
 
 
 
10.14.1*
Amendment No. 1 to Employment Agreement entered into as of August 14, 2013 between the Company and Alexander J. Pepe (34)
 
 
 
10.14.2*
Amendment No. 2 to Employment Agreement entered into as of October 24, 2013 between the Company and Alexander J. Pepe, as executed by the parties on August 5, 2014 (35)

59



 
 
 
10.14.3*
Amendment No. 3 to Employment Agreement dated January 13, 2017 between the Company and Alexander J. Pepe
 
 
 
10.15*
Employment Offer Letter Agreement dated February 19, 2015 between the Company and Hans-Peter Klaey (36)
 
 
 
10.16*
Employment Separation Agreement dated as of September 9, 2016 between Ixia and Hans-Peter Klaey (37)
 
 
 
10.17
Voting and Support Agreement, dated as of January 30, 2017, by and among Keysight Technologies, Inc., Ixia, Laurent Asscher and Katelia Capital Group Ltd. (38)
 
 
 
10.18
Voting and Support Agreement, dated as of January 30, 2017, by and among Keysight Technologies, Inc., Ixia, Errol Ginsberg and The Errol Ginsberg and Annette R. Michelson Family Trust dated October 13, 1999 (39)
 
 
 
10.19*
2017 Sales SEC Plan for Patricia Key
 
 
 
10.20*
Form of Indemnity Agreement between Ixia and its directors and executive officers (superseded on January 29, 2017) (40)
 
 
 
14.1
Code of Ethics for Chief Executive Officer and Senior Financial Officers (40)
 
 
 
21.1
Subsidiaries of the Company
 
 
 
23.1
Consent of Deloitte & Touche, LLP, Independent Registered Public Accounting Firm
 
 
 
31.1
Certificate of Chief Executive Officer of Ixia pursuant to Rule 13a-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
31.2
Certificate of Chief Financial Officer of Ixia pursuant to Rule 13a-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
32.1
Certificate of Chief Executive Officer and Chief Financial Officer of Ixia pursuant to Rule 13a-14(b) under the Exchange Act and Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
101.INS
XBRL Instance Document
 
 
 
101.SCH
XBRL Taxonomy Extension Schema Document
 
 
 
101.CAL
XBRL Taxonomy Calculation Linkbase Document
 
 
 
101.LAB
XBRL Taxonomy Label Linkbase Document
 
 
 
101.PRE
XBRL Taxonomy Presentation Linkbase Document
 
 
 
101.DEF
XBRL Taxonomy Extension Definition Document
 

*
Constitutes a management contract or compensatory plan or arrangement required to be filed as an exhibit to this Annual Report on Form 10-K.

60




(1)
Incorporated by reference to Exhibit 2.1 to Ixia’s Current Report on Form 8-K (File No. 0-31523) filed with the SEC on February 1, 2017.

(2)
Incorporated by reference to Exhibit 3.1 to Amendment No. 1 to the Company’s Registration Statement on Form S-1 (Reg. No. 333-42678) filed with the SEC on September 5, 2000.

(3)
Incorporated by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K (File No. 0-31523) filed with the SEC on April 4, 2013.

(4)
Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 0-31523) filed with the SEC on March 6, 2015

(5)
Incorporated by reference to Exhibit 10.23 to the Company’s Annual Report on Form 10-K (File No. 0-31523) filed with the SEC on March 31, 2015.

(6)
Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 0-31523) filed with the SEC on October 5, 2015.

(7)
Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 0-31523) filed with the SEC on January 29, 2016.

(8)
Incorporated by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-8 (Reg. No. 333-176237) filed with the SEC on August 11, 2011.

(9)
Incorporated by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-8 (Reg. No. 333-188689) filed with the SEC on May 17, 2013.

(10)
Incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K (File No. 0-31523) filed with the SEC on June 25, 2013.

(11)
Incorporated by reference to Exhibit 10.4 to Amendment No. 1 to the Company’s Registration Statement on Form S- 1 (Reg. No. 333-42678) filed with the SEC on September 5, 2000.

(12)
Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K (File No. 0-31523) filed with the SEC on January 7, 2009.

(13)
Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K (File No. 0-31523) filed with the SEC on March 28, 2011.

(14)
Incorporated by reference to Exhibit 10.5 to the Company’s Annual Report on Form 10-K (File No. 0-31523) filed with the SEC on April 4, 2013.

(15)
Incorporated by reference to Exhibit 10.4 to Ixia’s Current Report on Form 8-K (File No. 0-31523) filed with the SEC on February 1, 2017.

(16)
Amends and restates the Ixia Officer Severance Plan (as Amended and Restated effective January 1, 2009), as amended. Incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q (File No. 0-31523) filed with the SEC on May 6, 2016.

(17)
Incorporated by reference to Exhibit 10.5 to Ixia’s Current Report on Form 8-K (File No. 0-31523) filed with the SEC on February 1, 2017.

(18)
Incorporated by reference to Exhibit 10.3 to Ixia’s Current Report on Form 8-K (File No. 0-31523) filed with the SEC on February 1, 2017.

(19)
Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 0-31523) filed with the SEC on September 25, 2007.

61




(20)
Incorporated by reference to Exhibit 10.7.1 to the Company’s Annual Report on Form 10-K (File No. 0-31523) filed with the SEC on March 5, 2012.

(21)
Incorporated by reference to Exhibit 10.7.2 to the Company’s Annual Report on Form 10-K (File No. 0-31523) filed with the SEC on March 5, 2012.

(22)
Incorporated by reference to Exhibit 10.8.3 to the Company’s Annual Report on Form 10-K (File No. 0-31523) filed with the SEC on April 4, 2013.

(23)
Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 0-31523) filed with the SEC on July 10, 2012.

(24)
Incorporated by reference to Exhibit 10.8.5 to the Company’s Annual Report on Form 10-K (File No. 0-31523) filed with the SEC on April 4, 2013.

(25)
Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q (File No. 0-31523) filed with the SEC on August 9, 2013.

(26)
Incorporated by reference to Exhibit 10.10 to the Company’s Annual Report on Form 10-K (File No. 0-31523) filed with the SEC on June 23, 2014.

(27)
Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 0-31523) filed with the SEC on March 25, 2016.

(28)
Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 0-31523) filed with the SEC on May 25, 2011.

(29)
Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K (File No. 0-31523) filed with the SEC on June 25, 2013.

(30)
Incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q (File No. 0-31523) filed with the SEC on May 6, 2016.

(31)
Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q (File No. 0-31523) filed with the SEC on November 7, 2014.

(32)
Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 0-31523) filed with the SEC on August 5, 2014.

(33)
Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K (File No. 0-31523) filed with the SEC on August 5, 2014.

(34)
Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K (File No. 0-31523) filed with the SEC on August 5, 2014.

(35)
Incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K (File No. 0-31523) filed with the SEC on August 5, 2014.

(36)
Incorporated by reference to Exhibit 10.20 to the Annual Report on Form 10-K (File No. 0-31523) filed with the SEC on February 29, 2016.

(37)
Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q (File No. 0-31523) filed with the SEC on November 7, 2016.

(38)
Incorporated by reference to Exhibit 10.1 to Ixia’s Current Report on Form 8-K (File No. 0-31523) filed with the SEC on February 1, 2017.


62



(39)
Incorporated by reference to Exhibit 10.2 to Ixia’s Current Report on Form 8-K (File No. 0-31523) filed with the SEC on February 1, 2017.

(40)
Incorporated by reference to Exhibit 10.5 to Amendment No. 1 to the Company’s Registration Statement on Form S-8 (Reg. No. 333-42678) filed with the SEC on September 5, 2000.

(41)
Incorporated by reference to Exhibit 14.1 to the Annual Report on Form 10-K (File No. 0-31523) filed with the SEC on March 12, 2004.

(b)
Exhibits
We hereby file as part of this Annual Report on Form 10-K the exhibits listed in Item 15(a)(3) above.
(c)
Financial Statement Schedules
None.

63



SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
Dated: March 1, 2017
IXIA
 
 
 
 
 
 
 
/s/ BETHANY MAYER
 
 
 
Bethany Mayer
 
 
 
Chief Executive Officer
 
 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
 
Name
 
Title
 
Date
  
 
  
 
  
/s/ BETHANY MAYER
 
President, Chief Executive Officer, Director
 
March 1, 2017
Bethany Mayer
 
(Principal Executive Officer)
 
  
  
 
  
 
  
/s/ BRENT NOVAK
 
Chief Financial Officer
 
March 1, 2017
Brent Novak
 
(Principal Financial and Accounting Officer)
 
  
 
 
 
 
 
/s/ ERROL GINSBERG
 
Chairman of the Board, Director
 
March 1, 2017
Errol Ginsberg
 
 
 
  
  
 
  
 
  
/s/ JONATHAN FRAM
 
Director
 
March 1, 2017
Jonathan Fram
 
  
 
  
  
 
  
 
  
/s/ GAIL HAMILTON
 
Director
 
March 1, 2017
Gail Hamilton
 
  
 
  
  
 
  
 
  
/s/ LAURENT ASSCHER
 
Director
 
March 1, 2017
Laurent Asscher
 
  
 
  
 
 
 
 
 
/s/ ILAN DASKAL
 
Director
 
March 1, 2017
Ilan Daskal
 
 
 
 

64



IXIA
 

65




REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Ixia
Calabasas, California

We have audited the accompanying consolidated balance sheets of Ixia and subsidiaries (the “Company”) as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2016. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Ixia and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2016, based on the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2017 expressed an unqualified opinion on the Company’s internal control over financial reporting.

/s/ DELOITTE AND TOUCHE LLP
Los Angeles, California
March 1, 2017

66



IXIA
Consolidated Balance Sheets
(in thousands)
 
 
As of December 31,
 
2016
 
2015
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
71,759

 
$
52,472

Marketable securities
71,251

 
14,504

Accounts receivable, net
103,395

 
121,932

Inventories
28,657

 
33,289

Prepaid expenses and other current assets
29,711

 
44,384

Total current assets
304,773

 
266,581

 
 
 
 
Property and equipment, net
36,666

 
36,536

Intangible assets, net
65,677

 
103,660

Goodwill
338,873

 
338,873

Other assets
11,578

 
34,227

Total assets
$
757,567

 
$
779,877

 
 
 
 
Liabilities and Shareholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
9,705

 
$
15,346

Accrued expenses and other
39,402

 
70,029

Deferred revenues
115,784

 
108,436

Term loan, net
5,048

 
3,045

Total current liabilities
169,939

 
196,856

 
 
 
 
Deferred revenues
30,861

 
22,117

Other liabilities
16,692

 
7,406

Term loan, net
28,538

 
34,487

Total liabilities
246,030

 
260,866

 
 
 
 
Commitments and contingencies (Note 10)

 

 
 
 
 
Shareholders’ equity:
 
 
 
Preferred stock, without par value; 1,000 shares authorized and none outstanding