S-1 1 b64586s1sv1.htm NETEZZA CORPORATION sv1
Table of Contents

As filed with the Securities and Exchange Commission on March 22, 2007
Registration No. 333-          
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
 
 
 
 
Netezza Corporation
(Exact name of registrant as specified in its charter)
 
         
Delaware   3571   04-3527320
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification No.)
 
 
 
 
Netezza Corporation
200 Crossing Boulevard
Framingham, MA 01702
(508) 665-6800
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
 
 
 
 
Jitendra S. Saxena
Chief Executive Officer
Netezza Corporation
200 Crossing Boulevard
Framingham, MA 01702
(508) 665-6800
(Name, address, including zip code, and telephone number, including area code, of agent for service)
 
 
 
 
Copies to:
 
     
Patrick J. Rondeau, Esq.
Wendell C. Taylor, Esq.
Wilmer Cutler Pickering Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109
(617) 526-6000
  Anthony J. Medaglia, Jr., P.C.
John M. Mutkoski, Esq.
Jocelyn M. Arel, Esq.
Goodwin Procter LLP
Exchange Place
Boston, Massachusetts 02109
(617) 570-1000
 
 
 
 
Approximate date of commencement of proposed sale to public:  as soon as practicable after this Registration Statement is declared effective.
 
If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  o
 
If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o           
 
If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier registration statement for the same offering.  o           
 
If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier registration statement for the same offering.  o           
 
CALCULATION OF REGISTRATION FEE
 
             
      Proposed Maximum
    Amount of
Title of Each Class of
    Aggregate Offering
    Registration
Securities to be Registered     Price(1)     Fee(2)
Common Stock, $0.001 par value per share
    $100,000,000     $3,070
             
 
(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
 
(2) Calculated pursuant to Rule 457(o) based on an estimate of the proposed maximum aggregate offering price.
 
 
 
 
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to Section 8(a), may determine.
 


Table of Contents

The information in this prospectus is not complete and may be changed. We and the selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
 
 
SUBJECT TO COMPLETION, DATED MARCH 22, 2007
 
          Shares
 
NETEZZA LOGO
 
Netezza Corporation
 
Common Stock
 
 
 
 
This is the initial public offering of shares of our common stock. We are selling           shares of our common stock.
 
 
 
 
Prior to this offering, there has been no public market for our common stock. The initial public offering price of our common stock is expected to be between          and           per share. We have applied to list our common stock on the NASDAQ Global Market under the symbol “NTZA.”
 
Investing in our common stock involves risks.  See “Risk Factors” beginning on page 7.
 
                         
          Underwriting
       
          Discounts and
    Proceeds to
 
    Price to Public     Commissions     Netezza Corporation  
 
Per Share
  $           $           $        
Total
    $       $       $  
 
Certain of our stockholders have granted the underwriters the right to purchase up to an additional           shares of common stock to cover over-allotments.
 
The Securities and Exchange Commission and state securities regulators have not approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
 
The underwriters expect to deliver the shares to purchasers on          , 2007.
 
 
 
 
Credit Suisse Morgan Stanley
 
Needham & Company, LLC Thomas Weisel Partners LLC
 
, 2007


Table of Contents

(GRAPHIC)


 

TABLE OF CONTENTS
 
         
    Page
 
  1
  7
  23
  24
  24
  25
  27
  29
  31
  48
  63
  78
  80
  83
  85
  87
  90
  94
  95
  95
  95
  F-1
 Ex-3.3 Form of Amended and Restated Certificate of Incorporation
 Ex-10.1 2000 Stock Incentive Plan, as amended
 Ex-10.2 Form of Incentive Stock Option Agreement under 2000 Stock Incentive Plan
 Ex-10.3 Form of Nonstatutory Stock Option Agreement under 2000 Stock Incentive Plan
 Ex-10.4 Form of Restricted Stock Option Agreement under 2000 Stock Incentive Plan
 EX-10.9 Fiscal 2008 Executive Officer Incentive Bonus Plan
 EX-10.10 Lease Agreement, dated February 12, 2004
 EX-10.11 Third Amended and Restated Investor Rights Agreement
 EX-10.12 Amendment No. 1 to the Third Amended and Restated Investor Rights Agreement
 EX-10.13 Letter Agreement, dated June 1, 2006
 EX-10.14 Form of Executive Retention Agreement
 EX-10.15 Form of Indemnification Agreement
 EX-10.16 Term Loan and Security Agreement dated June 14, 2005
 EX-10.17 Loan and Security Agreement dated January 31, 2007
 EX-23.1 Consent of PricewaterhouseCooper
 
 
You should rely only on the information contained in this document and any free writing prospectus prepared by or on behalf of us or to which we have referred you. We have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate on the date of this document.
 
Dealer Prospectus Delivery Obligation
 
Until          , 2007 (25 days after the commencement of this offering), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions.


i


Table of Contents

 
PROSPECTUS SUMMARY
 
This summary highlights information appearing elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, especially the “Risk Factors” section beginning on page 7 and our consolidated financial statements and the related notes appearing elsewhere in this prospectus, before making an investment decision.
 
NETEZZA CORPORATION
 
Overview
 
Netezza is a leading provider of data warehouse appliances. Our product, the Netezza Performance Server, or NPS, integrates database, server and storage platforms in a purpose-built unit to enable detailed queries and analyses on large volumes of stored data. The results of these queries and analyses, often referred to as business intelligence, provide organizations with actionable information to improve their business operations. We designed our NPS data warehouse appliance specifically for analysis of terabytes of data at higher performance levels and at a lower total cost of ownership with greater ease of use than can be achieved via traditional data warehouse systems. Our NPS appliance performs faster, deeper and more iterative analyses on larger amounts of detailed data, giving our customers greater insight into trends and anomalies in their businesses, thereby enabling them to make better strategic decisions.
 
As of January 31, 2007, we had shipped over 200 of our data warehouse appliances worldwide to 87 data-intensive customers including large global enterprises, mid-market companies and government agencies. Our customers span multiple vertical industries and include data intensive companies and government agencies such as Ahold, Amazon.com, American Red Cross, AOL, Blue Cross Blue Shield of Rhode Island, Capital One Services, Catalina Marketing, CNET Networks, CompuCredit Corporation, LoanPerformance, Marriott, the NASD, Neiman Marcus Group, Nielsen Company, Orange UK, Restoration Hardware, Ross Stores, Ryder Systems, Source Healthcare Analytics, Inc., a Wolters Kluwer Health company, the United States Army Corps of Engineers and the United States Department of Veterans Affairs. Our revenues have increased rapidly, from $13.6 million in fiscal 2004 to $79.6 million in fiscal 2007, representing a compound annual growth rate of 80.1%.
 
The Industry
 
The amount of data that is being generated and stored by organizations is exploding. Examples of this data include click-stream records generated by e-business, customer purchasing histories, call data records, information from RFID tagging of inventory and products, and pharmaceutical trial data. Additionally, compliance initiatives driven by government regulations, such as those issued under the Sarbanes-Oxley Act of 2002 and the Health Insurance Portability and Accountability Act of 1996, or HIPAA, as well as company policies requiring data preservation, are expanding the proportion of data that must be retained and easily accessible for future use. As the volume of data continues to grow, enterprises have recognized the value of analyzing such data to significantly improve their operations and competitive position. These enterprises have also realized that frequent analysis of data at a more detailed level is more meaningful than periodic analysis of sampled data.
 
This increasing amount of data and importance of data analysis has led to heightened demand for data warehouses that provide the critical framework for data-driven enterprise decision-making and business intelligence. A data warehouse consists of three main elements — database, server, and storage — and interacts with external systems to acquire and retain raw data, receive query instructions and provide analytical results. The data warehouse acts as a data repository for an enterprise, aggregating information from many departments, and more importantly, enabling analytics through the querying of the data to deliver specific information. The need for more robust, yet cost-effective, data warehouse solutions is being accelerated by the growing number of users of business intelligence within the enterprise, the increasing volume and sophistication of their queries and the need for real-time data availability.


1


Table of Contents

 
Our Solution
 
In contrast to traditional data warehouse systems which patch together general-purpose database, server and storage platforms that were not originally designed for analytical processing of large amounts of constantly changing data, our NPS appliance is designed specifically to provide high-performance business intelligence solutions at a low total cost of ownership. It tightly couples database, server, and storage platforms in a compact, efficient unit that integrates easily through open, industry-standard interfaces with leading data access and integration tools. This approach, combined with our proprietary Intelligent Query Streaming technology and Asymmetric Massively Parallel Processing architecture, provides significant benefits to our customers, including:
 
Superior Performance.  The time required to perform many complex and ad hoc queries on terabytes of data is reduced from days or hours to minutes or seconds, enabling our customers to analyze their data more comprehensively so they can make faster and better decisions.
 
Easy and Cost-Effective Procurement.  Combining database, server, and storage platforms into a single scalable platform, based on open standards and commodity components, delivers a significant cost advantage and enables an easier procurement process when compared with competing products.
 
Quick and Easy Infrastructure Installation and Deployment.  With our NPS appliance, data is loaded quickly and easily, and existing tools and software can be easily integrated through standard interfaces. Our NPS appliance can be quickly installed and deployed with minimal need for custom configuration or additional professional services.
 
Rapid Adaptation to Changing Business Needs.  Since our NPS appliance does not require the tuning, data indexing or the same degree of maintenance and configuration required by traditional systems, the NPS appliance can accommodate changes easily without additional administrative effort.
 
Minimal Ongoing Administration and Maintenance.  As a self-regulated and self-monitored data warehouse appliance, our systems typically require less than a single administrator to manage.
 
Small Footprint, and Low Power and Cooling Requirements.  Our NPS appliance is a compact, tightly integrated appliance that requires a significantly smaller data center “footprint”, consumes less power and generates less heat than traditional systems.
 
High Degree of Scalability.  Our unique architecture enables our systems to scale effectively with additional users, more sophisticated queries and greater amounts of data. More users can be supported and additional capacity added quickly and easily, enabling customers to “pay as they grow.”
 
Our Strategy
 
Our objective is to become the leading provider of data warehouse solutions. We plan to accomplish this through the following business strategies:
 
Broaden Our Target Markets.  We plan to continue our market penetration in the vertical industries that we currently serve, while expanding into new markets that can also utilize business intelligence at an affordable cost. We also plan to expand in the mid-market, enabling companies with fewer resources and smaller budgets to leverage the benefits of our data warehouse appliances.
 
Increase Sales to Our Existing Customer Base.  As our customers increasingly benefit from the advantages of our solution, we expect further sales to them to accommodate an increasing number of users and their growing amount of stored data, as well as for deployment of data warehouses for other applications in addition to the ones for which they initially purchased our system.
 
Extend Our Technology Leadership.  We believe that our proprietary product architecture and design provide us with significant competitive advantages over traditional data warehouse systems. We plan to continue to enhance our existing products and introduce new products to enable us to maintain our cost and performance advantages versus competitors.


2


Table of Contents

 
Expand Distribution Channels.  We plan to continue to invest in our global distribution channels, including our direct salesforce and relationships with resellers, systems integration firms and analytic service providers to accelerate the sales of our products.
 
Develop Additional Strategic Relationships.  We plan to continue to invest in our relationships with technology partners in the complementary areas of data access and analytics, data integration and data protection to simplify integration and increase sales of our combined offerings.
 
Expand Our Customer Support Capabilities.  We intend to invest in our global customer support organization to enable us to continue providing “high-touch,” high-quality support as we scale our customer base.
 
Pursue Selected Acquisition Opportunities.  We intend to pursue acquisitions of products and/or technologies that we believe are complementary to or can be integrated into our current product suite.
 
“Be Easy to Do Business With.” Our products, pricing, contracts and support principles are simple, straightforward and customer friendly. We plan to continue to operate with these principles to further differentiate our offerings from those of our larger competitors.
 
Company Information
 
We were incorporated in Delaware on August 18, 2000 as Intelligent Data Engines, Inc. and changed our name to Netezza Corporation in November 2000. Our corporate headquarters are located at 200 Crossing Boulevard, Framingham, Massachusetts 01702, and our telephone number is (508) 665-6800. Our website address is www.netezza.com. The information contained on our website or that can be accessed through our website is not part of this prospectus, and investors should not rely on any such information in deciding whether to purchase our common stock.
 
We use various trademarks and trade names in our business, including without limitation “Netezza,” “Netezza Performance Server,” “NPS” and “Intelligent Query Streaming.” This prospectus also contains trademarks and trade names of other businesses that are the property of their respective holders.
 
Unless the context otherwise requires, we use the terms “Netezza,” “our company,” “we,” “us” and “our” in this prospectus to refer to Netezza Corporation and its subsidiaries.


3


Table of Contents

THE OFFERING
 
Common stock offered           shares
 
Over-allotment option offered by the selling stockholders           shares
 
Common stock to be outstanding after this offering           shares
 
Use of proceeds We intend to use the net proceeds to us from this offering for working capital and other general corporate purposes, including the development of new products, sales and marketing activities, capital expenditures and the costs of operating as a public company. We also intend to use a portion of the net proceeds to us to repay approximately $     of debt. We may use a portion of the net proceeds to us to expand our current business through acquisitions of other companies, assets or technologies. We will not receive any of the proceeds from the sale of shares of common stock by the selling stockholders. See “Use of Proceeds” for more information.
 
Risk factors You should read the “Risk Factors” section of this prospectus for a discussion of factors to consider carefully before deciding whether to purchase shares of our common stock.
 
Proposed NASDAQ Global Market symbol “NTZA”
 
The number of shares of our common stock to be outstanding after this offering is based on 46,309,542 shares of our common stock outstanding as of February 28, 2007 and excludes:
 
  •  9,039,748 shares of our common stock issuable upon the exercise of stock options outstanding as of February 28, 2007;
 
  •  2,412,107 shares of our common stock reserved as of February 28, 2007 for future issuance under our stock compensation plans; and
 
  •  312,781 shares of our common stock issuable upon the exercise of warrants outstanding as of February 28, 2007.
 
Unless otherwise indicated, the information in this prospectus assumes the following:
 
  •  a one-for-two reverse split of our common stock to be effected prior to the closing of this offering;
 
  •  the automatic conversion of all of our outstanding convertible preferred stock into 38,774,847 shares of our common stock upon the closing of this offering;
 
  •  the filing of our second amended and restated certificate of incorporation and the adoption of our amended and restated by-laws as of the closing date of this offering; and
 
  •  no exercise by the underwriters of their over-allotment option.


4


Table of Contents

 
SUMMARY FINANCIAL DATA
 
You should read the following financial information together with the more detailed information contained in “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes appearing elsewhere in this prospectus. Our fiscal year ends on January 31. When we refer to a particular fiscal year, we are referring to the fiscal year ended on January 31 of that year. For example, fiscal 2007 refers to the fiscal year ended January 31, 2007.
 
                         
    Fiscal Year Ended January 31,  
    2005     2006     2007  
    (In thousands, except share, per share
 
    and other operating data)  
 
Consolidated Statement of Operations Data:
                       
Revenue
                       
Product
  $ 30,908     $ 45,508     $ 64,632  
Services
    5,121       8,343       14,989  
                         
Total revenue
    36,029       53,851       79,621  
Cost of revenue
                       
Product
    8,874       18,941       26,697  
Services
    1,640       3,491       5,403  
                         
Total cost of revenue
    10,514       22,432       32,100  
                         
Gross profit
    25,515       31,419       47,521  
Operating expenses
                       
Sales and marketing
    14,783       25,626       32,908  
Research and development
    11,366       16,703       18,037  
General and administrative
    2,500       3,124       4,827  
                         
Total operating expenses
    28,649       45,453       55,772  
                         
Operating loss
    (3,134 )     (14,034 )     (8,251 )
Interest income
    206       487       414  
Interest expense
    121       173       765  
Other income (expense), net
    35       (87 )     627  
                         
Loss before cumulative effect of change in accounting principle
    (3,014 )     (13,807 )     (7,975 )
Cumulative effect of change in accounting principle
          (218 )      
                         
Net loss
  $ (3,014 )   $ (14,025 )   $ (7,975 )
Accretion to preferred stock
    (4,096 )     (5,797 )     (5,931 )
                         
Net loss attributable to common shareholders
  $ (7,110 )   $ (19,822 )   $ (13,906 )
                         
Net loss per share attributable to common stockholders — basic and diluted Loss before cumulative effect of change in accounting principle
  $ (0.50 )   $ (2.08 )   $ (1.10 )
Cumulative effect of change in accounting principle
          (0.03 )      
Accretion to preferred stock
    (0.67 )     (0.88 )     (0.82 )
                         
Net loss per share attributable to common stockholders — basic and diluted
  $ (1.17 )   $ (2.99 )   $ (1.92 )
                         
Weighted average number of common shares outstanding:
    6,077,538       6,635,274       7,230,278  
                         
Pro forma net loss per share — basic and diluted (unaudited)(1)
                  $ (0.17 )
                         
Pro forma weighted average common shares outstanding (unaudited)(1)
                    46,005,125  
                         
Other Operating Data:
                       
Number of customers
    15       46       87  
Number of full-time employees
    140       179       225  
 
 
(1) The pro forma consolidated statement of operations data in the table above gives effect to the automatic conversion of all of our outstanding convertible preferred stock into common stock upon the closing of this offering.
 


5


Table of Contents

                         
    As of January 31, 2007  
                Pro Forma
 
    Actual     Pro Forma(1)     As Adjusted(2)  
    (In thousands)  
          (Unaudited)  
 
Consolidated Balance Sheet Data:
                       
Cash and cash equivalents
  $ 5,018     $ 5,018     $             
Working capital
    25,899       25,899          
Total assets
    69,199       69,199          
Note payable to bank, including current portion
    6,535       6,535          
Convertible redeemable preferred stock
    97,131                
Total stockholders’ equity (deficit)
    (81,123 )     16,008          
 
 
(1) The pro forma consolidated balance sheet data in the table above gives effect to the automatic conversion of all of our outstanding convertible preferred stock into common stock upon the closing of this offering.
 
(2) The pro forma as adjusted consolidated balance sheet data in the table above gives effect to our receipt of the estimated net proceeds to us from this offering at an assumed initial public offering price of $      per share, which is the midpoint of the range listed on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

6


Table of Contents

 
RISK FACTORS
 
An investment in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below together with all of the other information appearing elsewhere in this prospectus, including our consolidated financial statements and the related notes, before deciding whether to purchase shares of our common stock. Each of these risks could materially adversely affect our business, operating results and financial condition. As a result, the trading price of our common stock could decline and you might lose all or part of your investment in our common stock.
 
Risks Related to Our Business and Industry
 
We have a history of losses, and we may not achieve or maintain profitability in the future.
 
We have not been profitable in any fiscal period since we were formed. We experienced a net loss of $14.0 million in fiscal 2006 and $8.0 million in fiscal 2007. As of January 31, 2007, our accumulated deficit was $80.8 million. We expect to make significant additional expenditures to facilitate the expansion of our business, including expenditures in the areas of sales, research and development, and customer service and support. Additionally, as a public company, we expect to incur legal, accounting and other expenses that are substantially higher than the expenses we incurred as a private company. Furthermore, we may encounter unforeseen issues that require us to incur additional costs. As a result of these increased expenditures, we will have to generate and sustain increased revenue to achieve profitability. Accordingly, we may not be able to achieve or maintain profitability and we may continue to incur significant losses in the future.
 
Our operating results may fluctuate significantly from quarter to quarter and may fall below expectations in any particular fiscal quarter, which could adversely affect the market price of our common stock.
 
Our operating results are difficult to predict and may fluctuate from quarter to quarter due to a variety of factors, many of which are outside of our control. As a result, comparing our operating results on a period-to-period basis may not be meaningful, and you should not rely on our past results as an indication of our future performance. If our revenue or operating results fall below the expectations of investors or any securities analysts that follow our company in any period, the price of our common stock would likely decline.
 
Factors that may cause our operating results to fluctuate include:
 
  •  the typical recording of a significant portion of our quarterly sales in the final month of the quarter, whereby small delays in completion of sales transactions could have a significant impact on our operating results for that quarter;
 
  •  the relatively high average selling price of our products and our dependence on a limited number of customers for a substantial portion of our revenue in any quarterly period, whereby the loss of or delay in a customer order could significantly reduce our revenue for that quarter;
 
  •  the possibility of seasonality in demand for our products;
 
  •  the addition of new customers or the loss of existing customers;
 
  •  the rates at which customers purchase additional products or additional capacity for existing products from us;
 
  •  changes in the mix of products and services sold;
 
  •  the rates at which customers renew their maintenance and support contracts with us;
 
  •  our ability to enhance our products with new and better functionality that meet customer requirements;
 
  •  the timing of recognizing revenue as a result of revenue recognition rules, including due to the timing of delivery and receipt of our products;
 
  •  the length of our product sales cycle;
 
  •  the productivity and growth of our salesforce;


7


Table of Contents

 
  •  service interruptions with any of our single source suppliers or manufacturing partners;
 
  •  changes in pricing by us or our competitors, or the need to provide discounts to win business;
 
  •  the timing of our product releases or upgrades or similar announcements by us or our competitors;
 
  •  the timing of investments in research and development related to new product releases or upgrades;
 
  •  our ability to control costs, including operating expenses and the costs of the components used in our products;
 
  •  volatility in our stock price, which may lead to higher stock compensation expenses pursuant to Statement of Financial Accounting Standards No. 123(R), Share-Based Payment, or SFAS No. 123(R), which first became effective for us in fiscal 2007 and requires that employee stock-based compensation be measured based on fair value on grant date and treated as an expense that is reflected in our financial statements over the recipient’s service period;
 
  •  future accounting pronouncements and changes in accounting policies;
 
  •  costs related to the acquisition and integration of companies, assets or technologies;
 
  •  technology and intellectual property issues associated with our products; and
 
  •  general economic trends, including changes in information technology spending or geopolitical events such as war or incidents of terrorism.
 
Most of our operating expenses do not vary directly with revenue and are difficult to adjust in the short term. As a result, if revenue for a particular quarter is below our expectations, we could not proportionately reduce operating expenses for that quarter, and therefore this revenue shortfall would have a disproportionate effect on our expected operating results for that quarter.
 
Our limited operating history and the emerging nature of the data warehouse market make it difficult to evaluate our current business and future prospects, and may increase the risk of your investment.
 
Our company has only been in existence since August 2000. We first began shipping products in February 2003 and much of our growth has occurred in the past two fiscal years. Our limited operating history and the nascent state of the data warehouse market in which we operate makes it difficult to evaluate our current business and our future prospects. As a result, we cannot be certain that we will sustain our growth or achieve or maintain profitability. We will encounter risks and difficulties frequently experienced by early-stage companies in rapidly-evolving industries. These risks include the need to:
 
  •  attract new customers and maintain current customer relationships;
 
  •  continue to develop and upgrade our data warehouse solutions;
 
  •  respond quickly and effectively to competitive pressures;
 
  •  offer competitive pricing or provide discounts to customers in order to win business;
 
  •  manage our expanding operations;
 
  •  maintain adequate control over our expenses;
 
  •  maintain adequate internal controls and procedures;
 
  •  maintain our reputation, build trust with our customers and further establish our brand; and
 
  •  identify, attract, retain and motivate qualified personnel.
 
If we fail to successfully address these needs, our business, operating results and financial condition may be adversely affected.


8


Table of Contents

 
We depend on a single product family, the Netezza Performance Server family, for all of our revenue, so we are particularly vulnerable to any factors adversely affecting the sale of that product family.
 
Our revenue is derived exclusively from sales and service of the NPS product family, and we expect that this product family will account for substantially all of our revenue for the foreseeable future. If the data warehouse market declines or the Netezza Performance Server fails to maintain or achieve greater market acceptance, we will not be able to grow our revenues sufficiently to achieve or maintain profitability.
 
We face intense and growing competition from leading technology companies as well as from emerging companies. Our inability to compete effectively with any or all of these competitors could impact our ability to achieve our anticipated market penetration and achieve or sustain profitability.
 
The data warehouse market is highly competitive and we expect competition to intensify in the future. This competition may make it more difficult for us to sell our products, and may result in increased pricing pressure, reduced profit margins, increased sales and marketing expenses and failure to increase, or the loss of, market share, any of which would likely seriously harm our business, operating results and financial condition.
 
Currently, our most significant competition includes companies which typically sell several if not all elements of a data warehouse environment as individual products, including database software, servers, storage and professional services. These competitors are often leaders in many of these segments including EMC, Hewlett-Packard, IBM, Oracle, Sun Microsystems, Sybase and Teradata (a division of NCR). In addition, a large number of fast growing companies have recently entered the market, many of them selling integrated appliance offerings similar to our products. Additionally, as the benefits of an appliance solution have become evident in the marketplace, many of our larger competitors have also begun to bundle their products into appliance-like offerings that more directly compete with our products. We also expect additional competition in the future from new and existing companies with whom we do not currently compete directly. As our industry evolves, our current and potential competitors may establish cooperative relationships among themselves or with third parties, including software and hardware companies with whom we have partnerships and whose products interoperate with our own, that could acquire significant market share, which could adversely affect our business. We also face competition from internally-developed systems. Any of these competitive threats, alone or in combination with others, could seriously harm our business, operating results and financial condition.
 
Many of our competitors have greater market presence, longer operating histories, stronger name recognition, larger customer bases and significantly greater financial, technical, sales and marketing, manufacturing, distribution and other resources than we have. In addition, many of our competitors have broader product and service offerings than we do. These companies may attempt to use their greater resources to better position themselves in the data warehouse market including by pricing their products at a discount or bundling them with other products and services in an attempt to rapidly gain market share. Moreover, many of our competitors have more extensive customer and partner relationships than we do, and may therefore be in a better position to identify and respond to market developments or changes in customer demands. Potential customers may also prefer to purchase from their existing suppliers rather than a new supplier regardless of product performance or features. We cannot assure you that we will be able to compete successfully against existing or new competitors.
 
If we lose key personnel, or if we are unable to attract and retain highly-qualified personnel on a cost-effective basis, it will be more difficult for us to manage our business and to identify and pursue growth opportunities.
 
Our success depends substantially on the performance of our key senior management, technical, and sales and marketing personnel. Each of our employees may terminate his or her relationship with us at any time and the loss of the services of such persons could have an adverse effect on our business. We rely on our senior management to manage our existing business operations and to identify and pursue new growth opportunities, and our ability to develop and enhance our products requires talented hardware and software engineers with specialized skills. In addition, our success depends in significant part on maintaining and growing an effective salesforce. We experience intense competition for such personnel and we cannot ensure that we will successfully attract, assimilate, or retain highly qualified managerial, technical or sales and marketing personnel in the future.


9


Table of Contents

 
Our success depends on the continued recognition of the need for business intelligence in the marketplace and on the adoption by our customers of data warehouse appliances, often as replacements for existing systems, to enable business intelligence. If we fail to improve our products to further drive this market migration as well as to successfully compete with alternative approaches and products, our business would suffer.
 
Due to the innovative nature of our products and the new approaches to business intelligence that our products enable, purchases of our products often involve the adoption of new methods of database access and utilization on the part of our customers. This may entail the acknowledgement of the benefits conferred by business intelligence and the customer-wide adoption of business intelligence analysis that makes the benefits of our system particularly relevant. Business intelligence solutions are still in their early stages of growth and their continued adoption and growth in the marketplace remain uncertain. Additionally, our appliance approach requires our customers to run their data warehouses in new and innovative ways and often requires our customers to replace their existing equipment and supplier relationships, which they may be unwilling to do, especially in light of the often critical nature of the components and systems involved and the significant capital and other resources they may have previously invested. Furthermore, purchases of our products involve material changes to established purchasing patterns and policies. Even if prospective customers recognize the need for our products, they may not select our NPS solution because they choose to wait for the introduction of products and technologies that serve as a replacement or substitute for, or represent an improvement over, our NPS solutions. Therefore, our future success also depends on our ability to maintain our leadership position in the data warehouse market and to proactively address the needs of the market and our customers to further drive the adoption of business intelligence and to sustain our competitive advantage versus competing approaches to business intelligence and alternative product offerings.
 
Claims that we infringe or otherwise misuse the intellectual property of others could subject us to significant liability and disrupt our business, which could have a material adverse effect on our business and operating results.
 
Our competitors protect their intellectual property rights by means such as trade secrets, patents, copyrights and trademarks. We have not conducted an independent review of patents issued to third parties. Although we have not been involved in any litigation related to intellectual property rights of others, from time to time we receive letters from other parties alleging, or inquiring about, breaches of their intellectual property rights. We may in the future be sued for violations of other parties’ intellectual property rights, and the risk of such a lawsuit will likely increase as our size and the number and scope of our products increase, as our geographic presence and market share expand and as the number of competitors in our market increases. Any such claims or litigation could:
 
  •  be time-consuming and expensive to defend, whether meritorious or not;
 
  •  cause shipment delays;
 
  •  divert the attention of our technical and managerial resources;
 
  •  require us to enter into royalty or licensing agreements with third parties, which may not be available on terms that we deem acceptable, if at all;
 
  •  prevent us from operating all or a portion of our business or force us to redesign our products, which could be difficult and expensive and may degrade the performance of our products;
 
  •  subject us to significant liability for damages or result in significant settlement payments; and/or
 
  •  require us to indemnify our customers, distribution partners or suppliers.
 
Any of the foregoing could disrupt our business and have a material adverse effect on our operating results and financial condition.


10


Table of Contents

 
If we are unable to develop and introduce new products and enhancements to existing products, if our new products and enhancements to existing products do not achieve market acceptance, or if we fail to manage product transitions, we may fail to increase, or may lose, market share.
 
The market for our products is characterized by rapid technological change, frequent new product introductions and evolving industry standards. Our future growth depends on the successful development and introduction of new products and enhancements to existing products that achieve acceptance in the market. Due to the complexity of our products, which include integrated hardware and software components, any new products and product enhancements would be subject to significant technical risks that could impact our ability to introduce those products and enhancements in a timely manner. In addition, such new products or product enhancements may not achieve market acceptance despite our expending significant resources to develop them. If we are unable, for technological or other reasons, to develop, introduce and enhance our products in a timely manner in response to changing market conditions or evolving customer requirements, or if these new products and product enhancements do not achieve market acceptance due to competitive or other factors, our operating results and financial condition could be adversely affected.
 
Product introductions and certain enhancements of existing products by us in future periods may also reduce demand for our existing products or could delay purchases by customers awaiting arrival of our new products. As new or enhanced products are introduced, we must successfully manage the transition from older products in order to minimize disruption in customers’ ordering patterns, avoid excessive levels of older product inventories and ensure that sufficient supplies of new products can be delivered in a timely manner to meet customer demand.
 
Our products must interoperate with our customers’ information technology infrastructure, including customers’ software applications, networks, servers and data-access protocols, and if our products do not do so successfully, we may experience a weakening demand for our products.
 
To be competitive in the market, our products must interoperate with our customers’ information technology infrastructure, including software applications, network infrastructure and servers supplied by a variety of other vendors, many of whom are competitors of ours. Our products currently interoperate with a number of business intelligence and data-integration applications provided by vendors including Business Objects, Cognos, IBM and Oracle, among others. When new or updated versions of these software applications are introduced, we must sometimes develop updated versions of our software that may require assistance from these vendors to ensure that our products effectively interoperate with these applications. If these vendors do not provide us with assistance on a timely basis, or decide not to work with us for competitive or other reasons, including due to consolidation with our competitors, we may be unable to ensure such interoperability. Additionally, our products interoperate with servers, network infrastructure and software applications predominantly through the use of data-access protocols. While many of these protocols are created and maintained by independent standards organizations, some of these protocols that exist today or that may be created in the future are, or could be, proprietary technology and therefore require licensing the proprietary protocol’s specifications from a third party or implementing the protocol without specifications. Our development efforts to provide interoperability with our customers’ information technology infrastructures require substantial capital investment and the devotion of substantial employee resources. We may not accomplish these development efforts quickly, cost-effectively or at all. If we fail for any reason to maintain interoperability, we may experience a weakening in demand for our products, which would adversely affect our business, operating results and financial condition.
 
If we fail to enhance our brand, our ability to expand our customer base will be impaired and our operating results may suffer.
 
We believe that developing and maintaining awareness of the Netezza brand is critical to achieving widespread acceptance of our products and is an important element in attracting new customers and shortening our sales cycle. We expect the importance of brand recognition to increase as competition further develops in our market. Successful promotion of our brand will depend largely on the effectiveness of our marketing efforts and our ability to provide customers with reliable and technically sophisticated products at competitive prices. If customers do not perceive our products and services to be of high value, our brand and reputation could be harmed, which


11


Table of Contents

could adversely impact our financial results. Despite our best efforts our brand promotion efforts may not yield increased revenue sufficient to offset the additional expenses incurred in our brand-building efforts.
 
We may not receive significant revenues from our current research and development efforts for several years, if at all.
 
Investment in product development often involves a long payback cycle. We have made and expect to continue making significant investments in research and development and related product opportunities. Accelerated product introductions and short product life cycles require high levels of expenditures for research and development that could adversely affect our operating results if not offset by revenue increases. We believe that we must continue to dedicate a significant amount of resources to our research and development efforts to maintain our competitive position. However, we do not expect to receive significant revenues from these investments for several years, if at all.
 
Our sales cycles can be long and unpredictable, and our sales efforts require considerable time and expense, which contribute to the unpredictability and variability of our financial performance and may adversely affect our profitability.
 
The timing of our revenue is difficult to predict as we experience extended sales cycles, due in part to our need to educate our customers about our products and participate in extended product evaluations and the high purchase price of our products. In addition, product purchases are often subject to a variety of customer considerations that may extend the length of our sales cycle, including customers’ acceptance of our approach to data warehouse management and their willingness to replace their existing solutions and supplier relationships, timing of their budget cycles and approval processes, budget constraints, extended negotiations, and administrative, processing and other delays, including those due to general economic factors. As a result, our sales cycle extends to more than nine months in some cases, and it is difficult to predict when or if a sale to a potential customer will occur. All of these factors can contribute to fluctuations in our quarterly financial performance and increase the likelihood that our operating results in a particular quarter will fall below investor expectations. In addition, the provision of evaluation units to customers may require significant investment in inventory in advance of sales of these units, which sales may not ultimately transpire.
 
If we are unsuccessful in closing sales after expending significant resources, or if we experience delays for any of the reasons discussed above, our future revenues and operating expenses may be materially adversely affected.
 
Our company is growing rapidly and we may be unable to manage our growth effectively.
 
Between January 31, 2005 and January 31, 2007, the number of our employees increased from 140 to 225 and our installed base of customers grew from 15 to 87. In addition, during that time period our number of office locations has increased from 3 to 12. We anticipate that further expansion of our organization and operations will be required to achieve our growth targets. Our rapid growth has placed, and is expected to continue to place, a significant strain on our management and operational infrastructure. Our failure to continue to enhance our management personnel and policies and our operational and financial systems and controls in response to our growth could result in operating inefficiencies that could impair our competitive position and would increase our costs more than we had planned. If we are unable to manage our growth effectively, our business, our reputation and our operating results and financial condition will be adversely affected.
 
Our ability to sell to the U.S. federal government and its agencies is subject to uncertainties that could have a material adverse effect on our growth prospects and operating results, and our contracts with the U.S. federal government contain certain provisions that may be unfavorable to us.
 
In fiscal 2007, we derived approximately 5% of our revenue from the U.S. federal government and its agencies. Our ability to sell products to the government and its agencies is subject to uncertainties related to the government’s policies and funding priorities and commitments as well as our ability to maintain compliance with applicable government regulations and other requirements. Any difficulties complying with government regulations, or changes in government regulations, policies or priorities, including funding levels through agency or program


12


Table of Contents

budget reductions by the U.S. Congress or government agencies, could harm our ability to sell products to the government, causing fluctuations in our revenues from this segment from period to period and resulting in a weakening of our growth prospects, operating results and financial condition.
 
Our contracts with the government and its agencies subject us to certain risks and give the government and its agencies rights and remedies not typically found in commercial contracts, including rights that allow the government and its agencies to:
 
  •  terminate contracts for convenience at any time and for any reason;
 
  •  perform routine audits; and
 
  •  control or prohibit the export of certain of our products.
 
Moreover, some of our contracts allow the government and its agencies rights to use, or have others use, patented inventions developed under those contracts on behalf of the government. Some of the contracts allow the federal government and its agencies to disclose technical data without constraining the recipient in how that data is used. The ability of third parties to use patents and technical data for government purposes creates the possibility that the government could attempt to establish additional sources for the products we provide that stem from these contracts. It may also allow the government the ability to negotiate with us to reduce our prices for products we provide to it. The potential that the government may release some of the technical data without constraint creates the possibility that third parties may be able to use this data to compete with us in the commercial sector.
 
Our international operations are subject to additional risks that we do not face in the United States, which could have an adverse effect on our operating results.
 
In fiscal 2007, we derived approximately 24% of our revenue from customers based outside the United States, and we currently have sales personnel in five different foreign countries. We expect our revenue and operations outside the United States will continue to expand in the future. Our international operations are subject to a variety of risks that we do not face in the United States, including:
 
  •  difficulties in staffing and managing our foreign offices and the increased travel, infrastructure and legal and compliance costs associated with multiple international locations;
 
  •  general economic conditions in the countries in which we operate, including seasonal reductions in business activity in the summer months in Europe, during Lunar New Year in parts of Asia and in other periods in various individual countries;
 
  •  longer payment cycles for sales in foreign countries and difficulties in enforcing contracts and collecting accounts receivable;
 
  •  additional withholding taxes or other taxes on our foreign income, and tariffs or other restrictions on foreign trade or investment;
 
  •  imposition of, or unexpected adverse changes in, foreign laws or regulatory requirements, many of which differ from those in the United States;
 
  •  increased length of time for shipping and acceptance of our products;
 
  •  difficulties in repatriating overseas earnings;
 
  •  increased exposure to foreign currency exchange rate risk;
 
  •  reduced protection for intellectual property rights in some countries;
 
  •  costs and delays associated with developing products in multiple languages; and
 
  •  political unrest, war, incidents of terrorism, or responses to such events.
 
Our overall success in international markets depends, in part, on our ability to succeed in differing legal, regulatory, economic, social and political conditions. We may not be successful in developing and implementing policies and strategies that will be effective in managing these risks in each country where we do business. Our


13


Table of Contents

failure to manage these risks successfully could harm our international operations, reduce our international sales and increase our costs, thus adversely affecting our business, operating results and financial condition.
 
Our future revenue growth will depend in part on our ability to further develop our indirect sales channel, and our inability to effectively do so will impair our ability to grow our revenues as we anticipate.
 
Our future revenue growth will depend in part on the continued development of our indirect sales channel to complement our direct salesforce. Our indirect sales channel includes resellers, systems integration firms and analytic service providers. In fiscal 2007, we derived approximately 18% of our revenue from our indirect sales channel. We plan to continue to invest in our indirect sales channels, by expanding upon and developing new relationships with resellers, systems integration firms and analytic service providers. While the development of our indirect sales channel is a priority for us, we cannot predict the extent to which we will be able to attract and retain financially stable, motivated indirect channel partners. Additionally, due in part to the complexity and innovative nature of our products, our channel partners may not be successful in marketing and selling our products. Our indirect channel may be adversely affected by disruptions in relationships between our channel partners and their customers, as well as by competition between our channel partners or between our channel partners and our direct salesforce. In addition our reputation could suffer as a result of the conduct and manner of marketing and sales by our channel partners. Our agreements with our channel partners are generally not exclusive and may be terminated without cause. If we fail to effectively develop and manage our indirect channel for any of these reasons, we may have difficulty attaining our growth targets.
 
Our ability to sell our products and retain customers is highly dependent on the quality of our maintenance and support services offerings, and our failure to offer high-quality maintenance and support could have a material adverse effect on our operating results.
 
Most of our customers purchase maintenance and support services from us, which represents a significant portion of our revenue (approximately 19% of our revenue in fiscal 2007). Customer satisfaction with our maintenance and support services is critical for the successful marketing and sale of our products and the success of our business. In addition to our support staff and installation and technical account management teams, we have developed a worldwide service relationship with Hewlett-Packard to provide on-site hardware service to our customers. Although we believe Hewlett-Packard and any other third-party service provider we utilize in the future will offer a high level of service consistent with our internal customer support services, we cannot assure you that they will continue to devote the resources necessary to provide our customers with effective technical support. In addition, if we are unable to renew our service agreement with Hewlett-Packard or any other third-party service provider we utilize in the future or such agreements are terminated, we may be unable to establish alternative relationships on a timely basis or on terms acceptable to us, if at all. If we or our service partners are unable to provide effective maintenance and support services, it could adversely affect our ability to sell our products and harm our reputation with current and potential customers.
 
Our products are highly technical and may contain undetected software or hardware defects, which could cause data unavailability, loss or corruption that might result in liability to our customers and harm to our reputation and business.
 
Our products are highly technical and complex and are often used to store and manage data critical to our customers’ business operations. Our products may contain undetected errors, defects or security vulnerabilities that could result in data unavailability, loss or corruption or other harm to our customers. Some errors in our products may only be discovered after the products have been installed and used by customers. Any errors, defects or security vulnerabilities discovered in our products after commercial release or that are caused by another vendor’s products with which we interoperate but are nevertheless attributed to us by our customers, as well as any computer virus or human error on the part of our customer support or other personnel, that result in a customer’s data being misappropriated, unavailable, lost or corrupted could have significant adverse consequences, including:
 
  •  loss of customers;
 
  •  negative publicity and damage to our reputation;


14


Table of Contents

 
  •  diversion of our engineering, customer service and other resources;
 
  •  increased service and warranty costs; and
 
  •  loss or delay in revenue or market acceptance of our products.
 
Any of these events could adversely affect our business, operating results and financial condition. In addition, there is a possibility that we could face claims for product liability, tort or breach of warranty, including claims from both our customers and our distribution partners. The cost of defending such a lawsuit, regardless of its merit, could be substantial and could divert management’s attention from ongoing operations of the company. In addition, if our business liability insurance coverage proves inadequate with respect to a claim or future coverage is unavailable on acceptable terms or at all we may be liable for payment of substantial damages. Any or all of these potential consequences could have an adverse impact on our operating results and financial condition.
 
It is difficult to predict our future capital needs and we may be unable to obtain additional financing that we may need, which could have a material adverse effect on our business, operating results and financial condition.
 
We believe that our current balance of cash and cash equivalents, together with borrowings available under our bank line of credit and the net proceeds to us of this offering, will be sufficient to fund our projected operating requirements, including anticipated capital expenditures, for at least the next 12 months. We may need to raise additional funds subsequent to that or sooner if we are presented with unforeseen circumstances or opportunities in order to, among other things:
 
  •  develop or enhance our products;
 
  •  support additional capital expenditures;
 
  •  respond to competitive pressures;
 
  •  fund operating losses in future periods; or
 
  •  take advantage of acquisition or expansion opportunities.
 
Any required additional financing may not be available on terms acceptable to us, or at all. If we raise additional funds by issuing equity securities, you may experience significant dilution of your ownership interest, and the newly issued securities may have rights senior to those of the holders of our common stock. If we raise additional funds by obtaining loans from third parties, the terms of those financing arrangements may include negative covenants or other restrictions on our business that could impair our operational flexibility and would also require us to fund additional interest expense, which would harm our profitability. Holders of debt would also have rights, preferences or privileges senior to those of holders of our common stock.
 
If we are unable to protect our intellectual property rights, our competitive position could be harmed or we could be required to incur significant expenses to enforce our rights.
 
Our success is dependent in part on obtaining, maintaining and enforcing our intellectual property and other proprietary rights. We rely on a combination of trade secret, patent, copyright and trademark laws and contractual provisions with employees and third parties, all of which offer only limited protection. Despite our efforts to protect our intellectual property and proprietary information, we may not be successful in doing so, for several reasons. We cannot be certain that our pending patent applications will result in the issuance of patents or whether the examination process will require us to narrow our claims. Even if patents are issued to us, they may be contested, or our competitors may be able to develop similar or superior technologies without infringing our patents.
 
Although we enter into confidentiality, assignments of proprietary rights and license agreements, as appropriate, with our employees and third parties, including our contract engineering firm, and generally control access to and distribution of our technologies, documentation and other proprietary information, we cannot be certain that the steps we take to prevent unauthorized use of our intellectual property rights are sufficient to prevent their misappropriation, particularly in foreign countries where laws or law enforcement practices may not protect our intellectual property rights as fully as in the United States.


15


Table of Contents

 
Even in those instances where we have determined that another party is breaching our intellectual property and other proprietary rights, enforcing our legal rights with respect to such breach may be expensive and difficult. We may need to engage in litigation to enforce or defend our intellectual property and other proprietary rights, which could result in substantial costs and diversion of management resources. Further, many of our current and potential competitors are substantially larger than we are and have the ability to dedicate substantially greater resources to defending any claims by us that they have breached our intellectual property rights.
 
Our products may be subject to open source licenses, which may restrict how we use or distribute our solutions or require that we release the source code of certain technologies subject to those licenses.
 
Some of our proprietary technologies incorporate open source software. For example, the open source database drivers that we use may be subject to an open source license. The GNU General Public License and other open source licenses typically require that source code subject to the license be released or made available to the public. Such open source licenses typically mandate that proprietary software, when combined in specific ways with open source software, become subject to the open source license. We take steps to ensure that our proprietary software is not combined with, or does not incorporate, open source software in ways that would require our proprietary software to be subject to an open source license. However, few courts have interpreted the open source licenses, and the manner in which these licenses may be interpreted and enforced is therefore subject to uncertainty. If these licenses were to be interpreted in a manner different than we interpret them, we may find ourselves in violation of such licenses. While our customer contracts prohibit the use of our technology in any way that would cause it to violate an open source license, our customers could, in violation of our agreement, use our technology in a manner prohibited by an open source license.
 
In addition, we rely on multiple software engineers to design our proprietary products and technologies. Although we take steps to ensure that our engineers do not include open source software in the products and technologies they design, we may not exercise complete control over the development efforts of our engineers and we cannot be certain that they have not incorporated open source software into our proprietary technologies. In the event that portions of our proprietary technology are determined to be subject to an open source license, we might be required to publicly release the affected portions of our source code, which could reduce or eliminate our ability to commercialize our products.
 
We may engage in future acquisitions that could disrupt our business, cause dilution to our stockholders, reduce our financial resources and result in increased expenses.
 
In the future, we may acquire companies, assets or technologies in an effort to complement our existing offerings or enhance our market position. We have not made any acquisitions to date. Any future acquisitions we make could subject us to a number of risks, including:
 
  •  the purchase price we pay could significantly deplete our cash reserves, impair our future operating flexibility or result in dilution to our existing stockholders;
 
  •  we may find that the acquired company, assets or technology do not further improve our financial and strategic position as planned;
 
  •  we may find that we overpaid for the company, asset or technology, or that the economic conditions underlying our acquisition have changed;
 
  •  we may have difficulty integrating the operations and personnel of the acquired company;
 
  •  we may have difficulty retaining the employees with the technical skills needed to enhance and provide services with respect to the acquired assets or technologies;
 
  •  the acquisition may be viewed negatively by customers, financial markets or investors;
 
  •  we may have difficulty incorporating the acquired technologies or products with our existing product lines;
 
  •  we may encounter difficulty entering and competing in new product or geographic markets;
 
  •  we may encounter a competitive response, including price competition or intellectual property litigation;


16


Table of Contents

 
  •  we may have product liability, customer liability or intellectual property liability associated with the sale of the acquired company’s products;
 
  •  we may be subject to litigation by terminated employees or third parties;
 
  •  we may incur debt, one-time write-offs, such as acquired in-process research and development costs, and restructuring charges;
 
  •  we may acquire goodwill and other intangible assets that are subject to impairment tests, which could result in future impairment charges;
 
  •  our ongoing business and management’s attention may be disrupted or diverted by transition or integration issues and the complexity of managing geographically or culturally diverse enterprises; and
 
  •  our due diligence process may fail to identify significant existing issues with the target company’s product quality, product architecture, financial disclosures, accounting practices, internal controls, legal contingencies, intellectual property and other matters.
 
These factors could have a material adverse effect on our business, operating results and financial condition.
 
From time to time, we may enter into negotiations for acquisitions or investments that are not ultimately consummated. Such negotiations could result in significant diversion of management time, as well as substantial out-of-pocket costs, any of which could have a material adverse effect on our business, operating results and financial condition.
 
We currently rely on a single contract manufacturer to assemble our products, and our failure to manage our relationship with our contract manufacturer successfully could negatively impact our ability to sell our products.
 
We currently rely on a single contract manufacturer, Sanmina-SCI Corporation (referred to in this prospectus as “Sanmina”), to assemble our products, manage our supply chain and participate in negotiations regarding component costs. While we believe that our use of Sanmina provides benefits to our business, our reliance on Sanmina reduces our control over the assembly process, exposing us to risks, including reduced control over quality assurance, production costs and product supply. These risks could become more acute if we are successful in our efforts to increase revenue. If we fail to manage our relationship with Sanmina effectively, or if Sanmina experiences delays, disruptions, capacity constraints or quality control problems in its operations, our ability to ship products to our customers could be impaired and our competitive position and reputation could be harmed. In addition, we are required to provide forecasts to Sanmina regarding product demand and production levels. If we inaccurately forecast demand for our products, we may have excess or inadequate inventory or incur cancellation charges or penalties, which could adversely impact our operating results and financial condition.
 
Additionally, Sanmina can terminate our agreement for any reason upon 90 days’ notice or for cause upon 30 days’ notice. If we are required to change contract manufacturers or assume internal manufacturing operations due to any termination of the agreement with Sanmina, we may lose revenue, experience manufacturing delays, incur increased costs or otherwise damage our customer relationships. We cannot assure you that we will be able to establish an alternative manufacturing relationship on acceptable terms or at all.
 
We depend on a continued supply of components for our products from third-party suppliers, and if shortages of these components arise, we may not be able to secure enough components to build new products to meet customer demand or we may be forced to pay higher prices for these components.
 
We rely on a limited number of suppliers for several key components utilized in the assembly of our products, including disk drives and microprocessors. Although in many cases we use standard components for our products, some of these components may only be purchased or may only be available from a single supplier. In addition, we maintain relatively low inventory and acquire components only as needed, and neither we nor our contract manufacturer enter into long-term supply contracts for these components and none of our third-party suppliers is obligated to supply products to us for any specific period or in any specific quantities, except as may be provided in a particular purchase order. Our industry has experienced component shortages and delivery delays in the past, and


17


Table of Contents

we may experience shortages or delays of critical components in the future as a result of strong demand in the industry or other factors. If shortages or delays arise, we may be unable to ship our products to our customers on time, or at all, and increased costs for these components that we could not pass on to our customers would negatively impact our operating margins. For example, new generations of disk drives are often in short supply, which may limit our ability to procure these disk drives. In addition, disk drives represent a significant portion of our cost of revenue, and the price of various kinds of disk drives is subject to substantial volatility in the market. Many of the other components required to build our systems are also occasionally in short supply. Therefore, we may not be able to secure enough components at reasonable prices or of acceptable quality to build new products, resulting in an inability to meet customer demand or our own operating goals, which could adversely affect our customer relationships, business, operating results and financial condition.
 
We currently rely on a contract engineering firm for quality assurance and product integration engineering.
 
In addition to our internal research and development staff, we have contracted with Persistent Systems Pvt. Ltd. (referred to in this prospectus as “Persistent Systems”), located in Pune, India, to employ a dedicated team of over 50 engineers focused on quality assurance and product integration engineering. Persistent Systems can terminate our agreement for any reason upon 15 days’ notice. If we were required to change our contract engineering firm, including due to a termination of the agreement with Persistent Systems, we may experience delays, incur increased costs or otherwise damage our customer relationships. We cannot assure you that we will be able to establish an alternative contract engineering firm relationship on acceptable terms or at all.
 
Future interpretations of existing accounting standards could adversely affect our operating results.
 
Generally Accepted Accounting Principles in the United States, or GAAP, are subject to interpretation by the Financial Accounting Standards Board, or FASB, the American Institute of Certified Public Accountants, or AICPA, the SEC and various other bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported operating results, and they could affect the reporting of transactions completed before the announcement of a change. For example, we recognize our product revenue in accordance with AICPA Statement of Position, or SOP 97-2, Software Revenue Recognition, and related amendments and interpretations contained in SOP 98-9, Software Revenue Recognition with Respect to Certain Transactions. The AICPA and its Software Revenue Recognition Task Force continue to issue interpretations and guidance for applying the relevant accounting standards to a wide range of sales contract terms and business arrangements that are prevalent in software licensing arrangements and arrangements for the sale of hardware products that contain more than an insignificant amount of software. Future interpretations of existing accounting standards, including SOP 97-2 and SOP 98-9, or changes in our business practices could result in delays in our recognition of revenue that may have a material adverse effect on our operating results. For example, we may in the future have to defer recognition of revenue for a transaction that involves:
 
  •  undelivered elements for which we do not have vendor-specific objective evidence of fair value;
 
  •  requirements that we deliver services for significant enhancements and modifications to customize our software for a particular customer; or
 
  •  material acceptance criteria.
 
Because of these factors and other specific requirements under GAAP for recognition of software revenue, we must include specific terms in customer contracts in order to recognize revenue when we initially deliver products or perform services. Negotiation of such terms could extend our sales cycle, and, under some circumstances, we may accept terms and conditions that do not permit revenue recognition at the time of delivery.
 
If we fail to maintain proper and effective internal controls, our ability to produce accurate financial statements could be impaired, which could adversely affect our operating results, our ability to operate our business and investors’ and customers’ views of us.
 
Ensuring that we have adequate internal financial and accounting controls and procedures in place so that we can produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-


18


Table of Contents

evaluated frequently. We are in the process of documenting, reviewing and, if appropriate, improving our internal controls and procedures in anticipation of being a public company and eventually being subject to the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and the related SEC rules concerning internal control over financial reporting, which will in the future require annual management assessments, and an audit by our independent registered public accounting firm, of the effectiveness of our internal control over financial reporting. Implementing any appropriate changes to our internal controls may entail substantial costs in order to modify our existing financial and accounting systems, take a significant period of time to complete, and distract our officers, directors and employees from the operation of our business. Moreover, these changes may not be effective in maintaining the adequacy or effectiveness of our internal controls. Any failure to maintain effective internal controls, or a consequent inability to produce accurate financial statements on a timely basis in accordance with SEC and NASDAQ rules, which we will be subject to as a public company, could increase our operating costs, materially impair our ability to operate our business, result in SEC investigations and penalties and lead to the delisting of our common stock from the NASDAQ Global Market. The resulting damage to our reputation in the marketplace and our financial credibility could significantly impair our sales and marketing efforts with customers. In addition, investors’ perceptions that our internal controls are inadequate or that we are unable to produce accurate financial statements may seriously affect our stock price.
 
In the current public company environment, officers and directors are subject to increased scrutiny and may be subject to increased risk of liability. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as our executive officers. This could negatively impact our future success.
 
We are subject to governmental export controls that could impair our ability to compete in international markets.
 
Our products are subject to U.S. export controls and may be exported outside the United States only with the required level of export license or through an export license exception. Changes in our products or changes in export regulations may create delays in the introduction of our products in international markets, prevent our customers with international operations from deploying our products throughout their global systems or, in some cases, prevent the export of our products to certain countries altogether. Any change in export regulations or related legislation, shift in approach to the enforcement or scope of existing regulations or change in the countries, persons or technologies targeted by these regulations could result in decreased use of our products by, or in our decreased ability to export or sell our products to, existing or potential customers with international operations.
 
Adverse changes in economic conditions and reduced information technology spending may negatively impact our business.
 
Our business depends on the overall demand for information technology and on the economic health of our current and prospective customers and the geographic regions in which we operate. In addition, the purchase of our products is often discretionary and may involve a significant commitment of capital and other resources. As a result, weak economic conditions or a reduction in information technology spending could adversely impact demand for our products and therefore our business, operating results and financial condition.
 
Risks Related to this Offering and Ownership of Our Common Stock
 
The trading price of our common stock is likely to be volatile, and you might not be able to sell your shares at or above the initial public offering price.
 
Our common stock has no prior trading history. The initial public offering price for our common stock will be determined through negotiations with the underwriters. The trading prices of the securities of newly public companies have often been highly volatile and may vary significantly from the initial public offering price. In addition, the trading price of our common stock will be susceptible to fluctuations in the market due to numerous factors, many of which may be beyond our control, including:
 
  •  changes in operating performance and stock market valuations of other technology companies generally or those that sell data warehouse solutions in particular;


19


Table of Contents

 
  •  actual or anticipated fluctuations in our operating results;
 
  •  the financial guidance that we may provide to the public, any changes in such guidance, or our failure to meet such guidance;
 
  •  changes in financial estimates by securities analysts, our failure to meet such estimates, or failure of analysts to initiate or maintain coverage of our stock;
 
  •  the public’s response to our press releases or other public announcements by us, including our filings with the SEC;
 
  •  announcements by us or our competitors of significant technical innovations, customer wins or losses, acquisitions, strategic partnerships, joint ventures or capital commitments;
 
  •  introduction of technologies or product enhancements that reduce the need for our products;
 
  •  the loss of key personnel;
 
  •  the development and sustainability of an active trading market for our common stock;
 
  •  lawsuits threatened or filed against us;
 
  •  future sales of our common stock by our officers or directors; and
 
  •  other events or factors affecting the economy generally, including those resulting from political unrest, war, incidents of terrorism or responses to such events.
 
The trading price of our common stock might also decline in reaction to events that affect other companies in our industry even if these events do not directly affect us. As a result of these and other factors, you might not be able to sell your shares at or above the price you pay for them in the initial public offering.
 
Some companies that have had volatile market prices for their securities have had securities class actions filed against them. If a suit were filed against us, regardless of its merits or outcome, it would likely result in substantial costs and divert management’s attention and resources. This could have a material adverse effect on our business, operating results and financial condition.
 
An active trading market may not develop for our common stock.
 
Prior to this offering, there has been no public market for shares of our common stock, and we cannot assure you that one will develop or be sustained after this offering. If a market does not develop or is not sustained, it may be difficult for you to sell your shares of our common stock at an attractive price or at all.
 
Future sales of shares by existing stockholders could cause our stock price to decline.
 
Once a trading market develops for our common stock, many of our stockholders will have an opportunity to sell their common stock for the first time, subject to the contractual lock-up agreements and other restrictions on resale discussed in this prospectus. Sales by our existing stockholders of a substantial number of shares of common stock in the public market, or the threat that substantial sales might occur, could cause the market price of the common stock to decrease significantly. These factors could also make it difficult for us to raise additional capital by selling our common stock. See “Shares Eligible for Future Sale” for further details regarding the number of shares eligible for sale in the public market after this offering.
 
If securities or industry analysts do not publish research or publish unfavorable research about our business, our stock price and trading volume could decline.
 
The trading market for our common stock will depend in part on any research reports that securities or industry analysts publish about us or our business. After this offering, if no securities or industry analysts initiate coverage of our company, the trading price for our stock may be negatively impacted. In the event securities or industry analysts cover our company and one or more of these analysts downgrade our stock or publish unfavorable reports about our business, our stock price would likely decline. In addition, if any securities or industry analysts cease coverage of


20


Table of Contents

our company or fail to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price and trading volume to decline.
 
As a new investor, you will experience substantial dilution as a result of this offering.
 
The assumed initial public offering price per share is substantially higher than the pro forma net tangible book value per share of our common stock immediately prior to this offering. As a result, new investors purchasing shares of our common stock in this offering will experience immediate dilution of $      per share in pro forma net tangible book value per share from the price they paid, at an assumed initial public offering price of $      per share, which is the midpoint of the range listed on the cover page of this prospectus. In addition, investors who purchase shares in this offering will contribute approximately  % of the total amount of equity capital raised by us through the date of this offering, but such investors will only own approximately  % of our outstanding shares. This dilution is due to the fact that our earlier investors paid substantially less than the initial public offering price when they purchased their shares of the company. In addition, we have issued options and warrants to acquire common stock at prices significantly below the assumed initial public offering price. To the extent any outstanding options and warrants are exercised, there will be further dilution to new investors in this offering.
 
We do not currently intend to pay dividends on our common stock and your ability to achieve a return on your investment will therefore depend on appreciation in the price of our common stock.
 
We have never declared or paid any cash dividends on our common stock and do not currently expect to pay any cash dividends for the foreseeable future. Our loan agreements with our lenders contain provisions prohibiting us from paying any dividends during the term of the agreements without our lenders’ prior written consent. We intend to use our future earnings, if any, in the operation and expansion of our business. Accordingly, you are not likely to receive any dividends on your common stock for the foreseeable future, and your ability to achieve a return on your investment will therefore depend on appreciation in the price of our common stock.
 
Provisions in our certificate of incorporation and bylaws and Delaware law might discourage, delay or prevent a change in control of our company or changes in our management and, therefore, may negatively impact the trading price of our common stock.
 
Provisions of our certificate of incorporation and our bylaws may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares of our common stock. These provisions may also prevent or frustrate attempts by our stockholders to replace or remove our management. These provisions:
 
  •  establish a classified board of directors so that not all members of our board are elected at one time;
 
  •  provide that directors may only be removed “for cause;”
 
  •  authorize the issuance of “blank check” preferred stock that our board of directors could issue to increase the number of outstanding shares and to discourage a takeover attempt;
 
  •  eliminate the ability of our stockholders to call special meetings of stockholders;
 
  •  prohibit stockholder action by written consent, which has the effect of requiring all stockholder actions to be taken at a meeting of stockholders;
 
  •  provide that the board of directors is expressly authorized to make, alter or repeal our bylaws; and
 
  •  establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.
 
In addition, Section 203 of the Delaware General Corporation Law may discourage, delay or prevent a change in control of our company by prohibiting stockholders owning in excess of 15% of our outstanding voting stock from merging or combining with us during a specified period unless certain approvals are obtained.


21


Table of Contents

 
Our management will have broad discretion as to the use of the net proceeds from this offering and might not apply the proceeds in ways that increase the value of your investment or in ways with which you agree.
 
We expect to use a portion of the net proceeds to us from this offering to repay the amounts outstanding under our outstanding credit facilities. We intend to use the balance of the net proceeds for unspecified general corporate purposes, which may include acquisitions of companies, assets or technologies. Our management will have broad discretion over the use of the net proceeds from this offering, and you will be relying on the judgment of our management regarding the application of these net proceeds. While it is the intention of our management to use the net proceeds from the offering in the best interests of the company, our management might not apply the net proceeds from this offering in ways that increase the value of your investment or in ways with which you agree. In addition, the market price of our common stock may fall if the market does not view our use of the net proceeds from this offering favorably.
 
Insiders will continue to own a significant portion of our outstanding common stock following this offering and will therefore have substantial control over us and will be able to influence corporate matters.
 
Upon completion of this offering, our executive officers, directors and their affiliates will beneficially own, in the aggregate, approximately     % of our outstanding common stock. As a result, our executive officers, directors and their affiliates will be able to exercise significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as a merger or other sale of our company or its assets. This concentration of ownership could limit your ability to influence corporate matters and may have the effect of delaying or preventing another party from acquiring control over us.


22


Table of Contents

 
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This prospectus contains forward-looking statements. All statements other than statements of historical facts contained in this prospectus, including statements regarding our future results of operations and financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. In many cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or other similar words.
 
These forward-looking statements are only predictions. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other important factors that may cause our actual results, levels of activity, performance or achievements to materially differ from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. We have described in the “Risk Factors” section and elsewhere in this prospectus the principal risks and uncertainties that we believe could cause actual results to differ from these forward-looking statements. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on these forward-looking statements as guarantees of future events.
 
The forward-looking statements in this prospectus represent our views as of the date of this prospectus. We anticipate that subsequent events and developments will cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this prospectus.
 
This prospectus also contains estimates and other statistical data made by independent parties and by us relating to market size and growth and other data about our industry. This data involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. We have not independently verified the statistical and other industry data generated by independent parties and contained in this prospectus and, accordingly, we cannot guarantee their accuracy or completeness. In addition, projections, assumptions and estimates of our future performance and the future performance of the industries in which we operate are necessarily subject to a high degree of uncertainty and risk.


23


Table of Contents

 
USE OF PROCEEDS
 
We estimate that the net proceeds to us from this offering will be approximately $      million, assuming an initial public offering price of $      per share, which is the midpoint of the range listed on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. A $1.00 increase (decrease) in the assumed initial public offering price of $      per share would increase (decrease) the net proceeds to us from this offering by approximately $      million, assuming that the number of shares offered by us, as listed on the cover page of this prospectus, remains the same. We will not receive any of the proceeds from the sale of shares of our common stock by the selling stockholders.
 
We intend to use the net proceeds to us from this offering for working capital and other general corporate purposes, including the development of new products, sales and marketing activities, capital expenditures and the costs of operating as a public company. We also intend to use a portion of the net proceeds to us to repay our outstanding debt under two loan agreements. As of January 31, 2007 we had $6.5 million outstanding under a term loan credit facility, dated June 14, 2005, with Silicon Valley Bank, as agent for certain other lenders, including Gold Hill Venture Lending. All unpaid principal and accrued interest under this loan is due and payable in full on June 1, 2009. Under the terms of this loan, the interest rate for each advance is the prime rate plus 4% and was between 10% to 12% at the time of each advance. In addition, on January 31, 2007 we entered into a revolving credit facility with Silicon Valley Bank to borrow up to an additional $15 million. All outstanding debt incurred under this revolving facility will become payable on January 30, 2008. Our interest rate under this revolving facility is 1% below the prime rate, and on January 31, 2007 was 7.25%. As of February 28, 2007, there was nothing outstanding under this revolving credit facility.
 
We may use a portion of the net proceeds to us to expand our current business through acquisitions of complementary companies, assets or technologies. We currently have no agreements or commitments for any acquisitions. In addition, the amount and timing of what we actually spend for these purposes may vary significantly and will depend on a number of factors, including our future revenue and cash generated by operations. Accordingly, our management will have broad discretion in applying the net proceeds of this offering.
 
Some of the principal purposes of this offering are to create a public market for our common stock, increase our visibility in the marketplace, provide liquidity to existing stockholders and obtain additional working capital. A public market for our common stock will facilitate future access to public equity markets and enhance our ability to use our common stock as a means of attracting and retaining key employees and as consideration for acquisitions.
 
Pending the uses described above, we intend to invest the net proceeds to us in investment-grade, interest-bearing securities including corporate, financial institution, federal agency and U.S. government obligations.
 
DIVIDEND POLICY
 
We have never declared or paid any cash dividends on our capital stock and do not expect to pay any cash dividends for the foreseeable future. We intend to use future earnings, if any, in the operation and expansion of our business. Payment of future cash dividends, if any, will be at the discretion of our board of directors after taking into account various factors, including our financial condition, recent and expected operating results, current and anticipated cash needs, and restrictions imposed by lenders, if any.
 
Our term loan and security agreement, dated June 14, 2005 with Silicon Valley Bank and certain other lenders and our loan and security agreement with Silicon Valley Bank dated January 31, 2007 each contains a provision prohibiting us from paying any dividends during the term of the agreements without Silicon Valley Bank’s prior written consent.


24


Table of Contents

 
CAPITALIZATION
 
The following table sets forth our capitalization as of January 31, 2007:
 
  •  on an actual basis;
 
  •  on a pro forma basis to give effect to the automatic conversion of all of our outstanding convertible preferred stock into common stock upon the closing of this offering, the one-for-two reverse split of our common stock effected prior to the closing of this offering, and the filing of our second amended and restated certificate of incorporation as of the closing date of this offering; and
 
  •  on a pro forma as adjusted basis to give effect to the issuance and sale by us of           shares of our common stock in this offering at an assumed initial public offering price of $      per share, which is the midpoint of the range listed on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
 
You should read the following table together with our consolidated financial statements and the related notes appearing elsewhere in this prospectus and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other financial information appearing elsewhere in this prospectus.
 
                         
    As of January 31, 2007  
                Pro Forma
 
    Actual     Pro Forma     as Adjusted  
    (In thousands, except share and per share data)  
          (unaudited)  
 
Cash and cash equivalents
  $ 5,018     $ 5,018          
                         
Note payable to bank, net of current portion
  $ 4,099     $ 4,099          
Convertible redeemable preferred stock, par value $0.001 per share
                       
Series A convertible redeemable preferred stock, 17,280,000 shares authorized, 17,200,000 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted
    12,805                
Series B convertible redeemable preferred stock, 29,425,622 shares authorized, issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted
    35,245                
Series C convertible redeemable preferred stock, authorized, 23,058,151 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted
    25,700                
Series D convertible redeemable preferred stock, 8,147,452 shares authorized, 7,901,961 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted
    23,381                
Stockholders’ equity (deficit):
                       
Common stock, par value $0.001 per share, 150,000,000 shares authorized, 7,542,372 shares issued, actual; 500,000,000 shares authorized, 46,317,219 shares issued, pro forma; and 500,000,000 shares authorized,           shares issued, pro forma as adjusted
    8       46          
Preferred stock, par value $0.001 per share; no shares authorized issued or outstanding, actual; 5,000,000 shares authorized and no shares issued or outstanding, pro forma and pro forma as adjusted
                 
Treasury stock, at cost
    (14 )     (14 )        
Other comprehensive income (loss)
    (284 )     (284 )        
Additional paid-in capital
          97,093          
Accumulated deficit
    (80,833 )     (80,833 )        
                         
Total stockholders’ equity (deficit)
    (81,123 )     16,008          
                         
Total capitalization (including note payable, net of current portion)
  $ 20,107     $ 20,107     $  
                         
 
A $1.00 increase (decrease) in the assumed initial public offering price of $      per share would increase (decrease) total stockholders’ equity by $      million, assuming that the number of shares offered by us, as listed on the cover page of this prospectus, remains the same.


25


Table of Contents

 
The table above excludes (on a pro forma and pro forma as adjusted basis):
 
  •  7,441,697 shares of our common stock issuable upon the exercise of stock options outstanding as of January 31, 2007, at a weighted average exercise price of $1.66 per share;
 
  •  4,102,795 shares of our common stock reserved as of January 31, 2007 for future issuance under our stock compensation plans;
 
  •  312,781 shares of our common stock issuable upon the exercise of warrants outstanding as of January 31, 2007, at a weighted average exercise price of $1.26 per share; and
 
  •  38,750 shares of unvested restricted common stock.


26


Table of Contents

 
DILUTION
 
If you invest in our common stock in this offering, your ownership interest will be immediately diluted to the extent of the difference between the initial public offering price per share and the net tangible book value per share of our common stock after this offering. Our pro forma net tangible book value as of January 31, 2007, was $16.0 million, or $0.35 per share of our common stock. Pro forma net tangible book value per share represents the amount of our total tangible assets less our total liabilities, divided by the total number of shares of our common stock outstanding, after giving effect to the automatic conversion of all of our outstanding convertible preferred stock into common stock upon the closing of this offering and the one-for-two reverse split of our common stock effected prior to the closing of this offering.
 
After giving effect to the sale by us of           shares of our common stock in this offering at an assumed initial public offering price of $      per share, which is the midpoint of the range listed on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma net tangible book value as of January 31, 2007 would have been approximately $      million, or $      per share of our common stock. This amount represents an immediate increase in our pro forma net tangible book value of $      per share to our existing stockholders and an immediate dilution in our pro forma net tangible book value of $      per share to new investors purchasing shares of our common stock in this offering at the assumed initial public offering price.
 
                 
The following table illustrates this dilution on a per share basis:
               
Assumed initial public offering price per share
          $        
Pro forma net tangible book value per share as of January 31, 2007
  $ 0.35          
                 
Increase per share attributable to this offering
               
Pro forma net tangible book value per share after this offering
               
                 
Dilution per share to new investors
          $    
                 
 
A $1.00 increase (decrease) in the assumed initial public offering price of $      per share would increase (decrease) our pro forma net tangible book value per share after this offering by approximately $      and would increase (decrease) dilution per share to new investors by approximately $     , assuming that the number of shares offered by us, as listed on the cover page of this prospectus, remains the same. In addition, to the extent any outstanding options or warrants are exercised, new investors will experience further dilution.
 
The following table summarizes, as of January 31, 2007, the number of shares purchased or to be purchased from us, the total consideration paid or to be paid to us, and the average price per share paid or to be paid to us by existing stockholders and new investors purchasing shares of our common stock in this offering at an assumed initial public offering price of $      per share, which is the midpoint of the range listed on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. As the table below shows, new investors purchasing shares of our common stock in this offering will pay an average price per share substantially higher than our existing stockholders paid.
 
                                         
                            Average
 
    Shares Purchased     Total Consideration     Price Per
 
    Number     Percent     Amount     Percent     Share  
 
Existing stockholders
                %   $             %   $        
New investors
                                       
                                         
Total
            100 %             100 %        
                                         
 
A $1.00 increase (decrease) in the assumed initial public offering price of $      per share would increase (decrease) the total consideration paid to us by new investors by $      million and increase (decrease) the percent of total consideration paid to us by new investors by     % assuming that the number of shares offered by us, as listed on the cover page of this prospectus, remains the same.
 
The number of shares purchased from us by existing stockholders is based on 46,216,907 shares of our common stock outstanding as of January 31, 2007 after giving effect to the automatic conversion of all of our


27


Table of Contents

outstanding convertible preferred stock into common stock upon the closing of this offering and the one-for-two reverse split of our common stock effected prior to the closing of this offering. This number excludes:
 
  •  7,441,697 shares of our common stock issuable upon the exercise of stock options outstanding as of January 31, 2007, at a weighted average exercise price of $1.66 per share;
 
  •  4,102,795 shares of our common stock reserved as of January 31, 2007 for future issuance under our stock compensation plans; and
 
  •  312,781 shares of our common stock issuable upon the exercise of warrants outstanding as of January 31, 2007, at a weighted average exercise price of $1.26 per share.
 
If all our outstanding stock options and outstanding warrants had been exercised as of January 31, 2007, our pro forma net tangible book value as of January 31, 2007 would have been approximately $      million or $      per share of our common stock, and the pro forma net tangible book value after giving effect to this offering would have been $      per share, representing dilution in our pro forma net tangible book value per share to new investors of $     .


28


Table of Contents

 
SELECTED CONSOLIDATED FINANCIAL DATA
 
The following consolidated statement of operations data for the fiscal years ended January 31, 2005, January 31, 2006 and January 31, 2007 and consolidated balance sheet data as of January 31, 2006 and January 31, 2007 have been derived from our audited consolidated financial statements and the related notes appearing elsewhere in this prospectus. The following consolidated statement of operations data for the fiscal years ended January 31, 2003 and January 31, 2004 and consolidated balance sheet data as of January 31, 2003, January 31, 2004 and January 31, 2005 have been derived from our audited consolidated financial statements that do not appear in this prospectus. The financial data set forth below should be read together with our consolidated financial statements, the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus. Our historical results are not necessarily indicative of the results to be expected for any future period.
 
                                         
    Fiscal Year Ended January 31,  
    2003     2004     2005     2006     2007  
    (In thousands, except share and per share data)  
 
Consolidated Statement of Operations Data:
                                       
Revenue
                                       
Product
  $     $ 13,036     $ 30,908     $ 45,508     $ 64,632  
Services
          597       5,121       8,343       14,989  
                                         
Total revenue
          13,633       36,029       53,851       79,621  
Cost of revenue
                                       
Product
          4,017       8,874       18,941       26,697  
Services
          979       1,640       3,491       5,403  
                                         
Total cost of revenue
          4,996       10,514       22,432       32,100  
                                         
Gross profit
          8,637       25,515       31,419       47,521  
Operating expenses
                                       
Sales and marketing
    3,470       7,791       14,783       25,626       32,908  
Research and development
    9,162       8,643       11,366       16,703       18,037  
General and administrative
    2,557       2,010       2,500       3,124       4,827  
                                         
Total operating expenses
    15,189       18,444       28,649       45,453       55,772  
                                         
Operating loss
    (15,189 )     (9,807 )     (3,134 )     (14,034 )     (8,251 )
Interest income
    231       145       206       487       414  
Interest expense
    74       239       121       173       765  
Other income (expense), net
          (51 )     35       (87 )     627  
                                         
Loss before cumulative effect of change in accounting principle
  $ (15,032 )   $ (9,952 )   $ (3,014 )   $ (13,807 )   $ (7,975 )
Cumulative effect of change in accounting principle
                      (218 )      
                                         
Net loss
  $ (15,032 )   $ (9,952 )   $ (3,014 )   $ (14,025 )   $ (7,975 )
                                         
Accretion to preferred stock
    (2,482 )     (3,877 )     (4,096 )     (5,797 )     (5,931 )
                                         
Net loss attributable to common shareholders
  $ (17,514 )   $ (13,829 )   $ (7,110 )   $ (19,822 )   $ (13,906 )
                                         
Net loss per share attributable to common stockholders — basic and diluted:
                                       
Loss before cumulative effect of change in accounting principle
  $ (2.74 )   $ (1.74 )   $ (0.50 )   $ (2.08 )   $ (1.10 )
Cumulative effect of change in accounting principle
                      (0.03 )      
Accretion to preferred stock
    (0.45 )     (0.67 )     (0.67 )     (0.88 )     (0.82 )
                                         
Net loss per share attributable to common stockholders — basic and diluted
  $ (3.19 )   $ (2.41 )   $ (1.17 )   $ (2.99 )   $ (1.92 )
                                         
Weighted average common shares outstanding
    5,492,625       5,735,952       6,077,538       6,635,274       7,230,278  
                                         
Pro forma net loss per share — basic and diluted (unaudited)(1)
                                  $ (0.17 )
                                         
Pro forma weighted average common shares outstanding (unaudited)(1)
                                    46,005,125  
                                         
 
 
(1) The pro forma consolidated statement of operations data in the table above gives effect to the automatic conversion of all of our outstanding convertible preferred stock into common stock upon the closing of this offering.
 


29


Table of Contents

                                         
    As of January 31,  
    2003     2004     2005     2006     2007  
    (In thousands)  
 
Consolidated Balance Sheet Data:
                                       
Cash and cash equivalents
  $ 9,903     $ 15,014     $ 22,192     $ 14,663     $ 5,018  
Working capital
    9,371       19,387       28,708       20,329       25,899  
Total assets
    12,392       26,731       39,443       45,864       69,199  
Note payable to bank, including current portion
    1,454       1,544             3,000       6,535  
Convertible redeemable preferred stock
    37,279       61,156       80,904       91,200       97,131  
Total stockholders’ deficit
    (28,119 )     (41,977 )     (49,110 )     (67,932 )     (81,123 )

30


Table of Contents

 
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and the related notes and the other financial information appearing elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of various factors, including those discussed below and elsewhere in this prospectus, particularly under “Risk Factors.”
 
Overview
 
We were founded in August 2000 to develop data warehouse appliances that enable real-time business intelligence. Our NPS appliance integrates database, server and storage platforms in a purpose-built unit to enable detailed queries and analyses on large volumes of stored data. The results of these queries and analyses provide organizations with actionable information to improve their business operations.
 
We are headquartered in Framingham, Massachusetts. Our personnel and operations are also located throughout the United States, as well as in Canada, the United Kingdom, Australia, Japan and Korea. We expect to continue to add personnel in the United States and internationally to provide additional geographic sales and technical support coverage.
 
Revenue
 
We derive our revenue from sales of products and related services. We sell our data warehouse appliances worldwide to large global enterprises, mid-market companies and government agencies through our direct salesforce as well as indirectly via distribution partners. To date, we have derived the substantial majority of our revenue from customers located in the United States. In fiscal 2007, U.S. customers accounted for approximately 76% of our revenue.
 
Product Revenue.  The significant majority of our revenue is generated through the sale of our NPS appliances, primarily to companies in the following vertical industries: telecommunications, e-business, retail, financial services, analytic service providers, government and healthcare. Since we began shipping our products in fiscal 2004, our product revenue has grown from $13.0 million in fiscal 2004 to $30.9 million in fiscal 2005, $45.5 million in fiscal 2006 and $64.6 million in fiscal 2007. As we have grown we have reduced our dependency on our largest customers, with no customer accounting for more than 10% of our total revenue in fiscal 2007. Our future revenue growth will depend in significant part upon further sales of our NPS appliances to our existing customer base. As of January 31, 2007, 67% of our customers have purchased more than one NPS appliance, and the NPS system is priced to allow customers to “pay as they grow” by adding incremental capacity as their needs increase. In addition, increasing our sales to new customers in existing vertical industries we currently serve and in other vertical industries that depend upon high-performance data analysis is an important element of our strategy. We consider the further development of our direct and indirect sales channels in domestic and international markets to be a key to our future revenue growth and the global acceptance of our products. Our future revenue growth will also depend on our ability to sustain the high levels of customer satisfaction generated by providing “high-touch”, high-quality support. We also are dependent on the successful development and introduction of new products and enhancements to existing products that achieve acceptance in the market to increase our revenue.
 
We maintain a standard price list for all our products. In addition, we have a corporate policy that governs the level of discounting our sales organization may offer on our products based on factors such as transaction size, volume of products, competition and distribution partner involvement. Our total product revenue and gross profit are directly affected by our ability to manage our product pricing policy. In addition, competition continues to increase and, in the future, we may be forced to reduce our prices to remain competitive.
 
Services Revenue.  We sell hardware and software support services to our customers. In addition, we offer installation services and product training. The percentage of our total revenue derived from support services was 14% in fiscal 2005, 15% in fiscal 2006 and 19% in fiscal 2007. We anticipate that support services will continue to


31


Table of Contents

be purchased by new and existing customers and that services revenue will continue to be between 18% and 20% of our total revenue.
 
Cost of Revenue and Gross Profit
 
Cost of product revenue consists primarily of amounts paid to Sanmina, our contract manufacturer, in connection with the procurement of hardware components and assembly of those components into our NPS appliance systems. Neither we nor Sanmina enter into long-term supply contracts for our hardware components, which can cause our cost of product revenue to fluctuate. These product costs are recorded when the related product revenue is recognized. Cost of revenue also includes costs of shipping, warehousing and logistics expenses, warranty reserves and valuation reserves taken for excess and obsolete inventory. Shipping, warehousing and logistics costs are recognized as incurred. Estimated warranty costs are recorded when the related product revenue is recognized and inventory valuation reserves are evaluated and recognized periodically.
 
Cost of services revenue consists primarily of salaries and employee benefits for our support staff and worldwide installation and technical account management teams and amounts paid to Hewlett-Packard to provide on-site hardware service.
 
Our gross profit has been and will continue to be affected by a variety of factors, including the relative mix of product versus services revenue; our mix of direct versus indirect sales (as sales through our indirect channels have lower average selling prices and gross profit); and changes in the average selling prices of our products and services, which can be adversely affected by competitive pressures. Additional factors affecting gross profit include the timing of new product introductions, which may reduce demand for our existing product as customers await the arrival of new products and could also result in additional reserves against older product inventory, cost reductions through redesign of existing products and the cost of our systems hardware. The data warehouse market is highly competitive and we expect this competition to intensify in the future, which may increase pricing pressure and reduce product gross margins.
 
If our customer base continues to grow, it will be necessary for us to continue to make significant upfront investments in our customer service and support infrastructure to support this growth. The rate at which we add new customers will affect the level of these upfront investments. The timing of these additional expenditures could materially affect our cost of revenue, both in absolute dollars and as a percentage of total revenue, in any particular period. This could cause downward pressure on gross margins.
 
Operating Expenses
 
Operating expenses consist of sales and marketing, research and development, and general and administrative expenses. Personnel-related costs are the most significant component of each of these expense categories. We grew from 90 employees at January 31, 2004 to 225 employees at January 31, 2007. We expect to continue to hire significant numbers of new employees to support our anticipated growth.
 
Sales and Marketing Expenses
 
Sales and marketing expenses consist primarily of salaries and employee benefits, sales commissions, marketing program expenses and allocated facilities expenses. We plan to continue to invest in sales and marketing by increasing the number of our sales personnel worldwide, expanding our domestic and international sales and marketing activities, and further building brand awareness. Accordingly, we expect sales and marketing expenses to continue to increase in total dollars although we expect these expenses to decrease as a percentage of total revenue. Generally, sales personnel are not immediately productive and thus sales and marketing expenses related to new sales hires are not immediately accompanied by higher revenue. Hiring additional sales personnel may reduce short-term operating margins until the sales personnel become productive and generate revenue. Accordingly, the timing of hiring sales personnel and the rate at which they become productive will affect our future performance.


32


Table of Contents

 
Research and Development Expenses
 
Research and development expenses consist primarily of salaries and employee benefits, product prototype expenses, allocated facilities expenses and depreciation of equipment used in research and development activities. In addition to our U.S. development teams, we use an offshore development team employed by a contract engineering firm in Pune, India. Research and development expenses are recorded as incurred. We devote substantial resources to the development of additional functionality for existing products and the development of new products. We intend to continue to invest significantly in our research and development efforts because we believe they are essential to maintaining and increasing our competitive position. We expect research and development expenses to increase in total dollars, although we expect such expense to decrease as a percentage of total revenue.
 
General and Administrative Expenses
 
General and administrative expenses consist primarily of salaries and employee benefits, allocated facilities expenses and fees for professional services such as legal, accounting and compliance. We expect general and administrative expenses to increase in total dollars and to increase slightly as a percentage of revenue in fiscal 2008 as we invest in infrastructure to support continued growth and incur additional expenses related to being a publicly traded company, including additional accounting and legal fees, costs of compliance with securities and other regulations, investor relation expenses and higher insurance premiums, including premiums related to director and officer insurance.
 
Stock-based Compensation
 
Effective February 1, 2006, we adopted the Statement of Financial Accounting Standards, or SFAS, No. 123(R), Share Based Payment, using the prospective transition method. SFAS No. 123(R) addresses all forms of shared-based payment awards, including shares issued under employee stock purchase plans, stock options, restricted stock and stock appreciation rights. SFAS No. 123(R) requires us to expense share-based payment awards with compensation cost for share-based payment transactions measured at fair value. Under this transition method, stock-based compensation expense recognized beginning February 1, 2006 is based on the grant date fair value of stock awards granted or modified after February 1, 2006. For fiscal 2007, we recorded an expense of $0.9 million in connection with stock-based awards. Unrecognized stock-based compensation expense of non-vested stock options of $6.2 million, net of forfeitures, as of January 31, 2007 is expected to be recognized using the straight-line method over a weighted average period of 4.2 years. We expect to recognize $1.5 million in stock-based compensation in fiscal 2008, excluding the impact of any grants made after January 31, 2007.
 
Other
 
Interest Income (Expense), Net
 
Interest income (expense), net primarily consists of interest income on cash balances and interest expense on our outstanding debt.
 
Other Income (Expense), Net
 
Other income (expense), net primarily consists of losses or gains on translation of non-U.S. dollar transactions into U.S. dollars and mark-to-market adjustments on preferred stock warrants.
 
Cumulative Effect of Change in Accounting Principle
 
On June 29, 2005, the FASB issued FSP 150-5. FSP 150-5 affirms that freestanding warrants to purchase shares that are redeemable are subject to the requirements in SFAS No. 150, regardless of the redemption price or the timing of the redemption feature. Therefore, under SFAS No. 150, the outstanding freestanding warrants to purchase our convertible preferred stock are liabilities that must be recorded at fair value each quarter, with the changes in estimated fair value in the quarter recorded as other expense or income in our consolidated statement of operations.


33


Table of Contents

 
We adopted FSP 150-5 as of August 1, 2005 and recorded an expense of $0.2 million for the cumulative effect of the change in accounting principle to reflect the estimated fair value of these warrants as of that date. There was no change in fair value between the adoption date and January 31, 2006. In the year ended January 31, 2007, we recorded $0.2 million of additional expense to reflect the increase in fair value between February 1, 2006 and January 31, 2007. The pro forma effect of the adoption of FSP 150-5 on our results of operations for 2004 and 2005, if applied retroactively as if SFAS No. 150 had been adopted in those years, was not material. We estimated the fair value of these warrants at the respective balance sheet dates using the Black-Scholes option valuation model. This model utilizes as inputs the estimated fair value of the underlying convertible preferred stock at the valuation measurement date, the remaining contractual term of the warrant, risk-free interest rates, expected dividends and expected volatility of the price of the underlying convertible preferred stock.
 
Application of Critical Accounting Policies and Use of Estimates
 
Our consolidated financial statements are prepared in accordance with GAAP. These accounting principles require us to make certain estimates, judgments and assumptions that can affect the reported amounts of assets and liabilities as of the dates of the consolidated financial statements, the disclosure of contingencies as of the dates of the consolidated financial statements, and the reported amounts of revenue and expenses during the periods presented. We evaluate these estimates, judgments and assumptions on an ongoing basis. Although we believe that our estimates, judgments and assumptions are reasonable under the circumstances, actual results may differ from those estimates.
 
We believe that of our significant accounting policies, which are described in the notes to the financial statements appearing elsewhere in this prospectus, the following accounting policies involve the most judgment and complexity:
 
  •  revenue recognition;
 
  •  stock-based compensation;
 
  •  inventory valuation;
 
  •  warranty reserves; and
 
  •  accounting for income taxes.
 
Accordingly, we believe the policies set forth above are the most critical to aid in fully understanding and evaluating our financial condition and results of operations. If actual results or events differ materially from the estimates, judgments and assumptions used by us in applying these policies, our reported financial condition and results of operations could be materially affected.
 
Revenue Recognition
 
We derive our revenue from sales of products and related services and enter into multiple-element arrangements in the normal course of business with our customers and distribution partners. In all of our arrangements, we do not recognize any revenue until we can determine that persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and we deem collection to be probable. In making these judgments, we evaluate these criteria as follows:
 
  •  Evidence of an arrangement.  We consider a non-cancelable agreement signed by the customer and us to be persuasive evidence of an arrangement.
 
  •  Delivery has occurred.  We consider delivery to have occurred when product has been delivered to the customer and no post-delivery obligations exist other than ongoing support obligations. In instances where customer acceptance is required, delivery is deemed to have occurred when customer acceptance has been achieved.
 
  •  Fees are fixed or determinable.  We consider the fee to be fixed or determinable unless the fee is subject to refund or adjustment or is not payable within normal payment terms. If the fee is subject to refund or adjustment, we recognize revenue when the right to a refund or adjustment lapses. If offered payment terms


34


Table of Contents

  exceed our normal terms, we recognize revenue as the amounts become due and payable or upon the receipt of cash.
 
  •  Collection is deemed probable.  We conduct a credit review for all transactions at the inception of an arrangement to determine the creditworthiness of the customer. Collection is deemed probable if, based upon our evaluation, we expect that the customer will be able to pay amounts under the arrangement as payments become due. If we determine that collection is not probable, revenue is deferred and recognized upon the receipt of cash.
 
We enter into multiple element arrangements in the normal course of business with our customers. We recognize elements in such arrangements when delivered and the amount allocated to each element is based on vendor specific objective evidence of fair value (“VSOE”). We determine VSOE based upon the amount charged when we sell an element separately. When VSOE exists for undelivered elements but not for the delivered elements, we use the “residual method.” Under the residual method, we initially defer the fair value of the undelivered elements. The residual contract amount is then allocated to and recognized for the delivered elements. Thereafter, we recognize the amount deferred for the undelivered elements when those elements are delivered. For arrangements in which VSOE does not exist for each undelivered element, we defer revenue for the entire arrangement and recognize it only when delivery of all the elements without VSOE has occurred, unless the only undelivered element is maintenance in which case we recognize revenue from the entire contract ratably over the maintenance period.
 
The determination of VSOE is highly judgmental and is a key factor in determining whether revenue may be recognized or must be deferred and the extent to which it may be recognized once the various elements of an arrangement are delivered. We assess VSOE based on previous sales of products and services, the type and size of customer and renewal rates in contracts. We monitor VSOE on an ongoing basis. A change in our assessment of, or our inability to establish VSOE for products or services may result in significant variation in our revenues and operating results.
 
Stock-Based Compensation
 
Through January 31, 2006, we accounted for our stock-based employee compensation arrangements in accordance with the intrinsic value provisions of Accounting Principles Board, or APB, Opinion No. 25, Accounting for Stock Issued to Employees and related interpretations. Under the intrinsic value method, compensation expense is measured on the date of the grants as the difference between the fair value of our common stock and the exercise or purchase price multiplied by the number of stock options or restricted stock awards granted.
 
Through January 31, 2006, we accounted for stock-based compensation expense for non-employees using the fair value method prescribed by Statement of Financial Accounting Standards, or SFAS, No. 123 and the Black-Scholes option pricing model, and recorded the fair value of non-employee stock options as an expense over the vesting term of the option.
 
In December 2004, FASB issued SFAS No. 123(R), which requires companies to expense the fair value of employee stock options and other forms of stock-based compensation. We adopted SFAS No. 123(R) effective February 1, 2006. SFAS No. 123(R) requires nonpublic companies that used the minimum value method under SFAS No. 123 for either recognition or pro forma disclosures to apply SFAS No. 123(R) using the prospective-transition method. As such, we will continue to apply APB Opinion No. 25 in future periods to equity awards outstanding at the date of adoption of SFAS No. 123(R) that were measured using the minimum value method. In accordance with SFAS No. 123(R), we will recognize the compensation cost of employee stock-based awards granted subsequent to February 1, 2006 in the statement of operations using the straight-line method over the vesting period of the award. Effective with the adoption of SFAS No. 123(R), we have elected to use the Black-Scholes option pricing model to determine the fair value of stock options granted.
 
As there has been no public market for our common stock prior to this offering, and therefore a lack of company-specific historical and implied volatility data, we have determined the share price volatility for options granted in fiscal 2007 based on an analysis of reported data for a peer group of companies that granted options with substantially similar terms. The expected volatility of options granted has been determined using an average of the


35


Table of Contents

historical volatility measures of this peer group of companies for a period equal to the expected life of the option. The expected volatility for options granted during fiscal 2007 was 75%-83%. We intend to continue to consistently apply this process using the same or similar entities until a sufficient amount of historical information regarding the volatility of our own share price becomes available, or unless circumstances change such that the identified entities are no longer similar to us. In this latter case, more suitable, similar entities whose share prices are publicly available would be utilized in the calculation.
 
The expected life of options granted has been determined utilizing the “simplified” method as prescribed by the SEC’s Staff Accounting Bulletin, or SAB, No. 107, Share-Based Payment. The expected life of options granted during fiscal 2007 was 6.5 years. For fiscal 2007, the weighted average risk-free interest rate used ranged from 4.56% to 5.03%. The risk-free interest rate is based on a daily treasury yield curve rate whose term is consistent with the expected life of the stock options. We have not paid and do not anticipate paying cash dividends on our shares of common stock; therefore, the expected dividend yield is assumed to be zero.
 
In addition, SFAS No. 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates, whereas SFAS No. 123 permitted companies to record forfeitures based on actual forfeitures, which was our historical policy under SFAS No. 123. As a result, we applied an estimated forfeiture rate, based on our historical forfeiture experience, of 2.0% in fiscal 2007 in determining the expense recorded in our consolidated statement of operations.
 
We have historically granted stock options at exercise prices no less than the fair market value as determined by our board of directors, with input from management. Our board exercised judgment in determining the estimated fair value of our common stock on the date of grant based on a number of objective and subjective factors. Factors considered by our board of directors included:
 
  •  independent valuation reports that we received;
 
  •  The independent valuation methodology derives a range of equity values based upon a combination of three different approaches:
 
  •  Implied valuation based on comparable companies — uses direct comparisons to comparable public companies and their valuations, trading and operating statistics to estimate comparable valuation ranges. Discounts are applied based upon the lack of marketability and minority interest nature of our common stock to estimate its fair value.
 
  •  Implied valuation based on precedent transactions — compares recently acquired companies and their enterprise values relative to their revenue profile to develop a comparative valuation based upon revenue multiple profiles similar to our revenue multiple profiles.
 
  •  Implied valuation based upon projected discounted cash flows.
 
  •  the agreed-upon consideration paid in arms-length transactions in the form of convertible preferred stock;
 
  •  the superior rights and preferences of our preferred stock as compared to our common stock;
 
  •  historical and anticipated fluctuations in our revenue and results of operations; and
 
  •  the risk of owning our common stock and its lack of liquidity.
 
Since the beginning of fiscal 2006, we granted stock options with exercise prices as follows:
 
                 
          Exercise
 
    Number of
    Price per
 
Stock Option Grant Dates
  Options Granted     Share  
 
February 1, 2005 - November 7, 2005
    699,000     $ 1.00  
November 8, 2005 - December 18, 2005
    9,000     $ 1.20  
December 19, 2005 - November 14, 2006
    3,333,250     $ 2.50  
November 15, 2006 - February 13, 2007
    427,500     $ 4.50  
February 14, 2007 - February 28, 2007
    1,875,250     $ 6.70  


36


Table of Contents

Inventory Valuation
 
Inventories primarily consist of finished systems and are stated at the lower of cost or market value. A large portion of our inventory also relates to evaluation units located at customer locations, as some of our customers test our equipment prior to purchasing. The number of evaluation units has increased due to our overall growth and an increase in our customer base. We assess the valuation of all inventories, including raw materials, work-in-process and finished goods, on a periodic basis. We write down obsolete inventory or inventory in excess of our estimated usage to its estimated market value if less than its cost. Inherent in our estimates of market value in determining inventory valuation are estimates related to economic trends, future demand for our products and technological obsolescence of our products. If actual market conditions are less favorable than our projections, additional inventory write-downs may be required. Inventory valuation reserves were $0 and $0.7 million as of January 31, 2006 and 2007, respectively.
 
Warranty Reserves
 
Our standard product warranty provides that our product will be free from defects in material and workmanship and will, under normal use, conform to the published specifications for the product for a period of 90 days. Under this warranty, we will repair the product, provide replacement parts at no charge to the customer or refund amounts to the customer for defective products. We record estimated warranty costs, based upon historical experience, at the time we recognize revenue. As the complexity of our product increases, we could experience higher warranty costs relative to sales than we have previously experienced, and we may need to increase these estimated warranty reserves. Warranty reserves were $0.7 million and $1.1 million as of January 31, 2006 and 2007, respectively.
 
Accounting for Income Taxes
 
At January 31, 2007, we had net operating loss carryforwards available to offset future taxable income for federal and state purposes of $29.2 million and $25.7 million, respectively. These net operating loss carryforwards expire at various dates through fiscal year 2027 and 2011 for federal and state purposes, respectively. At January 31, 2007 we had available net operating losses for foreign purposes of $7.8 million, of which $7.5 million may be carried forward indefinitely and $0.3 million expire beginning in fiscal 2011. We also had available at January 31, 2007 research and development credit carryforwards to offset future federal and state taxes of approximately $3.0 million and $2.3 million respectively which may be used to offset future taxable income and expire at various dates beginning in 2016 through fiscal years 2027 As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. We record this amount as a provision or benefit for taxes in accordance with SFAS No. 109, Accounting for Income Taxes. This process involves estimating our actual current tax exposure, including assessing the risks associated with tax audits, and assessing temporary differences resulting from different treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. As of January 31, 2007, we had gross deferred tax assets of $25.8 million, which were primarily related to federal and state net operating loss carryforwards, research and development credit carryforwards and research and development expenses capitalized for tax purposes. We assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent that we believe recovery is not likely, we establish a valuation allowance. Due to the uncertainty of our future profitability, we have recorded a valuation allowance equal to the $25.8 million of gross deferred tax assets as of January 31, 2007. Accordingly, we have not recorded a provision for income taxes in our statement of operations for any of the periods presented. If we determine in the future that these deferred tax assets are more-likely-than-not to be realized, a release of all or a portion of the related valuation allowance would increase income in the period in which that determination is made.


37


Table of Contents

 
Results of Operations
 
The following table sets forth our consolidated results of operations for the periods shown:
 
                         
    Fiscal Year Ended January 31,  
    2005     2006     2007  
    (In thousands)  
 
Revenue
                       
Product
  $ 30,908     $ 45,508     $ 64,632  
Services
    5,121       8,343       14,989  
                         
Total revenue
    36,029       53,851       79,621  
                         
Cost of revenue
                       
Product
    8,874       18,941       26,697  
Services
    1,640       3,491       5,403  
                         
Total cost of revenue
    10,514       22,432       32,100  
                         
Gross profit
    25,515       31,419       47,521  
Operating expenses
                       
Sales and marketing
    14,783       25,626       32,908  
Research and development
    11,366       16,703       18,037  
General and administrative
    2,500       3,124       4,827  
                         
Total operating expenses
    28,649       45,453       55,772  
                         
Operating loss
    (3,134 )     (14,034 )     (8,251 )
Interest income
    206       487       414  
Interest expense
    121       173       765  
Other income (expense), net
    35       (87 )     627  
                         
Loss before cumulative effect of change in accounting principle
    (3,014 )     (13,807 )     (7,975 )
Cumulative effect of change in accounting principle
          (218 )      
                         
Net loss
  $ (3,014 )   $ (14,025 )   $ (7,975 )
                         
 
The following table sets forth our consolidated results of operations as a percentage of revenue for the periods shown:
 
                         
    Fiscal Year Ended January 31,  
    2005     2006     2007  
 
Revenue
                       
Product
    85.8 %     84.5 %     81.2 %
Services
    14.2       15.5       18.8  
                         
Total revenue
    100.0       100.0       100.0  
                         
Cost of revenue
                       
Product
    24.6       35.2       33.5  
Services
    4.6       6.5       6.8  
                         
Total cost of revenue
    29.2       41.7       40.3  
                         
Gross margin
    70.8       58.3       59.7  
Operating expenses
                       
Sales and marketing
    41.0       47.6       41.3  
Research and development
    31.5       31.0       22.7  
General and administrative
    6.9       5.8       6.1  
                         
Total operating expenses
    79.5       84.4       70.1  
                         
Operating loss
    (8.7 )     (26.1 )     (10.4 )
Interest income
    0.6       0.9       0.5  
Interest expense
    0.3       0.3       0.9  
Other income (expense), net
    0.1       (0.2 )     0.8  
                         
Loss before cumulative effect of change in accounting principle
    (8.4 )     (25.6 )     (10.0 )
Cumulative effect of change in accounting principle
          (0.4 )      
                         
Net loss
    (8.4 )%     (26.0 )%     (10.0 )%
                         


38


Table of Contents

Fiscal 2007 Compared to Fiscal 2006
 
Revenue
 
Total revenue increased $25.7 million, or 48%, to $79.6 million in fiscal 2007 from $53.9 million in fiscal 2006. Total revenue related to new customer sales represented 61% of total revenue in fiscal 2007 as compared to 74% in fiscal 2006, while repeat business from the installed customer base represented 39% of total revenue in fiscal 2007 as compared to 26% in fiscal 2006.
 
Product revenue increased $19.1 million, or 42%, to $64.6 million in fiscal 2007 from $45.5 million in fiscal 2006. This increase was due primarily to sales to new customers, as the number of customers increased from 46 to 87, or 89%, during the year.
 
Services revenue increased $6.7 million, or 81%, to $15.0 million in fiscal 2007 from $8.3 million in fiscal 2006. This increase was a result of increased product sales and accompanying sales of new maintenance and support contracts combined with the renewal of maintenance and support contracts by existing customers.
 
Gross Margin
 
Total gross margin increased to 60% in fiscal 2007 from 58% in fiscal 2006. Product gross margin increased to 59% in fiscal 2007 from 58% in fiscal 2006. This increase was due primarily to a reduction in the cost of our hardware components throughout fiscal 2007 and as a result of higher transition costs, consisting primarily of the costs to upgrade inventory to then current selling specifications, incurred in fiscal 2006 in conjunction with the release of a new product line. These cost improvements were partially offset by price erosion primarily due to increased competition. Stock-based compensation expense included in cost of product revenue increased to approximately $12,000 in fiscal 2007 from $0 in fiscal 2006 in connection with our adoption of SFAS No. 123(R) in fiscal 2007.
 
Services gross margin increased to 64% in fiscal 2007 from 58% in fiscal 2006. This increase was a result of our services revenue growth of 81% while services headcount only grew 22% between fiscal 2006 and fiscal 2007. Stock-based compensation expense included in cost of services revenue increased to approximately $19,000 in fiscal 2007 from $0 in fiscal 2006.
 
Sales and Marketing Expenses
 
Sales and marketing expenses increased $7.3 million, or 28%, to $32.9 million in fiscal 2007 from $25.6 million in fiscal 2006. As a percentage of revenue, sales and marketing expenses decreased to 41% in fiscal 2007 from 48% in fiscal 2006. The number of sales and marketing employees increased to 85 at January 31, 2007 from 67 at January 31, 2006. Sales commissions, salaries and employee benefits, sales and marketing promotions and programs, partner referral fees and sales and marketing travel accounted for $3.3 million, $1.4 million, $0.7 million, $0.6 million and $0.4 million, respectively, of the $7.3 million increase. The remainder of the increase was attributable primarily to additional sales office rent and office costs to support the geographic expansion of the salesforce. Stock-based compensation expense included in sales and marketing expenses increased to $0.2 million in fiscal 2007 from $0 in fiscal 2006.
 
Research and Development Expenses
 
Research and development expenses increased $1.3 million, or 8%, to $18.0 million in fiscal 2007 from $16.7 million in fiscal 2006. As a percentage of revenue, research and development expenses decreased to 23% in fiscal 2007 from 31% in fiscal 2006. The number of research and development employees increased to 85 at January 31, 2007 from 70 at January 31, 2006. The offshore development team from our contract engineering firm increased to 53 people at January 31, 2007 from 43 people at January 31, 2006. Salaries and benefit and offshore and other consulting costs each increased by $1.0 million from fiscal 2006. This increase was also attributable to higher allocated facilities and depreciation expenses and travel expenses totaling $0.5 million. These increases were partially offset by a $1.3 million decrease in new product prototype expenses.


39


Table of Contents

 
Stock-based compensation expense included in research and development expenses decreased to $0.2 million in fiscal 2007 from $0.8 million in fiscal 2006. The fiscal 2006 stock-based compensation expense related to a purchase by certain principal investors in Netezza of 500,000 shares of our common stock from a former executive of Netezza. We determined that the transaction resulted in consideration paid to the former executive in excess of the fair value of the common stock purchased. Due to the close relationship between the investors and the company, the excess consideration was considered compensation on behalf of the company and recorded as an expense.
 
General and Administrative Expenses
 
General and administrative expenses increased $1.7 million, or 55%, to $4.8 million in fiscal 2007 from $3.1 million in fiscal 2006. As a percentage of revenue, general and administrative expenses were 6% in both fiscal 2007 and fiscal 2006. The number of general and administrative employees increased to 19 at January 31, 2007 from 14 at January 31, 2006. Salaries and professional services fees accounted for $0.7 million and $0.3 million, respectively, of the $1.7 million increase. The remainder of the increase was attributable to stock-based compensation expense and various other expenses including allocated facilities expenses. The additional personnel and professional services fees were primarily the result of our ongoing efforts to build legal, financial, human resources and information technology functions required of a public company. Stock-based compensation expense included in general and administrative expenses increased to $0.5 million in fiscal 2007 from approximately $24,000 in fiscal 2006.
 
Interest Income (Expense), Net
 
We incurred $0.4 million of interest expense, net in fiscal 2007 as compared to $0.3 million of interest income, net in fiscal 2006. This increase was due to an increase in our average debt balance during fiscal 2007. The increase in the average debt balance was attributable to $3.6 million in net debt drawdowns during fiscal 2007.
 
Other Income (Expense), Net
 
We incurred other income, net of $0.6 million in fiscal 2007 as compared to $0.1 million of other expense, net in fiscal 2006. This increase was due to higher transaction gains for activities in our foreign subsidiaries, primarily the United Kingdom, and $0.2 million from the mark-to-market adjustments on preferred stock warrants.
 
Fiscal 2006 Compared to Fiscal 2005
 
Revenue
 
Total revenue increased $17.8 million, or 49%, to $53.9 million in fiscal 2006 from $36.0 million in fiscal 2005. Total revenue related to new customer sales represented 74% of total revenue in fiscal 2006 as compared to 19% in fiscal 2005, while repeat business from the installed customer base represented 26% of total revenue in fiscal 2006 as compared to 81% in fiscal 2005. One repeat customer accounted for 49% of total revenue in fiscal 2005.
 
Product revenue increased $14.6 million, or 47%, to $45.5 million in fiscal 2006 from $30.9 million in fiscal 2005. This increase was due primarily to sales to new customers, as the number of customers increased from 15 to 46, or 207%, during the year.
 
Services revenue increased $3.2 million, or 63%, to $8.3 million in fiscal 2006 from $5.1 million in fiscal 2005. This increase was a result of increased product sales and accompanying sales of new maintenance and support contracts combined with the renewal of maintenance and support contracts by existing customers.
 
Gross Margin
 
Total gross margin decreased to 58% in fiscal 2006 from 71% in fiscal 2005. Product gross margin also decreased to 58% in fiscal 2006 from 71% in fiscal 2005. This decrease was primarily due to our increased penetration into more vertical industries and increased pricing pressure from competition in those vertical industries. In addition, the release of a new product line in fiscal 2006 resulted in higher product costs initially for these new products.
 
Services gross margin decreased to 58% in fiscal 2006 from 68% in fiscal 2005. During fiscal 2006, we developed a more high-touch strategy for our support services and, accordingly, invested in the staffing of a


40


Table of Contents

technical account management team. This account management team provides on-site customer support services to supplement our Framingham-based help desk services. The initial investment in this group resulted in additional costs incurred in advance of anticipated additional services revenue.
 
Sales and Marketing Expenses
 
Sales and marketing expenses increased $10.8 million, or 73%, to $25.6 million in fiscal 2006 from $14.8 million in fiscal 2005. As a percentage of revenue, sales and marketing expenses increased to 48% in fiscal 2006 from 41% in fiscal 2005. The number of sales and marketing employees increased to 67 at January 31, 2006 from 46 at January 31, 2005. Salaries and employee benefits, sales and marketing travel, sales commissions, and sales and marketing promotions and programs accounted for $4.4 million, $2.4 million, $1.3 million and $0.9 million, respectively, of the $10.8 million increase. The remainder of the increase was attributable primarily to additional sales office rents and office costs to support the geographic expansion of the salesforce.
 
Research and Development Expenses
 
Research and development expenses increased $5.3 million, or 47%, to $16.7 million in fiscal 2006 from $11.4 million in fiscal 2005. As a percentage of revenue, research and development expenses were 31% and 32% in fiscal 2006 and 2005, respectively. The number of research and development employees increased to 70 at January 31, 2006 from 65 at January 31, 2005. The offshore development team from our contract engineering firm increased to 43 people at January 31, 2006 from 24 people at January 31, 2005. Salaries and benefits and offshore consulting costs accounted for $2.6 million and $0.7 million, respectively, of the $5.3 million increase. New product prototype expenses and test equipment depreciation accounted for $1.5 million of the increase. The remainder of the increase was attributable primarily to allocated facilities and other depreciation expenses.
 
General and Administrative Expenses
 
General and administrative expenses increased $0.6 million, or 24%, to $3.1 million in fiscal 2006 from $2.5 million in fiscal 2005. As a percentage of revenue, general and administrative expenses decreased to 6% in fiscal 2006 from 7% in fiscal 2005. This decrease is attributable to 50% revenue growth from fiscal 2006 to fiscal 2007 while the number of general and administrative employees totaled 14 at both January 31, 2006 and January 31, 2005. Salaries and professional services fees, office costs and Massachusetts use tax expenses accounted for $0.2 million, $0.1 million and $0.2 million, respectively, of the $0.6 million increase. The remainder of the increase was attributable to various expenses including allocated facilities expenses.
 
Interest Income (Expense), Net
 
Interest income, net increased to $0.3 million in fiscal 2006 from $0.1 million in fiscal 2005. This increase was due to a higher average cash balance during fiscal 2006.
 
Other Income (Expense), Net
 
We incurred other expense, net of $0.1 million in fiscal 2006 as compared to approximately $35,000 of other income, net, in fiscal 2005. This increase in expense resulted from an increase in transaction losses for activities in our foreign subsidiaries, primarily the United Kingdom.


41


Table of Contents

 
Quarterly Results of Operations
 
The following table sets forth our unaudited quarterly consolidated statements of operations data for each of the eight quarters of fiscal 2006 and fiscal 2007. The quarterly data have been prepared on the same basis as the audited consolidated financial statements included elsewhere in this prospectus, and reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of this information. You should read this information together with our consolidated financial statements and the related notes appearing elsewhere in this prospectus. Our operating results may fluctuate due to a variety of factors. As a result, comparing our operating results on a quarter-to-quarter basis may not be meaningful. Our results for these quarterly periods are not necessarily indicative of the results to be expected for a full year or any future period.
 
                                                                 
    Fiscal Quarter Ended  
    April 30,
    July 31,
    October 31,
    January 31,
    April 30,
    July 31,
    October 31,
    January 31,
 
    2005     2005     2005     2006     2006     2006     2006     2007  
    (In thousands)  
 
Consolidated Statement of Operations Data:
                                                               
Revenue
                                                               
Product
  $ 8,077     $ 10,017     $ 12,466     $ 14,948     $ 8,889     $ 14,389     $ 19,359     $ 21,995  
Services
    1,631       2,152       1,824       2,736       3,109       3,395       3,812       4,673  
                                                                 
Total revenue
    9,708       12,169       14,290       17,684       11,998       17,784       23,171       26,668  
                                                                 
Cost of revenue
                                                               
Product
    2,984       4,974       5,255       5,727       3,565       6,046       8,127       8,959  
Services
    651       1,004       891       946       1,325       1,109       1,448       1,521  
                                                                 
Total cost of revenue
    3,635       5,978       6,146       6,673       4,890       7,155       9,575       10,480  
                                                                 
Gross profit
    6,073       6,191       8,144       11,011       7,108       10,629       13,596       16,188  
Operating expenses
                                                               
Sales and marketing
    5,653       6,724       6,362       6,887       6,373       7,217       9,281       10,039  
Research and development
    4,429       3,578       3,721       4,976       4,226       4,321       4,667       4,823  
General and administrative
    1,073       763       754       533       852       1,247       1,135       1,591  
                                                                 
Total operating expenses
    11,155       11,065       10,837       12,396       11,451       12,785       15,083       16,453  
                                                                 
Operating loss
    (5,082 )     (4,874 )     (2,693 )     (1,385 )     (4,343 )     (2,156 )     (1,487 )     (265 )
Interest income
    113       103       168       103       120       99       136       59  
Interest expense
          13       52       108       92       196       215       261  
Other income (expense), net
    10       (144 )     (5 )     52       185       360       72       10  
                                                                 
Loss before cumulative effect of change in accounting principle
    (4,959 )     (4,928 )     (2,582 )     (1,338 )     (4,130 )     (1,893 )     (1,494 )     (457 )
Cumulative effect of change in accounting principle
                (218 )                              
                                                                 
Net loss
  $ (4,959 )   $ (4,928 )   $ (2,800 )   $ (1,338 )   $ (4,130 )   $ (1,893 )   $ (1,494 )   $ (457 )
                                                                 


42


Table of Contents

The following table sets forth our consolidated results of operations as a percentage of revenue for the periods shown:
 
                                                                 
    Fiscal Quarter Ended  
    April 30,
    July 31,
    October 31,
    January 31,
    April 30,
    July 31,
    October 31,
    January 31,
 
    2005     2005     2005     2006     2006     2006     2006     2007  
 
Consolidated Statement of Operations Data:
                                                               
Revenue
                                                               
Product
    83.2 %     82.3 %     87.2 %     84.5 %     74.1 %     80.9 %     83.5 %     82.5 %
Services
    16.8       17.7       12.8       15.5       25.9       19.1       16.5       17.5  
                                                                 
Total revenue
    100.0       100.0       100.0       100.0       100.0       100.0       100.0       100.0  
                                                                 
Cost of revenue
                                                               
Product
    30.7       40.9       36.8       32.4       29.7       34.0       35.1       33.6  
Services
    6.7       8.3       6.2       5.3       11.0       6.2       6.2       5.7  
                                                                 
Total cost of revenue
    37.4       49.1       43.0       37.7       40.8       40.2       41.3       39.3  
                                                                 
Gross margin
    62.6       50.9       57.0       62.3       59.2       59.8       58.7       60.7  
Operating expenses
                                                               
Sales and marketing
    58.2       55.2       44.5       39.0       53.1       40.6       40.1       37.6  
Research and development
    45.6       29.4       26.0       28.1       35.2       24.3       20.1       18.1  
General and administrative
    11.1       6.3       5.3       3.0       7.1       7.0       4.9       6.0  
                                                                 
Total operating expenses
    114.9       90.9       75.8       70.1       95.4       71.9       65.1       61.7  
                                                                 
Operating loss
    (52.3 )     (40.1 )     (18.8 )     (7.8 )     (36.2 )     (12.1 )     (6.4 )     (1.0 )
Interest income
    1.2       0.8       1.2       0.6       1.0       0.6       0.6       0.2  
Interest expense
    0.0       0.1       0.4       0.6       0.8       1.1       0.9       1.0  
Other income (expense), net
    0.1       (1.2 )     0.0       0.3       1.5       2.0       0.3       0.0  
                                                                 
Loss before cumulative effect of change in accounting principle
    (51.1 )     (40.5 )     (18.1 )     (7.6 )     (34.4 )     (10.6 )     (6.4 )     (1.7 )
Cumulative effect of change in accounting principle
    0.0       0.0       1.5       0.0       0.0       0.0       0.0       0.0  
                                                                 
Net loss
    (51.1 )%     (40.5 )%     (19.6 )%     (7.6 )%     (34.4 )%     (10.6 )%     (6.4 )%     (1.7 )%
                                                                 
 
Seasonality
 
Revenue has increased sequentially in most of the quarters presented due to increases in the number of products sold to new and existing customers. Our product revenue has tended to be seasonal. In our fourth quarter, we have historically benefited from our customers’ year-end purchasing activity in November and December in addition to customers’ new budget year purchasing activity in January. As a result, historically we have experienced seasonally reduced product revenue, cost of product revenue and gross profit in the first quarter of each fiscal year, as is the case with many technology companies. Operating expenses have increased sequentially in most of the quarters presented as we continued to add personnel and related costs to accommodate our growing business on a quarterly basis.
 
Timing of sales
 
On a quarterly basis, we have usually generated the majority of our product revenue in the final month of each quarter. This is primarily due to the fact that our sales personnel who have a strong incentive to meet quarterly sales targets tend to increase their sales activity as the end of a quarter nears. As a result, small delays in completion of sales transactions could have a significant impact on our operating results for any particular quarter.


43


Table of Contents

 
Liquidity and Capital Resources
 
At January 31, 2007, we had cash and cash equivalents of $5.0 million and accounts receivable of $31.8 million.
 
Since our inception, we have funded our operations using a combination of issuances of convertible preferred stock, which has provided us with aggregate net proceeds of $73.3 million, cash collections from customers and a term loan credit facility with Silicon Valley Bank. As of January 31, 2007, we had a total of $6.5 million outstanding under this credit facility.
 
Our principal uses of cash historically have consisted of payroll and other operating expenses, repayments of borrowings, purchases of property and equipment primarily to support the development of new products and purchases of inventory to support our sales and our increasing volume of evaluation units located at customer locations that enable our customers and prospective customers to test our equipment prior to purchasing. The number of evaluation units has consistently increased due to our overall growth and an increase in our pipeline of potential customers.
 
The following table shows our cash flows from operating activities, investing activities and financing activities for the stated periods:
 
                         
    Fiscal Year Ended January 31,  
    2005     2006     2007  
    (In thousands)  
 
Net cash used in operating activities
  $ (2,596 )   $ (9,760 )   $ (11,163 )
Net cash used in investing activities
    (4,311 )     (5,506 )     (1,477 )
Net cash provided by financing activities
    14,107       7,644       3,789  
 
Cash Used In Operating Activities
 
Net cash used in operating activities is affected by our investments in sales and marketing, research and development, and corporate administration to support the growth of our business. We also use cash to support growth and changes in inventory, accounts receivable, accounts payable and other current assets and liabilities. Accounts receivable balances at quarter and year-ends have historically been affected by the timing of orders from our customers during the year.
 
Net cash used in operating activities was $2.6 million, $9.8 million and $11.2 million in fiscal 2005, 2006 and 2007, respectively. Net cash used in operating activities in fiscal 2007 primarily consisted of a net loss of $8.0 million, an increase in accounts receivable of $17.9 million due to the timing of year-end orders, and a use of $15.5 million to fund our net increase in inventory primarily used to provide additional evaluation units provided to our increasing customer base and prospective customers. These were partially offset by an increase in deferred revenue of $14.8 million due to the increase in our customer base and related increase in purchases of annual maintenance and support agreements, depreciation expense of $2.6 million, stock-based compensation expense of $0.9 million and net changes in our other operating assets and liabilities of $11.6 million. Net cash used in operating activities in fiscal 2006 consisted of a net loss of $14.0 million, a net increase in accounts receivable of $8.4 million and a net increase in inventory of $2.8 million. These were partially offset by an increase in deferred revenue of $6.3 million, depreciation expense of $2.8 million and net changes in our other operating assets and liabilities of $5.2 million. Net cash used in operating activities in fiscal 2005 consisted of a net loss of $3.0 million and a net increase in inventory of $5.1 million, reduced by depreciation expense of $1.8 million and net changes in our other operating assets and liabilities of $3.7 million.
 
Cash Used in Investing Activities
 
Net cash used in investing activities primarily relates to capital expenditures to support our growth, including computer equipment, internal use software, furniture and fixtures and engineering and test equipment.
 
Net cash used in investing activities was $4.3 million, $5.5 million and $1.5 million in fiscal 2005, 2006 and 2007, respectively. Net cash used in investing activities in fiscal 2007 primarily consisted of $1.1 million of


44


Table of Contents

computer equipment and software and $0.4 million of engineering and test equipment. Net cash used in investing activities in fiscal 2005 and 2006 consisted primarily of $3.2 million and $4.3 million, respectively, related to purchases of engineering and test equipment. Our capital expenditure budget for fiscal 2008 totals approximately $2 million, primarily for additional network and infrastructure systems and for computer equipment and software for additional personnel we anticipate hiring.
 
Cash Provided by Financing Activities
 
Net cash provided by financing activities was $14.1 million, $7.6 million and $3.8 million in fiscal 2005, 2006 and 2007, respectively. Net cash provided by financing activities in fiscal 2007 primarily consisted of $3.6 million of net borrowings under our term loan credit facility. These borrowings were used to fund losses from operations and our net increase in accounts receivable and inventory. Net cash provided by financing activities in fiscal 2006 consisted primarily of $4.5 million in net proceeds from the sale of our Series D preferred stock and $3.0 million of net borrowings under our term loan credit facility. Net cash provided by financing activities in fiscal 2005 consisted primarily of $15.5 million in net proceeds from the sale of our Series D preferred stock, partially offset by a $1.5 million repayment of principal and interest on an equipment line of credit.
 
Working Capital Facilities
 
As of January 31, 2007 we had $6.5 million outstanding under a term loan credit facility with Silicon Valley Bank, as agent for certain other lenders, including Gold Hill Venture Lending. We were required to initially make interest-only payments on any amounts borrowed through June 2006, after which we were required to make 36 equal consecutive monthly installments of principal and interest through June 2009. All unpaid principal and accrued interest under this loan is due and payable in full on June 1, 2009. Under the terms of this loan, interest rates are fixed for the term of the loan at the time of each advance at the prime rate plus 4% and were 10%, 10.75%, 11.75% and 12%, for each advance, respectively, as of January 31, 2007. As of January 31, 2007, there was no additional borrowing availability under this agreement.
 
On January 31, 2007, we obtained a revolving line of credit with Silicon Valley Bank under which we can borrow up to $15.0 million. Our interest rate under this revolving line of credit is 1% below the prime rate, and at January 31, 2007 was 7.25%. Borrowings are secured by substantially all of our assets other than our intellectual property. All outstanding debt will become payable on January 30, 2008. As of January 31, 2007, we had no amounts outstanding under this new revolving line of credit and $15.0 million available to borrow.
 
Contractual Obligations
 
The following is a summary of our contractual obligations as of January 31, 2007:
 
                                         
    Payments Due In  
    Total     Less Than 1 Year     1 - 3 Years     3 - 5 Years     More Than 5 Years  
    (In thousands)  
 
Long-term debt, including current portion(1)
  $ 6,639     $ 2,540     $ 4,099              
Capital lease obligations
                             
Operating lease obligations
    900       846       54              
Purchase obligations(2)
    16,310       16,310                    
 
 
(1) Excludes interest payments, which cannot be calculated at this time due to the fluctuating interest rate.
 
(2) Purchase obligations primarily represent the value of purchase orders issued to our contract manufacturer, Sanmina, for the procurement of assembled NPS appliance systems for the next three months.
 
We believe that our cash and cash equivalents of $5.0 million and accounts receivable of $31.8 million at January 31, 2007, together with the anticipated net proceeds to us of this offering and any cash flows from our operations will be sufficient to fund our projected operating requirements for at least the next 12 months. However, we may need to raise additional funds subsequent to that time, or sooner if we are presented with unforeseen


45


Table of Contents

circumstances or opportunities. See “Risk Factors — It is difficult to predict our future capital needs and we may be unable to obtain additional financing that we may need, which could have a material adverse effect on our business, operating results and financial condition.”
 
Off-Balance Sheet Arrangements
 
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under SEC rules, such as relationships with unconsolidated entities or financial partnerships, which are often referred to as structured finance or special purpose entities, established for the purpose of facilitating financing transactions that do not have to be reflected on our balance sheet.
 
Quantitative and Qualitative Disclosures About Market Risk
 
Foreign Currency Risk
 
Our international sales and marketing operations incur expenses that are denominated in foreign currencies. These expenses could be materially affected by currency fluctuations. Our exposures are to fluctuations in exchange rates for the U.S. dollar versus the British pound and the Japanese yen. Changes in currency exchange rates could adversely affect our consolidated results of operations or financial position. Additionally, our international sales and marketing operations maintain cash balances denominated in foreign currencies. In order to decrease the inherent risk associated with translation of foreign cash balances into our reporting currency, we have not maintained excess cash balances in foreign currencies. As of January 31, 2007, we had $0.8 million of cash in foreign accounts. To date, we have not hedged our exposure to changes in foreign currency exchange rates and, as a result, we could incur unanticipated translation gains and losses.
 
Interest Rate Risk
 
We had a cash and cash equivalents balance of $5.0 million at January 31, 2007, which was held for working capital purposes. We do not enter into investments for trading or speculative purposes. We do not believe that we have any material exposure to changes in the fair value of these investments as a result of changes in interest rates. Declines in interest rates, however, will reduce future investment income, and increases in interest rates may increase future interest expense.
 
At January 31, 2007, we had $6.5 million of borrowings outstanding under our term loan credit facility, which bears interest at a variable rate adjusted monthly based on the prime rate plus applicable margins.
 
Recent Accounting Pronouncements
 
On February 15, 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115, (“SFAS No. 159”), which permits companies to choose to measure many financial instruments and certain other items at fair value. The objective of SFAS No. 159 is to improve financial reporting by providing companies with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the effect that SFAS No. 159 may have on our financial statements taken as a whole.
 
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. This statement does not require any new fair value measurements; rather, it applies under other accounting pronouncements that require or permit fair value measurements. The provisions of SFAS No. 157 are effective for fiscal years beginning after November 15, 2007. We are currently assessing SFAS No. 157 and have not yet determined the impact, if any, that its adoption will have on our result of operations or financial condition.
 
In June 2006, the FASB issued FASB Interpretation No. (“FIN”) 48, Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109, which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a


46


Table of Contents

tax return. FIN 48 will be effective for fiscal years beginning after December 15, 2006. We do not expect the adoption to have a material impact on our results of operations or financial condition.
 
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, which replaces APB No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements — An Amendment of APB Opinion No. 28. SFAS No. 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application, or the latest practicable date, as the required method for reporting a change in accounting principle and the reporting of a correction of an error. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. We adopted SFAS No. 154 effective February 1, 2006 and the adoption did not have an effect on our consolidated results of operations and financial condition.
 
In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of Accounting Research Bulletin (“ARB”) No. 43, Chapter 4, Inventory Pricing. SFAS No. 151 amends previous guidance regarding treatment of abnormal amounts of idle facility expense, freight, handling costs, and spoilage. SFAS No. 151 requires that those items be recognized as current period charges regardless of whether they meet the criterion of “so abnormal” which was the criterion specified in ARB No. 43. In addition, SFAS No. 151 requires that allocation of fixed production overheads to the cost of the production be based on normal capacity of the production facilities. We adopted SFAS No. 151 effective February 1, 2006 and the adoption did not have an effect on our consolidated results of operations and financial condition.
 
From time to time, new accounting pronouncements are issued by the FASB that are adopted by us as of the specified effective date. Unless otherwise discussed, we believe that the impact of recently issued standards, which are not yet effective, will not have a material impact on our consolidated financial statements upon adoption.


47


Table of Contents

 
BUSINESS
 
Overview
 
Netezza is a leading provider of data warehouse appliances. Our product, the Netezza Performance Server, or NPS, integrates database, server and storage platforms in a purpose-built unit to enable detailed queries and analyses on large volumes of stored data. The results of these queries and analyses, often referred to as business intelligence, provide organizations with actionable information to improve their business operations. As more information is recorded and communicated electronically, the amount of data generated and the potential utility of the business intelligence that can be extracted from this data is increasing significantly. We designed our NPS data warehouse appliance specifically for analysis of terabytes of data at higher performance levels and at a lower total cost of ownership with greater ease of use than can be achieved via traditional data warehouse systems. Our NPS appliance performs faster, deeper and more iterative analyses on larger amounts of detailed data, giving our customers greater insight into trends and anomalies in their businesses, thereby enabling better strategic decision-making.
 
Unlike traditional data warehouse systems, which patch together general-purpose database, server and storage platforms that were not originally designed for analytical processing of large amounts of constantly changing data, our NPS appliance is purpose-built to deliver:
 
  •  Fast data query response times through our proprietary Intelligent Query Streaming technology.
 
  •  Massive scalability through our proprietary Asymmetric Massively Parallel Processing, or AMPP, architecture.
 
  •  Simplicity of installation, operation and administration.
 
  •  Cost effectiveness through the use of industry-standard server and storage components packaged in a single unified solution.
 
Our products integrate easily through open, industry-standard interfaces with leading data access and analytics, data integration and data protection tools to enable quick and accurate business intelligence. Our customers have reported faster query performance, lower costs of ownership and improved analytic productivity as a result of using our products.
 
We sell our data warehouse appliances worldwide to large global enterprises, mid-market companies and government agencies through our direct salesforce as well as indirectly via distribution partners. As of January 31, 2007, we had 87 customers and had shipped over 200 of our data warehouse appliances. Our customers span multiple vertical industries and include data-intensive companies and government agencies such as Ahold, Amazon.com, AOL, American Red Cross, Blue Cross Blue Shield of Rhode Island, Capital One Services, Catalina Marketing, CNET Networks, CompuCredit Corporation, LoanPerformance, Marriott, the NASD, Neiman Marcus Group, Nielsen Company, Orange UK, Restoration Hardware, Ross Stores, Ryder Systems, Source Healthcare Analytics, Inc., a Wolters Kluwer Health company, the United States Army Corps of Engineers and the United States Department of Veterans Affairs.
 
Industry Background
 
Proliferation of Data
 
Data is one of the most valued assets within an organization. The amount of data that is being generated and kept for availability and analysis by organizations is exploding. The timely and comprehensive analysis of this vast amount of data is vital to organizations in a variety of vertical industries, including:
 
  •  Telecommunications.  The telecommunications industry is characterized by intense competition and customer attrition, or “churn.” Targeted marketing opportunities and the rapid response to behavior trends are paramount to the success of telecommunications service providers in retaining existing customers and attracting new customers. Customer relationship management, or CRM, analyses need to be constantly and quickly performed, to enable service providers to market to at-risk customers before they churn, offer new


48


Table of Contents

  products and services to those most likely to buy, and identify and manage key customer relationships. Other key analytical needs of telecommunications service providers include call data record analysis for revenue assurance, billing and least-cost routing, fraud detection and network management.
 
  •  E-Business.  For online businesses, the process of collecting, analyzing and reporting data about page visits, otherwise known as click stream analysis, is required for constant monitoring of website performance and customer pattern changes. In addition to needing to address the operational and customer relationship challenges faced by traditional retailers, e-businesses must also analyze hundreds of millions or even billions of click stream data records to track and respond to customer behavior patterns in real time. Additionally, with online advertising becoming a major revenue generator, many e-businesses and their advertisers need to understand who is looking at the advertisements and their actions as a result of viewing the advertisements. Fast analysis of online activity can enable better cross-selling of products, prevent customers from abandoning shopping carts or leaving the web site, and mitigate click stream fraud.
 
  •  Retail.  With thousands of products and millions of customers, many retailers need sophisticated systems to track, manage and optimize customer and supplier relationships. Targeted marketing programs often require the analysis of millions of customer transactions. To prevent supply shortages large retailers must integrate and analyze customer transaction data, vendor delivery schedules and RFID supply chain data. Other useful analyses for retail companies include “market basket” analysis of the items customers buy in a given shopping session, customer loyalty programs for frequent buyers, overstock/understock and supply chain optimization.
 
  •  Financial Services.  Financial services institutions generate terabytes of data related to millions of client purchases, banking transactions and contacts with marketing, sales and customer service across multiple channels. This data contains crucial business information on client preferences and buying behavior, and can reveal insights that enable stronger customer relationship management and increase the lifetime value of the customer. In addition, risk management and portfolio management applications require analysis of vast amounts of rapidly changing data for fraud prevention and loan analysis. With extensive compliance and regulatory requirements, financial institutions are required to retain an ever-increasing amount of data and need to make this data available for detailed reporting on a periodic basis.
 
  •  Analytic Service Providers.  The primary purpose of these companies is providing business intelligence support to enterprises on an outsourced basis. Analytic service providers serving many industries, including retail, telecommunications, healthcare and others, provide clients with domain expertise in database-driven marketing and customer segmentation. Since their clients are looking for faster turn-arounds for more sophisticated reports on continuously increasing amounts of data, these companies require solutions that will scale better with lower cost of ownership to meet their clients’ service-level agreements, while improving their own profitability.
 
  •  Government.  As some of the largest creators and consumers of data, government agencies around the world need to access, analyze and share vast amounts of up-to-date data quickly and efficiently. These agencies face a broad range of challenges, including identifying terrorist threats and reducing fraud, waste and abuse. Iterative analysis on many terabytes of data with high performance is crucial for achieving these missions.
 
  •  Healthcare.  Healthcare providers seek to analyze terabytes of operational and patient care data to measure drug effectiveness and interactions, improve quality of care and streamline operations through more cost-effective services. Pharmaceutical companies rely on data analysis to speed new drug development and increase marketing effectiveness. In the future, these companies plan to incorporate large amounts of genomic data into their analyses in order to tailor drugs for more personalized medicine.
 
Additionally, compliance initiatives driven by government regulations, such as those issued under the Sarbanes-Oxley Act of 2002 and the Health Insurance Portability and Accountability Act of 1996, or HIPAA, as well as company policies requiring data preservation, are expanding the proportion of data that must be retained and easily accessible for future use.


49


Table of Contents

 
This significant growth of enterprise data is fueling a need for additional storage and other information technology infrastructure to maintain and manage it. According to a 2006 report by IDC, an independent technology research organization, worldwide shipment of disk storage systems capacity exceeded 2 million terabytes in 2005 and is forecasted to grow to over 16 million terabytes in 2010, representing a compound annual growth rate of approximately 51%. This growth in data is being further fueled by a steady decline in data storage prices, which makes storing large data sets more economical.
 
As the volume of data continues to grow, enterprises have recognized the value in analyzing such data to significantly improve their operations and competitive position. They have also realized that frequent analysis of data at a more detailed level is more meaningful than periodic analysis of sampled data. These factors have driven the demand for the data warehouses that provide the critical framework for data-driven enterprise decision-making by way of business intelligence.
 
Growing Role of the Data Warehouse
 
A data warehouse consists of three main elements — database, server, and storage — and interacts with external systems to acquire and retain raw data, receive query instructions and provide analytical results. The data warehouse acts as a data repository for the enterprise, aggregating information from many departments, and more importantly, enables analytics through the querying of the data to deliver specific information used to monitor, measure and manage business performance and to drive future business decisions. The goal of a data warehouse is to enable a business to better understand its customers’ behavior patterns, competitive position, and internal efficiency and productivity.
 
As business intelligence becomes more widespread across the enterprise, data warehouses are experiencing explosive growth in the amount of their data as well as in the number of business users accessing this data. October 2006 IDC research indicates that 15% of organizations expect their data warehouse to at least double in the next 12 months, and Winter Corp., a consulting and research organization, estimates that the size of the largest data warehouses triple every two years.
 
The need for even more robust, yet cost-effective, data warehouse solutions across multiple industries is being further accelerated by the following:
 
Growth in Users of Business Intelligence.  The need for detailed analytics is becoming more mainstream throughout the enterprise as well as in the “extended enterprise,” which includes suppliers, partners and customers. As the number of users accessing the data warehouse increases, demand for data warehouse solutions multiplies. This is a change from prior years when business intelligence analysis within an organization was primarily performed by a small number of analysts and IT professionals. IDC noted in a 2006 report that 70% of organizations indicated they are planning to increase the number of internal users of business intelligence tools over the next 12 months.
 
Increasing Number and Sophistication of Data Queries.  As enterprises continue to recognize the utility of the analyses data warehouses enable, the quantity and sophistication of data queries continue to increase. Without more powerful data warehouse performance to meet this demand, significant data latency problems can ensue. A data warehouse solution can contain several billion rows of data within its resident database causing even one sophisticated data query to take as long as several hours to several weeks to perform using some traditional data warehouse systems.
 
Need for Real-time Data Availability.  As data continues to proliferate, increasing load times are continually shrinking the time windows for querying warehoused data. Many organizations need to have their data warehouses available for query and analysis at all times even as fresh data is being constantly loaded. This creates increasing requirements for simultaneous load and query performance.
 
All these factors are resulting in an addressable data warehouse market that is large and growing quickly. IDC estimates that the data warehouse management software market alone will increase from $4.0 billion in 2005 to $6.3 billion in 2010, a compound annual growth rate of 9.6%. We believe the software required to manage the data warehouse represents only a portion of the total cost of data warehouse systems, which require hardware such as servers and storage as well as services to install, integrate and manage the data warehouse.


50


Table of Contents

 
Limitations of Traditional Data Warehouse Systems
 
Many traditional data warehouse systems were initially designed to aggregate and analyze smaller quantities of data, using general-purpose database, server and storage platforms patched together as a data warehouse system. Such patchwork architectures are often used by default to store and analyze data, despite the fact that they are not optimized to handle terabytes of constantly growing and changing data and as a result, they are not as effective in handling the in-depth analyses that large businesses are now requiring of their data warehouse systems. The increasing number of users accessing the data warehouse and the sophistication of the queries employed by these users is making the strain of using these legacy systems even more challenging for many organizations.
 
We believe traditional data warehouse systems do not fully address the key requirements of today’s business intelligence environments and the needs of customers for the following reasons:
 
Inefficient Execution of Complex and Ad Hoc Queries.  Most traditional systems read data from storage, bring it across an input/output, or I/O, interface and load it into memory for processing. This approach is extremely inefficient for processing millions or even billions of rows of data in order to execute complex queries or “ad hoc” queries, which are queries created to obtain information as the need arises, often as other queries are reviewed. The result is significant delays in data movement and query processing, which can slow response times to many hours or even days. This delay often eliminates any potential benefit of the query results as conclusions are reached too late to be actionable.
 
Difficult and Costly Procurement Process.  Most traditional data warehouse systems require multiple product and service contracts from several suppliers. The customer must manage the procurement of costly servers, storage, cabling, database and operating systems software licenses, systems management tools, and installation and integration services. This “a la carte” approach results in higher costs and a lack of accountability from suppliers due to their tendency to blame each other when issues arise and need to be remedied. Additionally, these disparate products are often not easily integrated with other business intelligence applications or other hardware or software products that a customer may incorporate into its data warehouse, resulting in additional hardware, implementation, training, maintenance and support costs.
 
Complex Infrastructure Installation and Deployment.  A traditional data warehouse is a complex environment that must be assembled and configured on site. Installation can take weeks, requiring assembly, testing, debugging and fine-tuning of system parameters. Traditional data warehouse systems depend on elaborate tuning and data manipulation to generate the performance required by the user. Data loads into the system need to be balanced, indexes created, and disk partitions and logical volumes defined. The entire process can take from weeks to several months, typically requiring extensive professional services engagements.
 
Slow Response to Changing Business Needs.  As the data warehouse grows and queries and analyses increase in volume and complexity, the tuning and configuration needs of the data warehouse solution further increase, creating ongoing costs in hardware, software and services for the user. In addition, business requirements are constantly changing and the data warehouse needs to evolve to meet these changing requirements. Most traditional data warehouses have customized data models that define the structure and relationships of the data; therefore, when data formats or query requirements change, these solutions require extensive reconfiguration and tuning, resulting in delays and extra personnel costs.
 
Costly Ongoing Administration and Maintenance.  Managing a traditional data warehouse system is a complex and time-intensive task. Dedicated database administrators are required to monitor and maintain the system. Often, separate administrative teams are dedicated to distinct solution components such as database, server, and storage platforms. Additionally, many traditional systems come with separate management programs for each component, lowering the efficacy of the management of the overall data warehouse.
 
Inefficient Power, Cooling and Footprint Requirements.  As data warehouses grow dramatically with the proliferation of data, the costs of space, power and cooling are becoming serious concerns in data center management. Because traditional systems are often a patchwork of general-purpose components, significant footprint size and energy consumption issues arise, at odds with ongoing efforts of many businesses to centralize and shrink data center square footage and increase energy efficiency.


51


Table of Contents

 
Limited Scalability.  Most traditional systems have a difficult time increasing capacity to meet increased user demand and the growing amounts of stored data due to their architectures and technology. In these instances, the I/O limitations become particularly acute. In addition, there are difficulties associated with procurement, installation and integration of additional capacity with existing infrastructure. As a result, significant time and effort must be dedicated to retune the system to reflect the new parameters. In most cases, it is impossible to achieve linear scalability, which means that performance will not scale at the same rate as data growth or system capacity.
 
As a consequence of these limitations, the rapid growth of enterprise data, and the growing need to utilize this data to address business requirements, we believe there is a significant market opportunity for a purpose-built data warehouse solution that is optimized for efficiently analyzing vast amounts of business-critical data to enable actionable business intelligence.
 
Our Solution
 
Our NPS appliance is designed specifically to enable high-performance business intelligence solutions at a low total cost of ownership. It tightly couples database, server, and storage platforms in a compact, efficient unit that integrates easily through open, industry-standard interfaces with leading business intelligence, data access and analytics, data integration and data protection tools. As a result, the NPS appliance enables our customers to load, access and query data faster, more easily and cost-effectively than with traditional systems.
 
This approach, combined with our innovative product architecture, provides the following significant benefits to our customers:
 
Superior Performance.  We believe our systems provide industry-leading performance. With the NPS appliance, many complex and ad hoc queries on terabytes of information are reduced from days or hours to minutes or seconds, as disk access speed becomes the primary limiting factor rather than I/O and network constraints. Our customers have reported response times for complex and ad hoc queries that are often 10 to 100 times faster, and in some instances 500 times faster than those of traditional data warehouse systems. This improved performance enables our customers to analyze their data more comprehensively, more iteratively and in a more timely way, so they can make faster and better decisions.
 
Easy and Cost-Effective Procurement.  Our NPS appliance combines database, server, and storage platforms in a single scalable device using open standards and commodity components, to deliver a significant cost advantage compared with the products of our competitors. In addition, since our NPS appliance provides these technologies in a single product, customers can purchase their data warehouse appliance from one vendor as opposed to from multiple vendors, streamlining the procurement process.
 
Quick and Easy Infrastructure Installation and Deployment.  NPS appliances are factory-configured and tested, enabling our customers to install our systems typically in less than two days. With all processors and storage in the same cabinet and all components integrated, configured and tested as a purpose-built data warehouse appliance, there is no custom installation and configuration required, unlike traditional solutions. In addition to faster installation, the NPS appliance enables customers to deploy large, multi-terabyte data warehouse environments much more rapidly than with traditional systems. Data is loaded quickly and easily from source systems, and existing tools and software for business intelligence, data access and analytics, data integration and data protection all integrate in a straightforward way through standard interfaces. This enables our customers to deploy and launch their data warehousing initiatives faster than is possible with traditional systems, with minimal need for professional services or customization.
 
Rapid Adaptation to Changing Business Needs.  Our NPS appliance does not require the tuning, data indexing or most of the maintenance and configuration tasks required by traditional systems. As a result, the NPS appliance is flexible with regard to the layout and structure of data models, so as new data is added and models are automatically updated, the NPS appliance can accommodate changes easily without requiring additional administrative effort.
 
Minimal Ongoing Administration and Maintenance.  As a self-regulated and self-monitored data warehouse appliance, our systems typically require less than a single administrator to manage. There are no obscure Netezza-specific commands that need to be learned by administrators, and the NPS appliance integrates a single interface for


52


Table of Contents

the management and operation of the entire data warehouse. The management and administration requirements of our systems remain limited even as the data and system capacity grow significantly in size.
 
Small Footprint, and Low Power and Cooling Requirements.  The NPS appliance is a compact, tightly integrated appliance that requires a significantly smaller data center “footprint” than traditional solutions. Because we build our systems specifically for data warehousing, we are able to more effectively integrate components in a less dense, rack-enabled solution consuming significantly less power and generating less heat than the solutions of our competitors.
 
High Degree of Scalability.  Our systems scale effectively with additional users or more sophisticated queries, as the limiting factor becomes disk access speed rather than shared I/O and network constraints. Because storage and processing are tightly coupled into a modular unit, as data scales, so does processing power without diminution of performance. Additionally, with no need for tuning or indexing, more users can be supported and additional capacity added very quickly and easily. The NPS appliance is priced to allow customers to “pay as they grow,” adding incremental capacity at a low cost per terabyte.
 
Our Strategy
 
Our objective is to become the leading provider of data warehouse solutions. We plan to accomplish this through the following business strategies:
 
Broaden Our Target Markets.  Today, we have market penetration in the telecommunications, e-business, retail, financial services, analytic service provider, government and healthcare markets. Our customers are large and established organizations in these markets. We plan to continue our market penetration in these target industries, while expanding into new markets that can utilize business intelligence at an affordable cost. We also plan to continue to expand our addressable market through offerings in the mid-market, enabling companies with fewer resources and smaller budgets to leverage the benefits of data warehouse appliances.
 
Increase Sales to Our Existing Customer Base.  As our customers increasingly benefit from the performance and cost attributes of our solution, we expect further sales, driven by growing volumes of their stored data, the increasing usage of business intelligence by growing numbers of internal users, as well as additional users accessing our systems across our customers’ extended enterprise. Additionally, we have seen our customers use our systems for other applications beyond the ones for which they initially purchased our system as the benefits of the system become evident, resulting in incremental sales. We expect our existing customers to continue to be important sources of revenue in addition to important allies in promoting the benefits of our solution to new customers.
 
Extend Our Technology Leadership.  We believe that our proprietary product architecture and design provide us with significant competitive advantages over traditional data warehouse systems. Our appliance design enables us to leverage advances and innovations in both hardware and software. We plan to continue to employ our hardware acceleration techniques and software optimization techniques to achieve faster data loading and processing rates, and to take advantage of improvements in the reliability, performance, cost, power and cooling attributes of the hardware components integrated into our appliances. We believe this will enable us to maintain our cost and performance advantages versus competitive products.
 
Expand Distribution Channels.  We plan to continue to invest in our global distribution channels, including our direct salesforce and relationships with resellers, systems integration firms and analytic service providers. We are establishing relationships with additional resellers and with systems integration firms across North America, Europe and Asia, which we believe will accelerate the sales of our products.
 
Develop Additional Strategic Relationships.  We have established relationships with leading technology partners in the complementary areas of data access and analytics, data integration and data protection. These partners have certified our appliances for integration with their software solutions, and we participate in joint sales and marketing activities. We plan to continue to invest in these relationships to simplify integration and increase sales of our combined offerings. In addition, we plan to introduce integrated product offerings with our partners by bundling additional hardware or applications with our NPS appliance to further extend the value of our product offering. We believe our partnership-based model differentiates us from our competitors, providing flexibility to our customers and enhancing our operating leverage.


53


Table of Contents

 
Expand Our Customer Support Capabilities.  We plan to continue investing in our global customer support organization, through additional hiring, training, technical infrastructure and partnerships with global hardware support providers. Our customers have reported high levels of satisfaction with our support organization, and we intend to continue providing “high-touch,” high-quality support as we scale our customer base.
 
Pursue Selected Acquisition Opportunities that are Complementary to Our Strategy.  We intend to pursue acquisition opportunities that we believe will provide us with products and/or technologies that are complementary to or can be integrated into our current products. We believe that further expansion of our product offerings will enable us to offer more comprehensive solutions and functionality to our customers.
 
“Be Easy to Do Business With.”  Our customers are our most valuable asset and we have designed our products, pricing, contracts and support principles to be simple, straightforward and customer friendly. We plan to continue to operate with these principles to further differentiate our offerings with those of our larger competitors.
 
Products
 
The NPS family of appliances currently consists of two main product lines:
 
The 10000 Series is our core performance line, with current data capacity ranging from less than one terabyte of data up to 100 terabytes. This is the primary product line from which we derive the substantial majority of our revenue. The 10000 Series currently consists of six product models (10050, 10100, 10200, 10400, 10600 and 10800). The various models have different price points and support varying amounts of data capacity. The prices range from several hundred thousand dollars up to several million dollars. Our on-demand pricing allows our customers to add capacity in terabyte increments based on their data growth.
 
The 5000 Series, which currently consists of one product model, has available data capacity of up to three terabytes, with prices ranging from less than $200,000 to $250,000. This product is sized and priced for our mid-market and smaller customers and does not need to be deployed in a data center, which offers more flexibility to these customers. Many of our customers purchase the 5000 Series as a development system to enable them to design and test new applications and queries prior to deploying a 10000 Series production system.
 
NPS Product Performance Scalability
 
                 
    Smallest
    Largest
 
    Configuration
    Configuration
 
    (NPS 5200)     (NPS 10800)  
 
Snippet Processing Units (SPUs)
    28       896  
User Data Capacity (Terabytes)
    3       100  
Data Scan Rate (Terabytes/hour)
    6       190  
 
Product Partnerships and Alliances.  Through a network of partnerships and alliances, we provide our customers with integrated, best-of-breed solutions to meet their growing business intelligence requirements. Our appliances provide high-performance infrastructure technology as part of a larger “bundle” of software and hardware used by our customers to load and integrate data, perform analyses on their data and protect their data. We have developed partnerships and alliances with major software partners in the areas of business intelligence, data access and analytics, data integration and data protection, which have certified that our appliances integrate easily with their software solutions. We are working to create closer integration of our products with certain of these partners for even simpler customer deployments and administration.
 
Our partnerships and alliances include the following software providers:
 
  •  Business intelligence: Business Objects, Cognos, MicroStrategy and SAP
 
  •  Data access and analytics: SAS Institute, SPSS and Unica
 
  •  Data integration: Ab Initio Software, IBM, Informatica and Oracle
 
  •  Data protection: Symantec
 
  •  Industry-specific solutions: QuantiSense, Claraview and Unica


54


Table of Contents

 
Technology and Architecture
 
The architecture of the NPS appliance is based upon two guiding principles:
 
  •  Moving processing intelligence to a record stream adjacent to storage significantly enhances performance and scalability. Our approach allows us to perform database operations in a “streaming” fashion. This patent-pending Netezza innovation is called Intelligent Query Streaming technology. The approach of traditional solutions requires data from storage to be moved through many stages before database operations can be performed.
 
  •  Performance and scalability goals can be met using elements of both symmetric multi-processing, or SMP, and massively parallel processing, or MPP, applying each method where it is best suited to meet the specific needs of analytic applications operating on terabytes of data. We believe our architectural approach, which we refer to as AMPP, provides significant improvements in performance and scalability as compared to traditional data warehouse systems. We have several patents pending surrounding our AMPP architecture.
 
By applying these two principles in an integrated architecture, we believe we have achieved significant improvement in the performance, scalability and manageability of data warehouse systems.
 
Our AMPP architecture is a two-tiered system designed to quickly handle very large queries from multiple users:
 
  •  The first tier is a high-performance Linux SMP host that compiles data query tasks received from business intelligence applications, and generates query execution plans. It then divides a query into a sequence of sub-tasks, or snippets that can be executed in parallel, and distributes the snippets to the second tier for execution.
 
  •  The second tier consists of dozens to many hundreds of snippet processing units, or SPUs, operating in parallel. Each SPU is an intelligent query processing and storage node, and consists of a commodity processor, dedicated memory, a disk drive and a field programmable gate array, or FPGA, acting as a disk controller with hard-wired logic to manage data flows.
 
(GRAPH)
 
This disk controller, which is at the heart of our Intelligent Query Streaming technology, filters records as they stream off the disk into memory on the SPU. This greatly reduces the data traffic at SPU nodes and at the host, and therefore the data that needs to be processed even for large and complex queries. Nearly all query processing is done at the SPU level, significantly reducing the amount of data required to be transferred within the system and shared over I/O, thereby limiting latency and speeding response times.
 
With our approach, the pathways used by traditional architectures to deliver data to the host are streamlined and shortened. Because the query is initially screened at the disk drive level in the NPS appliance, there is far less


55


Table of Contents

reliance on CPUs, data modeling or bandwidth for performance. This results in a significant competitive advantage over traditional systems, which often require shared connections over which large amounts of data must travel prior to any analysis, and which rely primarily on incremental gains in general-computing processing power that cannot overcome I/O constraints.
 
Customers
 
We sell our data warehouse appliances worldwide to large global enterprises, mid-market companies and government agencies through our direct salesforce as well as indirectly via distribution partners. As of January 31, 2007, we had 87 customers and had shipped over 200 of our data warehouse appliances. Our customers span multiple vertical industries and include data-intensive companies and government agencies, including:
 
         
Vertical Segment
 
Sample Customers
 
Representative Applications
 
Telecommunications
  Orange UK   CRM analysis; revenue assurance and cost management; click stream analysis; fraud detection; network management
         
E-Business
  Amazon.com
CNET Networks
  Click stream analysis; CRM analysis; market basket analysis; fraud detection
         
Retail
  Ahold
Neiman Marcus Group
Restoration Hardware
Ross Stores
  CRM analysis; supply chain analysis; click stream analysis; market basket analysis; loyalty card analysis
         
Financial Services
  Capital One Services
LoanPerformance
The NASD
  Campaign management; compliance management
         
Analytic Service Providers
  Catalina Marketing
CompuCredit
Epsilon
Ryder Systems
Nielsen Company
  Database marketing and analytics
         
Government
  The United States Army Corps of Engineers
The United States Department of Veterans Affairs
American Red Cross
  Confidential
         
Healthcare
  Blue Cross Blue Shield of Rhode Island
Premier Health
Source Healthcare Analytics, Inc., a Wolters Kluwer Health company
  Healthcare analytics; supply chain analysis
 
Our customers use our data warehouse appliances to analyze terabytes of customer and operational data faster, more comprehensively and affordably than they had been able to do with the traditional systems that we replaced. They report faster query performance, the ability to perform previously impossible queries, lower costs of ownership, and improvements in analytical productivity as a result of using our products.


56


Table of Contents

 
Some representative customer experiences with our appliances include:
 
  •  Catalina Marketing, a leading behavior-based marketing company, operates in over 20,000 retail stores nationwide and reaches approximately 250 million shoppers weekly. Catalina Marketing needed a data warehouse system that could keep pace with the analytic demands of its large volumes of data. With the NPS system, Catalina has a scalable data warehouse architecture that can now accommodate large numbers of complex queries on five times the data by a greater number of users than its previous system, giving its retail customers faster and more comprehensive insights to their data.
 
  •  Orange UK, one of the UK’s most popular mobile phone services and a division of France Telecom Group, chose the NPS system to analyze billions of call data records in a fraction of the time other systems are capable of delivering. Even as the amount of information stored in Orange’s data center continues to grow, it has managed to reduce its equipment footprint. The new infrastructure in the data center has seen the number of cabinet spaces dedicated to data warehousing drop from 26 to nine. With complexity and floor space now seen as two of the biggest costs facing information technology departments, we have helped Orange prepare itself for future growth.
 
  •  CompuCredit, a specialty finance company, relies on sophisticated computer models and targeted marketing strategies in its efforts to evaluate credit risk more effectively than its competitors. The company’s explosive growth had led to a substantial increase in the amount of data that it had to manage, creating significant IT challenges and limiting the overall ability of the organization to extract impactful business intelligence from this data. Since deploying the NPS appliance, CompuCredit has been able to perform many queries more than 100 times faster than before, drastically improving the usability of its business intelligence applications and spurring user adoption throughout the organization. In addition, CompuCredit has also realized significant administrative efficiencies, boosting IT productivity and enhancing its ability to react to changing business needs. With the NPS appliance, CompuCredit is able to extract value from its enterprise data more completely and efficiently and is enhancing the return on its business intelligence investments.
 
  •  Epsilon is a leading provider of multi-channel, data-driven marketing technologies and services to Fortune 2,000 companies. Epsilon analyzes terabytes of data against strict deadlines and needed a data warehouse that would scale with client growth and meet stringent service level agreements. By optimizing data storage and querying speeds using the NPS appliance, Epsilon can work more efficiently with clients to quickly turn data into valuable insights that drive success across the enterprise. In addition to improved performance including shortening campaign cycles by days and in some cases weeks, Epsilon has reduced the total cost of ownership for its data warehouse using Netezza.
 
Service and Support
 
Through our 27 service and support employees as of January 31, 2007, we offer our customers service and support for the deployment and ongoing use of NPS appliances. We focus primarily on maintenance, although we offer training and consulting services on a limited basis as well. We believe the overall simplicity of our appliances limits the need for extensive training, customization and deployment services or ongoing consulting. Unlike vendors offering traditional systems, we do not depend on service offerings for revenue growth opportunities and, as a result, our interests in providing easy-to-use products are clearly aligned with those of our customers.
 
We provide our customers with support priced as a percentage of license sales. Our support strategy includes highly-trained support staff located in our Framingham, Massachusetts headquarters, and worldwide installation and technical account management teams. We have invested in help desk, FAQ, trouble-ticketing and online forum infrastructure to enable our customers to log product and support issues, and to share best practices with each other. Our on-site hardware service is performed through a hardware service relationship that we have with Hewlett-Packard.
 
We offer training services to our customers in administration and usage of our NPS appliances through three-day sessions as well as shorter sessions on-site and in our Framingham, Massachusetts headquarters. In addition, we plan to offer limited consulting services, in particular where the customers do not have the on-site staff


57


Table of Contents

required for their data warehouse projects and the projects are too small to justify systems integration partner services. These bundled services are provided by our technical account managers assigned to help customers with specific installation, integration and administration projects.
 
Our customers report high levels of satisfaction with our support and we believe our “high-touch” approach is an important aspect of our growth and success, driving repeat business through further product purchases and upgrades. We plan to continue to invest in the growth and training of our support staff and infrastructure as we scale.
 
Where additional professional services are requested by the customer for application development and customization, these services are provided through our network of systems integration and consulting partners worldwide. Our partners provide expertise in business intelligence, data warehousing and related areas to our customers. We believe the combined “best-of-breed” expertise and technology of us and our partners provide significant value to our joint customers, without the channel conflict that is typical of traditional data warehouse vendors and third-party services firms.
 
Our professional services partnerships and alliances include the following companies:
 
  •  Cognizant Technology Solutions
 
  •  Electronic Data Systems Corporation (EDS)
 
  •  Headstrong Corporation
 
  •  Infosys Technologies Limited
 
  •  Multi Threaded, Inc.
 
  •  NEC
 
  •  Systech Solutions, Inc.
 
  •  Unisys
 
Sales and Marketing
 
We have established a worldwide sales and distribution network to sell data warehouse appliances to large global enterprises, mid-market companies and government agencies, both directly through our salesforce and indirectly via distribution partners. As of January 31, 2007, we had 85 sales and marketing employees located in 12 offices, including offices throughout the United States, as well as in Canada, the United Kingdom, Australia, Japan and Korea. We plan to continue to invest in both our direct and indirect selling efforts worldwide.
 
Direct Salesforce
 
Our direct salesforce consists of paired teams of account executives and systems engineers who work closely together throughout the sales cycle. These teams are primarily organized geographically and are focused on strategic account targets. In addition, we have built two larger sales groups that focus solely on the retail/consumer packaged goods vertical industry and federal government, respectively.
 
Distribution Partnerships
 
In addition to our direct selling efforts, we continue to develop reseller partnerships, which we believe will enable us to reach a broader range of customers worldwide. Our reseller partners sell to global enterprises as well as to mid-market customers. We are particularly reliant on these relationships in the Asia-Pacific region. We plan to continue to invest in building and supporting our reseller distribution channel in order to increase overall sales as well as the percentage of our revenues through this channel.


58


Table of Contents

 
We have reseller partnerships with the following companies:
 
  •  North America: EDS and MSI Systems Integrators
 
  •  EMEA: EDS, BizIntel and Keyrus
 
  •  Asia-Pacific: NEC, Unisys, Information Services International-Dentsu and CTC
 
In addition to our traditional reseller partners, many of our systems integrator partners have in certain circumstances acted as distribution partners. We also work closely with a number of analytic service providers who provide hosted analytic and data warehousing services as a bundled solution to their customers. These partners continue to be an important part of our channel selling and we plan to expand our relationships with existing and new partners.
 
We have partnerships with the following analytic service providers:
 
  •  Acxiom
 
  •  Epsilon (an affiliate of Alliance Data Systems Corporation)
 
  •  Merkle
 
Marketing
 
We conduct a broad range of marketing activities to promote market awareness of our products, generate product demand, accelerate sales and demonstrate our thought leadership. These include trade shows, field marketing events, public relations, analyst relations, user conferences, webinars and other activities. In addition, we are actively engaged with existing customers in marketing activities to build a community of NPS users worldwide who can promote the benefits of our products from first-hand experience.
 
We have been recognized by industry analysts for our development of data warehouse appliances, and our company, technology and management team have garnered numerous industry awards and recognition for our innovation and vision.
 
Research and Development
 
Our research and development organization, which as of January 31, 2007 was comprised of 85 employees, is responsible for designing, developing and testing our products and for integrating our appliances with partner solutions. Our product development approach utilizes a multi-disciplinary team of professionals with experience in a broad range of areas, including databases, networking, microcode, firmware, performance measurement, application programming interfaces, optimization techniques and user interface design.
 
In addition to our internal research and development staff, we have contracted with Persistent Systems, located in Pune, India, to employ a dedicated team of over 50 engineers focused on quality assurance and product integration engineering. Our relationship with Persistent Systems began in 2001, but is terminable by either party on short notice. If we are required to change our contract engineering firm, including due to a termination of the agreement with Persistent Systems, we may experience delays, incur increased costs and damage our customer relationships.
 
We plan to continue to invest in all areas of research and development to maintain our price/performance leadership and to continue to innovate in software, hardware and firmware design. We are also investing in an advanced development team that is engaged in prototyping technologies that enable new market applications for our products, leveraging our core product advantages.


59


Table of Contents

 
Manufacturing
 
Our NPS appliance integrates several commodity hardware components including CPUs, disk drives, servers, network switches and memory. Our manufacturing strategy is to manage the supply chain, manufacturing process, test process, finished goods inventory and logistics using third-party expertise and resources, using a highly-leveraged outsourced manufacturing model. We had 9 employees dedicated to manufacturing operations as of January 31, 2007. Our manufacturing team is augmented by a dedicated group of 25 persons at Sanmina.
 
We work closely with several suppliers to select components based on price/performance, reliability, and power and cooling characteristics. Our operations and engineering personnel work directly with these suppliers on technology roadmap and supply chain issues. We update our hardware platform roughly every 18 months, taking advantage of our suppliers’ advances and new market offerings. Our advanced manufacturing team, located in our Framingham, Massachusetts headquarters, works closely with hardware engineering to review the hardware product roadmap and to plan short- and longer-term materials acquisition strategies, in addition to testing new components for manufacturability and reliability. We rely on a limited number of suppliers for several key components utilized in the assembly of our products, including disk drives and microprocessors. Although in many cases we use standard components for our products, some of these components may only be purchased or may only be available from a single supplier. In addition, we maintain relatively low inventory and acquire components only as needed, and neither we nor our contract manufacturer enter into long-term supply contracts for these components and none of our third-party suppliers is obligated to supply products to us for any specific period or in any specific quantities, except as may be provided in a particular purchase order.
 
We partner with Sanmina, a global provider of electronics manufacturing services for the manufacture and delivery of our systems. Sanmina fulfills our manufacturing requirements from their facility in Manchester, New Hampshire and has other locations across the United States at which our requirements may be fulfilled. The Sanmina manufacturing facility is International Standards Organization, or ISO, 9002 certified for manufacturing, ISO 14001 certified for new product introduction and has a quality-system training program based on TL9000 directives of the Quality Excellence for Suppliers of Telecommunications, or QuEST, Forum. Our agreement with Sanmina is terminable on short notice. If we are required to change contract manufacturers or assume internal manufacturing operations due to any termination of the agreement with Sanmina, we may lose revenue, experience manufacturing delays, incur increased costs and damage our customer relationships.
 
We have implemented a formal product development life cycle process that is based on Software Engineering Institute, or SEI, and ISO guidelines and principles. We plan to continue to improve our manufacturing and quality processes, and to drive down the manufacturing costs of our appliances through scaling and improvements in overall design, including the ongoing evaluation of component costs.
 
Competition
 
Competition in the data warehouse industry is based primarily on performance; ease of deployment and administration; acquisition and operating costs; scalability; and power, cooling and footprint requirements. We believe we compete effectively based on all of these factors.
 
The data warehouse industry has traditionally been dominated by a small number of major providers, including EMC, Hewlett-Packard, IBM, Oracle, Sun Microsystems, Sybase and Teradata (a division of NCR). Each of these companies provides several if not all elements of a data warehouse environment as individual products, including database software, servers, storage and professional services. Many of our competitors have greater market presence, longer operating histories, stronger name recognition, larger customer bases and significantly greater financial, technical, sales and marketing, manufacturing, distribution and other resources than we have. Moreover, many of our competitors have more extensive customer and partner relationships than we do, and may therefore be in a better position to identify and respond to market developments or changes in customer demands. Potential customers may also prefer to purchase from their existing suppliers rather than a new supplier regardless of product performance or features.


60


Table of Contents

 
In addition to traditional data warehouse offerings, several new offerings and vendors have entered the market over the past few years. As the benefits of an appliance solution become evident in the marketplace, several of the large players have introduced “appliance-like” offerings that combine traditional database software integrated with lower-cost, commodity hardware including servers and storage. In addition, several smaller vendors have entered the market, offering open source or proprietary database software with commodity hardware. Furthermore, we expect additional competition in the future from new and existing companies with whom we do not currently compete directly. As our industry evolves, our current and potential competitors may establish cooperative relationships among themselves or with third parties, including software and hardware companies with whom we have partnerships and whose products interoperate with our own, that could acquire significant market share, which could adversely affect our business. We also face competition from internally developed systems. The success of any of these sources of competition, alone or in combination with others, could seriously harm our business, operating results and financial condition.
 
Intellectual Property
 
Our success depends in part upon our ability to develop and protect our core technology and intellectual property. We rely primarily on a combination of trade secret, patent, copyright and trademark laws, as well as contractual provisions with employees and third parties, to establish and protect our intellectual property rights. Our products are provided to customers pursuant to agreements that impose restrictions on use and disclosure. Our agreements with employees and contractors who participate in the development of our core technology and intellectual property include provisions that assign any intellectual property rights to us. In addition to the foregoing protections, we generally control access to our proprietary and confidential information through the use of internal and external controls.
 
As of January 31, 2007, we had 8 issued patents and 15 pending patent applications in the United States. As of January 31, 2007, we also had 14 European patent applications with the European Patent Office, which, if allowed, may be converted into issued patents in various European Contracting States. Pending patent applications may receive unfavorable examination and are not guaranteed allowance as issued patents. To the extent that a patent is issued, any such future patent may be contested, circumvented, found unenforceable or invalidated, and we may not be able to prevent third parties from infringing this patent. We may elect to abandon or otherwise not pursue prosecution of certain pending patent applications due to patent examination results, strategic concerns, economic considerations or other factors. We will continue to assess appropriate occasions to seek patent protection for aspects of our technology that we believe provide us a significant competitive advantage in the market. However, we believe that effective and timely product innovation is more important to the success of our business than the protection of our existing technology.
 
We have registered the following trademarks in the United States: Netezza, Netezza and design, Netezza Performance Server and NPS. We also have numerous trademarks registered and trademark applications pending in foreign jurisdictions including: the European Union, India, Australia, China, Japan, Canada, Argentina, Hong Kong, Korea, Norway, Poland, Singapore, Switzerland, Taiwan, Thailand, Turkey, Mexico and Brazil.
 
Despite our efforts to protect the intellectual property rights associated with our technology, unauthorized parties may still attempt to copy or otherwise obtain and use our technology. Moreover, it is difficult and expensive to monitor whether other parties are complying with patent and copyright laws and their confidentiality or other agreements with us, and to pursue legal remedies against parties suspected of breaching our intellectual property rights. In addition, we intend to expand our international operations where the laws do not protect our proprietary rights as fully as do the laws of the United States.
 
Third parties could claim that our products or technologies infringe their proprietary rights. Our industry is characterized by the existence of a large number of patents, trademarks and copyrights and by frequent litigation based on allegations of infringement or other violations of intellectual property rights. Although we have not been involved in any litigation related to intellectual property rights of others, we have from time to time received letters from other parties alleging, or inquiring about, breaches of their intellectual property rights. We may in the future be


61


Table of Contents

sued for violations of other parties’ intellectual property rights, and the risk of such a lawsuit will likely increase as our size and market share expand and as the number of products and competitors in our market increase.
 
Employees
 
As of January 31, 2007, we had 225 employees worldwide, including 27 employees in service and support, 85 employees in sales and marketing, 85 employees in research and development, 9 employees in manufacturing and 19 employees in general administration. None of our employees is represented by a labor union, and we consider current employee relations to be good.
 
Facilities
 
Our principal administrative, sales, marketing, customer support and research and development facility is located at our headquarters in Framingham, Massachusetts. We currently occupy approximately 46,000 square feet of office space in the Framingham facility under the terms of an operating lease expiring in March 2008. We believe that our current facilities are adequate to meet our needs until the expiration of our operating lease in March 2008. We also have leased sales or support offices in various locations throughout the United States, as well as in Canada, the United Kingdom, Australia, Japan and Korea. We believe that suitable additional or alternative facilities will be available as needed on commercially reasonable terms.
 
Legal Proceedings
 
From time to time, we may become involved in legal proceedings arising in the ordinary course of our business. We are not presently a party to any legal proceedings.


62


Table of Contents

 
MANAGEMENT
 
Executive Officers and Directors
 
The following table sets forth information regarding our executive officers and directors, including their ages as of February 28, 2007.
 
             
Name
 
Age
 
Position
 
Jitendra S. Saxena
  61   Chief Executive Officer, Director
James Baum
  43   President and Chief Operating Officer, Director
Patrick J. Scannell, Jr. 
  53   Senior Vice President, Chief Financial Officer, Treasurer and Secretary
Raymond Tacoma
  57   Senior Vice President, Worldwide Sales
Patricia Cotter
  48   Vice President Worldwide Customer Support & Manufacturing
Sunil Dhaliwal
  31   Director
Ted R. Dintersmith(1)(2)
  54   Director
Robert J. Dunst, Jr.(1)
  46   Director
Paul J. Ferri(2)(3)
  68   Director
Charles F. Kane(1)
  49   Director
Edward J. Zander(2)(3)
  60   Director
 
 
(1) Member of audit committee
 
(2) Member of compensation committee
 
(3) Member of the nominating and corporate governance committee
 
Jitendra S. Saxena, a founder of Netezza, has served as our Chief Executive Officer and as a director since October 2000. Mr. Saxena also served as our President from our inception to June 2006. Prior to founding Netezza, Mr. Saxena served as Chairman and Chief Executive Officer of Applix, Inc., a provider of performance management applications, from 1983 to 2000. In July 2003, Mr. Saxena was named an Ernst & Young New England Entrepreneur of the Year in the “Emerging” category.
 
James Baum has served as our President and Chief Operating Officer since June 2006 and as a director since August 2006. Prior to joining Netezza, Mr. Baum served as the President and Chief Executive Officer of Endeca Technologies, Inc., a provider of search and guided navigation solutions, from November 2004 to October 2005 and President and Chief Operating Officer from June 2001 to November 2004. From October 1998 to December 2000, Mr. Baum served first as Executive Vice President, Engineering, Research and Development, then Executive Vice President and General Manager of Parametric Technology Corporation, a provider of product lifecycle management, content management and publishing solutions.
 
Patrick J. Scannell, Jr. has served as our Senior Vice President and Chief Financial Officer since March 2003. Prior to joining Netezza, Mr. Scannell served as Chief Financial Officer of PhotonEX Corporation, a provider of optical systems, from November 2000 to January 2003. From November 1998 to August 2000, Mr. Scannell served as Chief Financial Officer of Silknet Software, Inc., a provider of CRM infrastructure software. From September 1992 until October 1998, Mr. Scannell served as Executive Vice President and Chief Financial Officer of Applix, Inc.
 
Raymond Tacoma has served as our Senior Vice President, Worldwide Sales since September 2003. Prior to joining Netezza, Mr. Tacoma served as Executive Vice President of Sales and Marketing at Corechange, a global provider of portal framework software, from February 2002 to July 2003. From August 1996 to December 2001, Mr. Tacoma served as Vice President of North American Sales at MicroStrategy, Inc., a business intelligence software company.


63


Table of Contents

 
Patricia Cotter has served as our Vice President, Worldwide Customer Support and Manufacturing since July 2001. Prior to joining Netezza, Ms. Cotter served as a Vice President at Visual Networks, Inc., a provider of application performance and network management solutions, from 1996 to 2000. From 1993 to 1996, Ms. Cotter served as Director of Corporate Program Management at Stratus Technologies, Inc. a global solutions provider.
 
Sunil Dhaliwal has served as a director since August 2005. Mr. Dhaliwal is a Partner at Battery Ventures, a venture capital firm, which he joined in August 1998. Prior to joining Battery Ventures, Mr. Dhaliwal worked in the High Technology Group at Alex Brown & Sons, Inc. where he executed numerous equity financings and mergers and acquisitions in the communications and software industries.
 
Ted R. Dintersmith has served as a director since December 2000. Mr. Dintersmith has been a General Partner of Charles River Ventures, a venture capital firm, since February 1996. Mr. Dintersmith has been an early and active investor in numerous successful start-ups and previously served on the board of directors for the National Venture Capital Association.
 
Robert J. Dunst, Jr. has served as a director since February 2007. Mr. Dunst is currently Executive Vice President, Technology and Supply Chain of Albertsons, a food and drug retailer where from November 2001 to May 2005, he served as Executive Vice President and Chief Technology Officer. Prior to holding that position, Mr. Dunst was Vice President, Advanced Technology and Internet Business Group at Safeway, Inc., a food retailer. Mr. Dunst is also an Executive Board Member of the Global Commerce Initiative and World Wide Retail Exchange.
 
Paul J. Ferri has served as a director since November 2005. Mr. Ferri has been a General Partner of Matrix Partners, a venture capital firm, since February 1982. Mr. Ferri also is a director of Sycamore Networks, Inc. Mr. Ferri also serves on the boards of directors of several private companies.
 
Charles F. Kane has served as a director since May 2005. Mr. Kane is currently the Chief Financial Officer of One Laptop per Child, a non-profit organization founded at Massachusetts Institute of Technology that provides computers and internet access for students in the developing world. From May 2006 to September 2006 Mr. Kane served as the Chief Financial Officer of RSA Security, Inc., a provider of e-security solutions. From July 2003 to May 2006 Mr. Kane served as Senior Vice President, Finance and Chief Financial Officer of Aspen Technology, Inc., a provider of software and professional services. From May 2000 to February 2003 Mr. Kane was President and Chief Executive Officer of Corechange. Mr. Kane is a director of Applix, Inc. and Progress Software Corporation.
 
Edward J. Zander has served as a director since April 2002. Mr. Zander has served as Chairman and Chief Executive Officer of Motorola, Inc., a provider of wireless and broadband communications products, since January 2004. Prior to joining Motorola, Mr. Zander was a managing partner of Silver Lake Partners, a private equity fund focused on investments in technology industries, from July 2003 to December 2003. Prior to holding that position, Mr. Zander was President and Chief Operating Officer of Sun Microsystems, Inc., a provider of hardware, software and services for networks, from January 1998 until June 2002. He serves on the board of directors of Time Warner Inc., and several educational and non-profit organizations. He also serves as a member of the Dean’s Advisory Council of the School of Management at Boston University, a trustee and Presidential Advisor at Rensselaer Polytechnic Institute and Chairman of the Technology CEO Council.
 
Corporate Governance Guidelines
 
Our board of directors has adopted corporate governance guidelines to assist the board in the exercise of its duties and responsibilities and to serve the best interests of our company and our stockholders. These guidelines, which provide a framework for the conduct of our board’s business, provide that:
 
  •  the board’s principal responsibility is to oversee the management of Netezza;
 
  •  a majority of the members of the board shall be independent directors;
 
  •  the independent directors meet regularly in executive session;
 
  •  directors have full and free access to management and, as necessary and appropriate, independent advisors;
 
  •  new directors participate in an orientation program and all directors are expected to participate in continuing director education on an ongoing basis; and


64


Table of Contents

 
  •  at least annually, the board and its committees will conduct a self-evaluation to determine whether they are functioning effectively.
 
Code of Business Conduct and Ethics
 
We have adopted a written code of business conduct and ethics that applies to our directors, officers and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. Following this offering, a current copy of the code will be posted on the Corporate Governance section of our website, which is located at www.netezza.com.
 
Board Composition
 
Our board of directors currently consists of eight members. Our directors hold office until their successors have been elected and qualified or until the earlier of their resignation or removal. Our board of directors has determined that none of Messrs. Dhaliwal, Dintersmith, Dunst, Ferri, Kane and Zander has a relationship which would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and that each of these directors is an independent director, as such term is defined by the listing standards of the NASDAQ Stock Market. In reaching such determination, our board considered, among other factors, the transactions described under “Related Party Transactions” and the stock holdings of the venture capital funds with which Messrs. Dhaliwal, Dintersmith and Ferri are affiliated.
 
In accordance with the terms of our certificate of incorporation and by-laws, our board of directors is divided into three classes, class I, class II and class III, with members of each class serving staggered three-year terms. Upon the closing of this offering, the members of the classes will be divided as follows:
 
  •  the class I directors will be Messrs. Baum, Dhaliwal and Kane, and their term will expire at the annual meeting of stockholders to be held in 2008;
 
  •  the class II directors will be Messrs. Dintersmith and Saxena, and their term will expire at the annual meeting of stockholders to be held in 2009; and
 
  •  the class III directors will be Messrs. Dunst, Ferri and Zander, and their term will expire at the annual meeting of stockholders to be held in 2010.
 
Our certificate of incorporation provides that the authorized number of directors may be changed only by resolution of the board of directors. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the directors. Our certificate of incorporation and our by-laws also provide that our directors may be removed only for cause by the affirmative vote of the holders of at least 75% of our voting stock, and that any vacancy on our board of directors, including a vacancy resulting from an enlargement of our board of directors, may be filled only by vote of a majority of our directors then in office. Our classified board could have the effect of delaying or discouraging an acquisition of Netezza or a change in our management.
 
We currently are party to a stockholders’ voting agreement providing certain parties with the right to designate directors. The stockholders’ voting agreement will terminate upon the closing of this offering, and there will be no further contractual obligations regarding the election of our directors.
 
There are no family relationships among any of our directors or executive officers.
 
Board Committees
 
Our board of directors has established an audit committee, a compensation committee and a nominating and corporate governance committee. Each committee operates under a charter that has been approved by our board. Following this offering, current copies of each committee’s charter will be posted on the Corporate Governance section of our website, which is located at www.netezza.com. Our board has determined that all of the members of each of our board’s three standing committees are independent as defined under the rules of the NASDAQ Stock Market, including, in the case of all members of the audit committee, the independence requirements contemplated by Rule 10A-3 under the Securities Exchange Act of 1934.


65


Table of Contents

 
Audit Committee.  The members of our audit committee are Messrs. Dintersmith, Dunst and Kane. Mr. Kane chairs the audit committee. Our board of directors has determined that Mr. Kane is an “audit committee financial expert” as defined in applicable SEC rules. Our audit committee’s responsibilities include:
 
  •  appointing, approving the compensation of, and assessing the independence of our registered public accounting firm;
 
  •  overseeing the work of our registered public accounting firm, including through the receipt and consideration of certain reports from such firm;
 
  •  reviewing and discussing with management and the registered public accounting firm our annual and quarterly financial statements and related disclosures;
 
  •  monitoring our internal control over financial reporting, disclosure controls and procedures and code of business conduct and ethics;
 
  •  establishing policies regarding hiring employees from the registered public accounting firm and procedures for the receipt and retention of accounting related complaints and concerns;
 
  •  meeting independently with our internal auditing staff, registered public accounting firm and management; and
 
  •  reviewing and approving or ratifying any related person transactions.
 
Compensation Committee.  The members of our compensation committee are Messrs. Dintersmith, Ferri and Zander. Mr. Dintersmith chairs the compensation committee. The purpose of our compensation committee is to discharge the responsibilities of our board of directors relating to compensation of our executive officers. Specific responsibilities of our compensation committee include:
 
  •  annually reviewing and approving corporate goals and objectives relevant to chief executive officer compensation;
 
  •  determining our chief executive officer’s compensation;
 
  •  reviewing and approving, or making recommendations to our board with respect to, the compensation of our other executive officers;
 
  •  overseeing an evaluation of our senior executives;
 
  •  overseeing and administering our cash and equity incentive plans; and
 
  •  reviewing and making recommendations to our board with respect to director compensation.
 
Nominating and Corporate Governance Committee.  The members of our nominating and corporate governance committee are Mr. Ferri and Mr. Zander. Mr. Ferri chairs the nominating and corporate governance committee. Our nominating and corporate governance committee’s responsibilities include:
 
  •  identifying individuals qualified to become members of our board;
 
  •  recommending to our board the persons to be nominated for election as directors and to each of our board’s committees;
 
  •  reviewing and making recommendations to our board with respect to management succession planning;
 
  •  developing and recommending to our board corporate governance principles; and
 
  •  overseeing an annual evaluation of our board.
 
Compensation Committee Interlocks and Insider Participation
 
None of our executive officers serves as a member of the board of directors or compensation committee, or other committee serving an equivalent function, of any other entity that has one or more of its executive officers serving as a member of our board of directors or compensation committee.


66


Table of Contents

 
Director Compensation
 
Non-employee directors receive no cash compensation for their service as directors or committee members. Non-employee directors are reimbursed for expenses incurred in connection with attendance at board and committee meetings.
 
In August 2004, we granted to Mr. Zander a stock option for 80,000 shares of our common stock, at an exercise price of $.78 per share, which was the fair market value of our common stock at the time of the grant of the option. That option vested over the two-year period following its grant.
 
In May 2005, we granted to Mr. Kane a stock option for 50,000 shares of our common stock, at an exercise price of $1.00 per share, which was the fair market value of our common stock at the time of the grant of the option. That option vests over the two-year period following its grant and will be fully vested on May 1, 2007.
 
In February 2007, we granted to each of Mr. Dhaliwal, Mr. Dintersmith, Mr. Dunst, Mr. Ferri and Mr. Zander a stock option for 50,000 shares of our common stock, at an exercise price of $6.70 per share, which was the fair market value of our common stock at the time of the grant of the option. Those options vest as to 25% of the shares on February 1, 2008 and as to an additional 6.25% of the shares at the end of each successive three-month period following February 1, 2008 through and including February 1, 2011, provided the optionholder continues to serve as a director on such dates. In addition, those options become vested in full upon an acquisition of Netezza.
 
Our board of directors, on the recommendation of the compensation committee, has adopted a policy under which we will grant a stock option for 50,000 shares of our common stock:
 
  •  to each new non-employee director upon his or her initial election to our board, and
 
  •  to each non-employee director at such time as the option held by him or her, as described in the preceding two paragraphs, becomes fully vested.
 
Those stock options will have an exercise price equal to the fair market value of our common stock on the date of grant. Those options will vest as to 25% of the shares on the first anniversary of the grant date and as to an additional 6.25% of the shares at the end of each successive three-month period following the first anniversary of grant through and including the fourth anniversary of grant, provided the optionholder continues to serve as a director on such dates. In addition, those options will become vested in full upon an acquisition of Netezza.
 
Compensation Discussion and Analysis
 
Objectives and Philosophy of Our Executive Compensation Program
 
The primary objectives of the compensation committee with respect to executive compensation are:
 
  •  to attract, retain and motivate executives who make important contributions to the achievement of our business objectives and
 
  •  to align the incentives of our executives with the creation of value for our stockholders.
 
Our compensation plans and policies currently, and will continue to, compensate executive officers with a combination of base salary, cash bonuses tied to our financial performance, equity incentives and customary employee benefits. We currently intend to implement total compensation packages for our executive officers in line with the median compensation levels of comparable public companies. Our compensation committee considers companies within the same industry, of comparable size, and in the same geographic region to be comparable companies for executive compensation comparison purposes.
 
As a privately-held company, both our board of directors and the compensation committee of our board participated in decisions concerning executive compensation. As a public company, the compensation committee will oversee our executive compensation program. In making compensation decisions for executives other than the Chief Executive Officer, the compensation committee receives and takes into account specific recommendations from our Chief Executive Officer.


67


Table of Contents

 
Components of our Executive Compensation Program
 
The following elements comprise compensation paid to our executive officers:
 
Base Salary.
 
The base salaries that we pay to our executives are based on the level of responsibility required of each executive, and take into account the level of base salary paid by comparable companies for similar positions. None of our executives has an employment agreement that provides for automatic or scheduled increases in base salary. Our compensation committee reviews base salaries annually, generally early in the fiscal year, based on each executive’s performance during the prior fiscal year, and it adjusts salaries to ensure that they are aligned with our compensation objectives and the compensation paid by comparable public companies.
 
Cash Bonuses.
 
A significant element of the cash compensation of our executive officers is based upon an annual executive officer incentive bonus plan adopted by our compensation committee. Our executive officer incentive bonus policy for fiscal 2007 covered Messrs. Saxena, Baum, Scannell and Tacoma. Our executive officer incentive bonus plan for fiscal 2008 covers Messrs. Saxena, Baum, Scannell, Tacoma and Ms. Cotter. The principal elements of the fiscal 2007 policy were as follows:
 
  •  The executive officers other than Mr. Tacoma were assigned a target bonus of approximately 40% of their annual base salary. Mr. Tacoma, who serves as our Senior Vice President, Worldwide Sales, had a target bonus that was slightly in excess of his annual base salary.
 
  •  For the executive officers other than Mr. Tacoma, 80% of their target bonus was based upon our attainment of a specified revenue target for fiscal 2007 and 20% of their target bonus was based upon our attainment of a specified adjusted operating income (which is operating income plus the amount of the our non-cash stock compensation expense) target for fiscal 2007. Revenue and adjusted operating income were selected as bonus metrics for the executive officers, other than Mr. Tacoma, to align executive bonus compensation with the metrics used by the board of directors to measure the success of the company. For Mr. Tacoma, 100% of his bonus was based upon our attainment of quarterly and annual bookings targets. Bookings targets were selected as bonus metrics for Mr. Tacoma to reward him for achieving sustained sales success during the year and generation of potential future revenue. The revenue, adjusted operating income and bookings targets used for purposes of the 2007 executive officer incentive bonus policy were established prior to the commencement of fiscal 2007, and were set at levels that were designed to be attainable if our business had what we considered to be a successful year but that were by no means certain or even probable of being attained.
 
  •  No portion of the target bonuses based on revenue was payable unless we attained at least 70% of our revenue target. No portion of the target bonuses based on adjusted operating income was payable unless we attained a specified level of net loss. No portion of the target bonuses based on bookings was payable unless we attained at least 60% of our bookings targets. There was no cap on the amount of the revenue-based bonus; the amount of the bonuses based on adjusted operating income and bookings could not exceed the target amounts.
 
In fiscal 2007, we attained 94% of our revenue target; we did not attain our adjusted operating income target; and we exceeded our bookings targets for fiscal 2007 and for three of the four quarters of fiscal 2007.
 
The principal elements of the fiscal 2008 executive officer incentive bonus plan are as follows:
 
  •  As in fiscal 2007, the executive officers other than Mr. Tacoma have a target bonus of approximately 40% of their annual base salary. Mr. Tacoma has a target bonus that is in excess of his annual base salary.
 
  •  For the executive officers other than Mr. Tacoma, 50% of their target bonus is based upon our attainment of a specified revenue target for fiscal 2008 and 50% of their target bonus is based upon our attainment of a specified adjusted operating income target for fiscal 2008. For Mr. Tacoma, $100,000 of his target bonus is based upon attainment of quarterly and annual revenue targets and $175,000 of his target bonus is based


68


Table of Contents

  upon attainment of quarterly, year-to-date and annual bookings targets. The revenue, adjusted operating income and bookings targets used for purposes of the fiscal 2008 incentive bonus plan were established prior to the commencement of fiscal 2008, and were set at levels that were designed to be attainable if our business had what we considered to be a successful year but that were by no means certain or even probable of being attained.
 
  •  No portion of the target bonuses based on revenue, adjusted operating income or bookings is payable unless we attain at least 70% of the applicable target. In addition, the amount of the revenue-based, operating income-based, and bookings-based bonuses is capped at 120% of the target bonus allocated to that metric.
 
Long-Term Equity Incentives.
 
We believe that the long-term performance of our business is improved through the grant of stock-based awards so that the interests of our executives are aligned with the creation of value for our stockholders. Prior to this offering, our executives were eligible to participate in our 2000 stock incentive plan (as amended, the 2000 Plan). Following the closing of this offering, we will continue to grant our executives and other employees stock-based awards pursuant to the 2007 stock incentive plan, or the 2007 Plan. Under the 2007 Plan, executives will be eligible to receive grants of stock options, restricted stock awards, restricted stock unit awards, stock appreciation rights and other stock-based equity awards at the discretion of the compensation committee.
 
To date, we have granted the substantial majority of our equity awards in the form of stock options that vest with the passage of time. While we currently expect to continue to use time-based stock options as the primary form of equity awards that we grant, we may in the future use alternative forms of equity awards, such as restricted stock or performance-based stock options, in addition to or in replacement of time-based stock options.
 
We generally grant options to executive officers and other employees upon their initial hire, in connection with a promotion, and annually based upon merit.
 
In February 2006 (early fiscal 2007), the compensation committee granted options to each of our executive officers (other than Mr. Baum, who had not yet joined the company), as part of a broad-based option grant to over 70 employees. Mr. Baum received an option grant in August 2006, shortly following the commencement of his employment with the company. See “— Executive Compensation — Grants of Plan-Based Awards in Fiscal 2007” below for a description of those grants and their material terms.
 
In February 2007 (early fiscal 2008), the board of directors granted options to each of our executive officers as part of a broad-based option grant to over 75 employees. The number of shares covered by the grants to our executive officers was as follows: Mr. Saxena: 600,000 shares; Mr. Baum: 100,000 shares; Mr. Scannell: 400,000 shares; Mr. Tacoma: 300,000 shares; and Ms. Cotter: 100,000 shares. We intend to make annual grants of equity awards to executive officers, generally early in the fiscal year following an evaluation of the executive’s performance in the prior fiscal year.
 
Except as described below, all of our option grants referenced above were on the following terms, and we currently expect that these terms will also be used for future option grants:
 
  •  The exercise price of the options is equal to the fair market value of the common stock on the date of grant. For the options referenced above, the exercise price was established by our board of directors, taking into account, among other factors, an appraisal of the fair market value of our common stock by an independent valuation firm. Following this offering, the exercise price will be equal to the closing sale price of our common stock on the NASDAQ Global Market on the date of grant.
 
  •  Options vest over a five-year period (subject to continued employment), with 20% of the shares vesting on the first anniversary of the vesting start date and the remaining shares vesting in 5% increments at the end of each successive three-month period following the first anniversary of the vesting start date. The vesting start date is generally the day on which the option was granted or the first day of the quarter or month in which the option was granted depending on the type of option grant. Prior to February 2006, option grants vested over a four-year period with 25% of the shares vesting on the first anniversary of the vesting start date and the remaining shares vesting in 6.25% increments at the end of each successive three-month period following


69


Table of Contents

  the first anniversary of the vesting start date. We adopted a five-year vesting period to create an incentive for employees to remain with the company for a longer period.
 
  •  Generally, vesting accelerates as to 20% of the shares covered by each option upon an acquisition of Netezza. As explained below, our executive officers have agreements providing for the acceleration of vesting in the event of an employment termination under specified circumstances following a “change in control” of Netezza.
 
  •  Options expire either seven or ten years following the date of grant, subject to earlier expiration upon termination of employment.
 
Our board of directors has adopted the following policies with respect to the grant of stock options. The primary purpose of these policies is to establish procedures for option grants that minimize the opportunity — or the perception of the opportunity — for us to time the grant of options in a manner that takes advantage of any material nonpublic information.
 
Annual Grants.  The annual option grants to our employees will be approved by the compensation committee on the first Monday following our public announcement of operating results for the recently completed fiscal year. The exercise price of the options will be at least equal to the closing price of our common stock on NASDAQ on the grant date.
 
New Hire Grants — Non-executives.  Our Chief Executive Officer has the authority, subject to limitations on the number of shares that may be covered by his grants, to make option grants to all newly hired employees other than executive officers. The grant date of those options will be the last trading day of the month of the employee’s hire date. The exercise price of those options will be at least equal to the closing price of our common stock on NASDAQ on the grant date.
 
New Hire Grants — Executives.  Option grants to all newly hired executive officers must be approved by the compensation committee at the first in-person or telephonic meeting of the committee following the executive’s hire date. However, if that meeting occurs during a quarterly or year-end trading blackout period under our Insider Trading Policy or during a time when we are otherwise in possession of material nonpublic information (referred to as an option blackout period), the option grant will instead be made at the first in-person or telephonic meeting of the committee outside of an option blackout period. The exercise price of those options will be at least equal to the closing price of our common stock on NASDAQ on the grant date.
 
Other Grants.  All option grants to employees not described above will be approved by the compensation committee at an in-person or telephonic meeting held outside of an option blackout period. The exercise price of those options will be at least equal to the closing price of our common stock on NASDAQ on the grant date.
 
Other Compensation.
 
Each of our executive officers is eligible to participate in our employee benefits programs on the same terms as non-executive employees, including our 401(k) plan, flexible spending accounts plan, medical plan, dental plan and vision care plans. In addition, employees, including executive officers, participate in our life and accidental death & dismemberment insurance policies, long-term and short-term disability plans, employee assistance program, maternity and paternity leave plans and standard company holidays.
 
Severance and Change-of-Control Benefits
 
We have entered into agreements with each of our executive officers that provide them with severance benefits in the event of the termination of their employment under specified circumstances, as well as acceleration of vesting of equity awards in the event of an employment termination under specified circumstances following a change in control of Netezza. These agreements, along with estimates of the value of the benefits payable under them, are described below under the caption “— Executive Compensation — Agreements with Executives.”
 
We believe providing these benefits helps us compete for and retain executive talent. After reviewing the practices of comparable companies, we believe that our severance and change-in-control benefits are generally in line with those provided to executives by comparable companies.


70


Table of Contents

 
Tax Considerations
 
Section 162(m) of the Internal Revenue Code of 1986, as amended, generally disallows a tax deduction for compensation in excess of $1.0 million paid to our chief executive officer and our four other most highly paid executive officers. Qualifying performance-based compensation is not subject to the deduction limitation if specified requirements are met. We periodically review the potential consequences of Section 162(m) and we generally intend to structure the performance-based portion of our executive compensation, where feasible, to comply with exemptions in Section 162(m) so that the compensation remains tax deductible to us. However, the compensation committee may, in its judgment, authorize compensation payments that do not comply with the exemptions in Section 162(m) when it believes that such payments are appropriate to attract and retain executive talent.
 
Executive Compensation
 
Summary Compensation Table
 
The following table sets forth information regarding compensation earned during fiscal 2007 by our Chief Executive Officer, our Chief Financial Officer and our three other executive officers:
 
                                                                         
                                        Change in
             
                                        Pension
             
                                        Value and
             
                                  Non-Equity
    Nonqualified
    All
       
                                  Incentive
    Deferred
    Other
       
                      Stock
    Option
    Plan
    Compensation
    Compen-
       
Name and Principal
  Fiscal
    Salary
    Bonus
    Awards
    Awards
    Compensation
    Earnings
    sation
    Total
 
Position
  Year     ($)     ($)     ($)     ($)(1)     ($)(2)     ($)     ($)     ($)  
 
Jitendra S. Saxena
    2007     $ 300,000                 $ 137,867     $ 93,672           $ 436 (3)   $ 531,975  
Chief Executive Officer
                                                                       
James Baum(4)
    2007       180,769                   263,900       56,460                     501,129  
President and Chief Operating Officer
                                                                       
Patrick J. Scannell, Jr. 
    2007       215,000                   51,700       63,697             872 (3)     331,269  
Senior Vice President and Chief Financial Officer
                                                                       
Raymond Tacoma
    2007       225,000                   51,700       258,047             720 (3)     535,467  
Senior Vice President, Worldwide Sales
                                                                       
Patricia Cotter
    2007       168,750       35,000(5 )           5,640                         209,390  
Vice President, Worldwide Customer Support & Manufacturing
                                                                       
 
 
(1) Compensation expense consists of the amount recognized in fiscal 2007 for financial statement purposes under SFAS No. 123(R) with respect to stock options granted to our executive officers in fiscal 2007. Options to purchase shares of common stock were granted at exercise prices equal to fair market value of the common stock on the date of grant. For a discussion of the assumptions relating to our valuation of stock option grants, see note 2 to our consolidated financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Application of Critical Accounting Policies and Use of Estimates- Stock-Based Compensation,” included elsewhere in this prospectus. Under the terms of the stock option agreements granted prior to fiscal 2007, the award vests as to 25% of the shares on the first anniversary of the vesting start date and as to an additional 6.25% of the shares at the end of each successive three-month period following the first anniversary of the vesting start date through and including the fourth anniversary of the vesting start date. Under the terms of the stock option agreements for grants in fiscal 2007, the award vests as to 20% of the shares on the first anniversary of the vesting start date and as to an additional 5% of the shares at the end of each successive three-month period following the first anniversary of the vesting start date through and


71


Table of Contents

including the fifth anniversary of the vesting start date. Under the terms of the executive retention agreements we have entered into with our executive officers if, following a “change in control” (as defined in the agreement) of Netezza, the executive’s employment is terminated by the acquiring company without cause or by the executive for good reason, all outstanding stock options, restricted stock or similar equity awards held by him or her will become vested in full.
 
(2) All amounts shown in this column were cash bonuses paid under our executive officer incentive bonus policy for fiscal 2007, which was established near the end of fiscal 2006. See “— Compensation Discussion and Analysis — Components of our Executive Compensation Program — Cash Bonuses” for a description of that plan.
 
(3) Consists of tax gross-up paid by us on behalf of the named executive officer in connection with the cost of travel for an accompanying spouse.
 
(4) The compensation reported for James Baum for fiscal 2007 is for the period from June 26, 2006, his date of hire, through January 31, 2007.
 
(5) Consists of a discretionary cash bonus paid for fiscal 2007.
 
Grants of Plan-Based Awards in Fiscal 2007
 
The following table sets forth information regarding grants of compensation in the form of plan-based awards made during fiscal 2007 to our Chief Executive Officer, our Chief Financial Officer and our three other executive officers.
 
                                                                                         
                                              All Other
                Grant
 
                                              Stock
    All Other
          Date Fair
 
                                              Awards:
    Awards:
    Exercise
    Value of
 
          Estimated Future Payouts     Estimated Future Payouts     Number
    Number of
    or Base
    Stock
 
          Under Non-Equity Incentive     Under Equity Incentive     of Shares
    Securities
    Price of
    and
 
          Plan Awards     Plan Awards     of Stock
    Underlying
    Option
    Option
 
    Grant
    Threshold
    Target
    Maximum
    Target
    Threshold
    Maximum
    or Units
    Options
    Awards
    Awards
 
Name
  Date     ($)     ($)     ($)     (#)     (#)     (#)     (#)     (#)(1)     ($/Sh)     (2)  
 
Jitendra S. Saxena
    2/20/2006                                                 400,000     $ 2.50     $ 752,000  
James Baum
    8/10/2006                                                 1,450,000       2.50       2,639,000  
Patrick J. Scannell, Jr. 
    2/20/2006                                                 150,000       2.50       282,000  
Raymond Tacoma
    2/20/2006                                                 150,000       2.50       282,000  
Patricia Cotter
    2/20/2006                                                 30,000       2.50       56,400  
 
 
(1) See Note 1 to the Summary Compensation Table above for a description of these option grants.
 
(2) For a discussion of the assumptions relating to our valuation of stock option grants, see note 2 to our consolidated financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Application of Critical Accounting Policies and Use of Estimates- Stock-Based Compensation,” included elsewhere in this prospectus.


72


Table of Contents

 
Outstanding Equity Awards at 2007 Fiscal Year End
 
The following table sets forth information regarding equity awards held as of January 31, 2007 by our Chief Executive Officer, our Chief Financial Officer and our three other executive officers.
 
                                                                         
    Option Awards(1)     Stock Awards(1)  
                                              Equity
       
                                              Incentive
       
                Equity
                            Plan
    Equity
 
                Incentive
                      Market
    Awards:
    Incentive Plan
 
                Plan
                      Value of
    Number of
    Awards:
 
                Awards:
                      Shares or
    Unearned
    Market or
 
    Number of
    Number of
    Number of
                Number of
    Units of
    Shares,
    Payout Value of
 
    Securities
    Securities
    Securities
                Shares or
    Stock
    Units or
    Unearned
 
    Underlying
    Underlying
    Underlying
                Units of
    That
    Other
    Shares, Units
 
    Unexercised
    Unexercised
    Unexercised
    Option
    Option
    Stock That
    Have Not
    Rights that
    or Other Rights
 
    Options (#)
    Options (#)
    Unearned
    Exercise
    Expiration
    Have Not
    Vested
    Have Not
    That Have Not
 
Name
  Exercisable     Unexercisable     Options (#)     Price($)     Date     Vested (#)     ($)(2)     Vested (#)     Vested ($)  
 
Jitendra S. Saxena
    207,000 (3)     169,000           $ 0.20       11/1/2013                                  
      125,000 (4)     125,000             1.00       1/14/2015                                  
            400,000 (5)           2.50       2/20/2016                                  
James Baum
          1,450,000 (6)           2.50       8/10/2016                                  
Patrick J. Scannell, Jr. 
          37,750 (3)           0.20       11/13/2013       18,750 (7)   $ 125,625                  
      50,000 (4)     50,000             1.00       1/14/2015                                  
            150,000 (5)           2.50       2/20/2016                                  
Raymond Tacoma
    262,500       37,500 (8)           0.20       10/7/2013                                  
      113,250       37,750 (3)           0.20       11/1/2013                                  
      50,000 (4)     50,000             1.00       1/14/2015                                  
            150,000 (5)           2.50       2/20/2016                                  
Patricia Cotter
    9,375 (3)     3,125             0.20       11/1/2013                                  
      10,000 (4)     10,000             1.00       1/14/2015                                  
            30,000 (5)           2.50       2/20/2016                                  
 
 
(1) All option awards and stock awards listed in this table were granted under our 2000 stock incentive plan. Under the terms of the executive retention agreements we have entered into with our executive officers, if following a “change in control” (as defined in the agreement) of Netezza, the executive’s employment is terminated by the acquiring company without cause or by the executive for good reason, all outstanding stock options, restricted stock or similar equity awards held by him or her will become vested in full.
 
(2) Our common stock did not have a closing market price at January 31, 2007. The market value of our unvested stock awards was determined by multiplying the number of shares unvested under the stock award by $6.70, which represents the fair market value of our common stock as determined by our board of directors at its meeting on February 14, 2007, the first such determination made following January 31, 2007.
 
(3) This option vested as to 25% of the shares on November 1, 2004 and vests as to an additional 6.25% of the shares at the end of each successive three-month period through and including November 1, 2007.
 
(4) This option vested as to 25% of the shares on January 14, 2006 and vests as to an additional 6.25% of the shares at the end of each successive three-month period through and including January 14, 2009.
 
(5) This option vested as to 20% of the shares on February 1, 2007 and vests as to an additional 5% of the shares at the end of each successive three-month period through and including February 1, 2010.
 
(6) Granted in connection with Mr. Baum’s commencement of employment. This option vests as to 20% of the shares on April 1, 2007 and then as to an additional 5% of the shares at the end of each successive three-month period through and including April 2011.
 
(7) Relates to a grant of 300,000 shares of restricted stock on June 18, 2003. This grant vested as to 25% of the shares on March 24, 2004 and vests as to an additional 6.25% of the shares at the end of each successive three-month period until March 24, 2007.
 
(8) This option vested as to 25% of the shares on July 1, 2004 and vests as to an additional 6.25% of the shares at the end of each successive three-month period through and including July 1, 2007.


73


Table of Contents

 
Option Exercises and Stock Vested
 
The following table sets forth information regarding stock options exercised and restricted stock awards vested during fiscal 2007 for our Chief Executive Officer, our Chief Financial Officer and our three other executive officers.
 
                                 
    Option Awards     Stock Awards  
    Number of Shares
    Value Realized
    Number of Shares
    Value Realized
 
    Acquired on Exercise
    on Exercise
    Acquired on Vesting
    on Vesting
 
Name
  (#)     ($)(1)     (#)     ($)(2)  
 
Jitendra S. Saxena
    50,000     $ 215,000              
James Baum
                       
Patrick J. Scannell, Jr. 
    37,750     $ 86,825       75,000     $ 337,500  
Raymond Tacoma
                       
Patricia Cotter
                       
 
 
(1) The value realized on exercise represents the difference between the fair market value of our common stock on the date of exercise, as most recently determined by our board of directors, and the exercise price of the option.
 
(2) The value realized on vesting represents the amount determined by multiplying the number of shares vested by the fair market value of the underlying shares on the vesting date, as most recently determined by our board of directors.
 
Agreements with Executives
 
In March 2007, we entered into an agreement with each of Mr. Saxena, Mr. Baum, Mr. Scannell, Mr. Tacoma and Ms. Cotter that provides as follows. If the executive’s employment is terminated by us without “cause” or by the executive for “good reason” (as those terms are defined in the agreement), then the executive shall receive, for a one-year period following employment termination, (i) severance payments at a rate equal to the sum of his or her annual base salary plus the bonus paid to the executive for the preceding fiscal year and (ii) a continuation of insurance benefits. In the case of Mr. Baum, if his employment is terminated prior to January 31, 2008, his bonus for the preceding fiscal year will be deemed to be $125,000. In addition, if, following a “change in control” (as defined in the agreement) of Netezza, the executive’s employment is terminated by the acquiring company without cause or by the executive for good reason, all outstanding stock options, restricted stock or similar equity awards held by him or her will become vested in full.
 
The table below shows the benefits potentially payable to each of our executive officers if he or she were to be terminated without cause or resign for good reason. These amounts are calculated on the assumption that the employment termination took place on January 31, 2007 and, in the case of the equity benefits, that the resignation followed a change in control of Netezza.
 
                         
Name
  Severance Payments     Medical/Dental(1)     Equity Benefits(2)  
 
Jitendra S. Saxena
  $ 378,329     $ 13,233     $ 3,491,000  
James Baum
    425,000       13,233       6,090,000  
Patrick J. Scannell, Jr. 
    269,839       13,233       1,411,625  
Raymond Tacoma
    389,229       13,233       1,404,125  
Patricia Cotter
    200,000       4,394       203,313  
 
 
(1) Calculated based on the estimated cost to us of providing these benefits.
 
(2) This amount is equal to (a) the number of option shares or restricted shares that would accelerate, assuming a January 31, 2007 employment termination, multiplied by (b) in the case of options, the excess of $6.70 over the exercise price of the option or, in the case of restricted stock, $6.70. $6.70 represents the fair market value of our common stock as determined by our board of directors at its meeting on February 14, 2007, the first such determination made following January 31, 2007.


74


Table of Contents

 
Stock Option and Other Compensation Plans
 
2007 Stock Incentive Plan
 
Our 2007 stock incentive plan, which we refer to as the 2007 Plan, will become effective as of the date of this prospectus. We have reserved for issuance 2,000,000 shares of common stock under the 2007 Plan. In addition, our plan contains an “evergreen” provision, which provides for an annual increase in the number of shares available for issuance under the plan on the first day of the fiscal years ending January 31, 2009, January 31, 2010 and January 31, 2011. The annual increase in the number of shares shall be equal to the lower of:
 
  •  a number of shares that, when added to the number of shares already reserved under the plan, equals 3.5% of our outstanding shares as of such date; or
 
  •  an amount determined by our board of directors.
 
Our compensation committee will administer the 2007 Plan. The 2007 Plan will provide for the grant of incentive stock options, nonstatutory stock options, restricted stock, restricted stock units, stock appreciation rights and other stock-based awards. Our officers, employees, consultants, advisors and directors, and those of any of our subsidiaries, will be eligible to receive awards under the 2007 Plan. Under present law, however, incentive stock options qualifying under Section 422 of the Internal Revenue Code may only be granted to our employees.
 
Stock options entitle the holder to purchase a specified number of shares of common stock at a specified option price, subject to the other terms and conditions contained in the option grant. Our compensation committee determines:
 
  •  the recipients of stock options,
 
  •  the number of shares subject to each option granted,
 
  •  the exercise price of the option, which will be no less than the fair market value of our common stock on the date of grant,
 
  •  the vesting schedule of the option (generally over five years),
 
  •  the duration of the option (generally seven years, subject to earlier termination in the event of the termination of the optionee’s employment), and
 
  •  the manner of payment of the exercise price of the option.
 
Restricted stock awards entitle the recipient to acquire shares of common stock, subject to our right to repurchase all or part of such shares from the recipient in the event of the termination of the recipient’s employment prior to the end of the vesting period for such award or if other conditions specified in the award are not satisfied. Our compensation committee determines:
 
  •  the recipients of restricted stock,
 
  •  the number of shares subject to each restricted stock award granted,
 
  •  the purchase price, if any, of the restricted stock award,
 
  •  the vesting schedule of the restricted stock award, and
 
  •  the manner of payment of the purchase price, if any, for the restricted stock award.
 
No award may be granted under the 2007 Plan after March 21, 2017, but the vesting and effectiveness of awards granted before that date may extend beyond that date.
 
2000 Stock Incentive Plan
 
Our 2000 stock incentive plan, which we refer to as the 2000 Plan, as amended, was adopted in October 2000. A maximum of 15,721,458 shares of common stock are authorized for issuance under the 2000 Plan. As of February 28, 2007, there were options and warrants to purchase 9,231,784 shares of common stock outstanding under the 2000 Plan, 4,077,567 shares of common stock had been issued and are outstanding pursuant to the


75


Table of Contents

exercise of options granted under this plan, and 2,412,107 shares of common stock are available for future grants under this plan. After the effective date of the 2007 Plan, we will grant no further stock options or other awards under the 2000 Plan.
 
The 2000 Plan, as amended, provided for the grant of incentive stock options, nonstatutory stock options, restricted stock, warrants and other stock-based awards. Our employees, officers, directors, consultants and advisors were eligible to receive awards under the 2000 Plan.
 
401(k) Plan
 
We maintain a deferred savings retirement plan for our U.S. employees. The deferred savings retirement plan is intended to qualify as a tax-qualified plan under Section 401 of the Internal Revenue Code. Contributions to the deferred savings retirement plan are not taxable to employees until withdrawn from the plan. The deferred savings retirement plan provides that each participant may contribute his or her pre-tax compensation (up to a statutory limit, which is $15,500 in 2007). For employees 50 years of age or older, an additional catch-up contribution of $5,000 is allowable. In 2007, the statutory limit for those who qualify for catch-up contributions is $20,500. Under the plan, each employee is fully vested in his or her deferred salary contributions. The deferred savings retirement plan also permits us to make additional discretionary contributions, subject to established limits and a vesting schedule.
 
Limitation of Liability and Indemnification
 
Our certificate of incorporation limits the personal liability of directors for breach of fiduciary duty to the maximum extent permitted by the Delaware General Corporation Law. Our certificate of incorporation provides that no director will have personal liability to us or to our stockholders for monetary damages for breach of fiduciary duty or other duty as a director. However, these provisions do not eliminate or limit the liability of any of our directors:
 
  •  for any breach of the director’s duty of loyalty to us or our stockholders;
 
  •  for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law;
 
  •  for voting or assenting to unlawful payments of dividends, stock repurchases or other distributions; or
 
  •  for any transaction from which the director derived an improper personal benefit.
 
Any amendment to or repeal of these provisions will not eliminate or reduce the effect of these provisions in respect of any act, omission or claim that occurred or arose prior to such amendment or repeal. If the Delaware General Corporation Law is amended to provide for further limitations on the personal liability of directors of corporations, then the personal liability of our directors will be further limited to the greatest extent permitted by the Delaware General Corporation Law.
 
In addition, our certificate of incorporation provides that we must indemnify our directors and officers and we must advance expenses, including attorneys’ fees, to our directors and officers in connection with legal proceedings, subject to very limited exceptions.
 
In addition to the indemnification provided for in our certificate of incorporation, we have entered into separate indemnification agreements with each of our directors and executive officers that may be broader than the specific indemnification provisions contained in our certificate of incorporation. These indemnification agreements require us, among other things, to indemnify our directors and executive officers for some expenses (including attorneys’ fees), judgments, fines and settlement amounts paid or incurred by a director or executive officer in any action or proceeding arising out of his or her service as one of our directors or executive officers. We believe that these provisions and agreements are important in attracting and retaining qualified individuals to serve as directors and executive officers.
 
We maintain a general liability insurance policy that covers certain liabilities of our directors and officers arising out of claims based on acts or omissions in their capacities as directors or officers.


76


Table of Contents

 
There is no pending litigation or proceeding involving any of our directors or executive officers to which indemnification is required or permitted, and we are not aware of any threatened litigation or proceeding that may result in a claim for indemnification.


77


Table of Contents

 
RELATED PARTY TRANSACTIONS
 
Since February 1, 2004 (the beginning of fiscal 2005), we have engaged in the following transactions in which the amount involved exceeded $120,000 and in which any of our related persons had a direct or indirect material interest. For purposes of this section, “related person” includes our directors and executive officers and holders of more than 5% of our voting stock, and immediate family members of our directors, executive officers and 5% stockholders:
 
On December 22, 2004, January 19, 2005 and June 15, 2005, we sold an aggregate of 7,901,961 shares of our Series D preferred stock to 15 purchasers at a purchase price of $2.55 per share, for approximately $20,150,000 in the aggregate. Various funds affiliated with Meritech Capital Partners, which currently owns more than 5% of our outstanding common stock, purchased 4,447,255 of those shares. Various funds affiliated with Sequoia Capital, which currently owns more than 5% of our outstanding common stock, purchased 713,399 of those shares. Various funds affiliated with Battery Ventures, which currently owns more than 5% of our outstanding common stock and has a representative on our board of directors, purchased 789,266 of those shares. Various funds affiliated with Matrix Partners, which currently owns more than 5% of our outstanding common stock and has a representative on our board of directors, purchased 973,867 of those shares. Various funds affiliated with Charles River Ventures, which currently owns more than 5% of our outstanding common stock and has a representative on our board of directors, purchased 919,351 of those shares.
 
In connection with the transaction described above, we entered into agreements with all of the purchasers of our convertible preferred stock providing for registration rights with respect to the shares of common stock issuable upon conversion of our convertible preferred stock, preemptive rights with respect to certain issuances of securities by us and other rights customary for purchasers of preferred stock. In addition, in connection with the transaction described above, we also entered into agreements with all of the purchasers of our convertible preferred stock providing us and the non-founder investors with certain rights of first refusal and co-sale rights in the event the founders seek to sell their shares of our common stock. These agreements (other than the registration rights provisions) terminate upon the closing of this offering.
 
In fiscal 2007, we sold products and services to Motorola for a total purchase price of approximately $2.2 million. Edward Zander, a member of our board of directors, is Chairman and Chief Executive Officer of Motorola. Mr. Zander had no personal involvement in that transaction.
 
Each of the transactions noted above were entered into prior to our adoption of a written related party transaction policy, which is described below. We believe that all transactions set forth above were made on terms no less favorable to us than would have been obtained from unaffiliated third parties.
 
Indemnification Arrangements
 
Please see “Management — Limitation of Liability and Indemnification” for information on our indemnification agreements with our directors and executive officers.
 
Executive Compensation and Employment Arrangements
 
Please see “Management — Executive Compensation” and “Management — Employment Agreement with Executives” for information on compensation arrangements with our executive officers, including option grants and agreements with executive officers.
 
Related Person Transaction Policy
 
We have adopted a written policy providing that all “related person transactions” must be:
 
  •  reported to our chief financial officer;
 
  •  approved or ratified by our audit committee, which our audit committee will do only if it determines that the transaction is in, or not inconsistent with, the best interests of Netezza; and


78


Table of Contents

 
  •  if applicable, reviewed by our audit committee annually to ensure that such transaction, arrangement or relationship has been conducted in accordance with the previous approval, and that all required disclosures regarding such transaction arrangement or relationship have been made.
 
Our policy provides that a “related person transaction” is any transaction, arrangement or relationship, or any series of similar transactions, arrangements or relationships, involving an amount exceeding $120,000 in which we are a participant and in which any of our executive officers, directors or 5% stockholders, or any immediate family member of any of our executive officers, directors or 5% stockholders, has or will have a direct or indirect material interest.


79


Table of Contents

 
PRINCIPAL AND SELLING STOCKHOLDERS
 
The following table sets forth information with respect to the beneficial ownership of our common stock, as of January 31, 2007 by:
 
  •  all persons known by us to beneficially own more than 5% of our common stock;
 
  •  each of our executive officers;
 
  •  each of our directors;
 
  •  all of our directors and executive officers as a group; and
 
  •  each of the selling stockholders.
 
The number of shares beneficially owned by each stockholder is determined under rules issued by the SEC. Under these rules, beneficial ownership includes any shares as to which the individual or entity has sole or shared voting power or investment power. In addition, these rules provide than an individual or entity beneficially owns any shares issuable upon the exercise of stock options or warrants held by such person or entity that were exercisable on January 31, 2007 or within 60 days after January 31, 2007; and any reference in the footnotes to this table to stock options or warrants refers only to such options or warrants. In computing the percentage ownership of each individual and entity, the number of outstanding shares of common stock includes, in addition to the 46,216,907 shares outstanding as of January 31, 2007, any shares subject to options or warrants held by that individual or entity that were exercisable on or within 60 days after January 31, 2007. These shares are not considered outstanding, however, for the purpose of computing the percentage ownership of any other stockholder. Each of the stockholders listed has sole voting and investment power with respect to the shares beneficially owned by the stockholder unless noted otherwise, subject to community property laws where applicable.
 
    &nb