Income Taxes

12 Months Ended

Jul. 31, 2011

Income Taxes [Abstract]

Income Taxes

9.   Income Taxes

Loss before income tax provision consists of the following:

	Years Ended July 31,
	2011			2010			2009
	(In thousands)
Domestic	$	25		$	(36,628	)	$	(24,762	)
International		(972	)		3,358			2,137
Loss before provision for income taxes	$	(947	)	$	(33,270	)	$	(22,625	)

The components of the provision for (benefit from) income taxes are as follows:

	Years Ended July 31,
	2011			2010			2009
	(In thousands)
Current
Federal	$	(126	)	$	(283	)	$	15
State		99			231			260
Foreign		1,241			874			513
Total current provision for income taxes		1,213			822			788
Deferred
Federal		(59,614	)		(85	)		—
State		(12,428	)		(9	)		—
Foreign		(806	)		—			—
Total deferred provision for income taxes		(72,848	)		(94	)		—
Total provision for (benefit from) income taxes	$	(71,635	)	$	728		$	788

The deferred income tax provision for (benefit from) for fiscal years 2011, 2010 and 2009, requires, in certain circumstances, items reported in accumulated other comprehensive income to be considered in the realization of the tax benefit associated with a net loss. The specific circumstance relates to pre-tax other accumulated comprehensive income (loss) related to the Company’s available-for-sale securities, and as a result, the Company recorded a deferred income tax liability of less than $0.1 million for fiscal 2011 and 2010.

The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities are as follows:

	As of July 31,
	2011			2010
	(In thousands)
Deferred tax assets
Current
Net operating loss carryforwards	$	24,295		$	—
Capital loss		75			—
Research and development credits		6,255			—
Accruals and reserves		22,992			31,373
Total deferred tax assets		53,618			31,373
Valuation allowance		(235	)		(31,279	)
Unrealized loss in other comprehensive income		(73	)		(94	)
Net deferred tax assets, current		53,310			—
Non-current
Net operating loss carryforwards		—			18,504
Capital loss		—			77
Research and development credits		14,119			11,653
Depreciation and amortization		—			345
Accruals and reserves		6,024			5,714
Total deferred tax assets		20,143			36,293
Valuation allowance		—			(36,293	)
Net deferred tax assets, non-current		20,143			—
Net deferred tax assets		73,453			—
Deferred tax liabilities
Non-current
Depreciation and amortization		(808	)		—
Book/tax basis in acquired assets		(7	)		—
Total deferred tax liabilities		(815	)		—
Net deferred tax asset (liability)	$	72,638		$	—

In assessing the realization of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences and net operating loss carryforwards are deductible.

Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. As a result of the Company’s increasing profitability in fiscal 2011, expectations for continued profits going forward, and expected material taxable income generated from intercompany payments resulting from the Company’s offshore tax restructuring to be implemented during fiscal year 2012, the Company has determined it is more likely than not that the tax benefits will be realizable in the near future. Accordingly, the Company released a majority of its valuation allowances against its deferred income tax assets, but continues to maintain $0.2 million valuation allowance against a portion of its foreign net operating loss deferred tax assets. The valuation allowance decreased approximately $67.3 million during fiscal year ended July 31, 2011 and increased approximately $12.7 million and $9.5 million, during the fiscal years ended July 31, 2010 and 2009, respectively.

The differences between the provision for income taxes computed at the federal statutory rate and the Company’s actual provision for income taxes are as follows:

	Years Ended July 31,
	2011			2010			2009
Federal income tax provision		(35.0	)%		(34.0	)%		(34.0	)%
State income tax provision (benefit), net of federal benefit		(3.3	)%		(3.5	)%		0.0	%
Foreign taxes		58.3	%		(0.9	)%		(1.2	)%
Stock compensation and warrant expense		452.4	%		6.0	%		10.6	%
Non-deductible expenses		(26.3	)%		3.0	%		(5.3	)%
Research and developments credits		(900.1	)%		(6.5	)%		(8.6	)%
Change in valuation allowance		(7,114.1	)%		38.1	%		41.9	%
Total provision for (benefit from) income taxes		(7,568.1	)%		2.2	%		3.4	%

For the fiscal years ended July 31, 2011, 2010, and 2009, the Company had $230.0 million, $97.4 million, and $84.1 million, respectively, of federal net operating loss carryforwards (“NOLs”), and $156.1 million, $74.4 million, and $71.1 million, respectively, of state NOLs, available to reduce future tax liability. These NOLs will begin to expire in 2023 and 2013 for federal and state tax purposes, respectively. As of the fiscal year ended July 31, 2011 the Company had $0.2 million of federal capital loss carryforwards which will begin to expire in 2014. Approximately $189.2 million of federal net operating losses relates to stock compensation deductions in excess of book deductions, the tax effect of which would be to credit to additional-paid-in-capital if realized. The Internal Revenue Code limits the use of net operating loss and tax credit carryforwards in certain situations where changes occur in the stock ownership of a company. In the event the Company may have a change in ownership, utilization of the carryforwards could be restricted.

The Company has research credit carryforwards for the fiscal years ended July 31, 2011, 2010, and 2009, of approximately $17.4 million, $6.4 million, and $6.0 million, respectively, for federal and $18.2 million, $8.0 million, and $5.7 million, respectively, for state income tax purposes. If not utilized, the federal carryforwards will expire in various amounts beginning in 2024. The California credit can be carried forward indefinitely. The Company has minimum-alternative tax (“MAT”) tax credits of less than $0.1 million from its subsidiary in India. The tax holiday in India expired during fiscal year 2011 But it is more likely than not the benefit of the MAT credits will be utilizable after expiration of the tax holiday. The Company has approximately $6.4 million of net operating loss from its Chinese subsidiary which will expire in various amounts beginning December 31, 2011.

Deferred tax liabilities have not been recognized for undistributed earnings for foreign subsidiaries because it is management’s intention to reinvest such undistributed earnings outside the U.S. The cumulative amount of such undistributed earnings upon which no U.S. income taxes have been provided as of July 31, 2011 was approximately $10.1 million. Generally, such earnings are subject to potential foreign withholding tax and U.S. tax upon remittance of dividends and under certain other circumstances. Determination of the amount of unrecognized deferred tax liability for temporary differences related to investments in these non-U.S. subsidiaries that are essentially permanent in duration is not practicable.

At July 31, 2011, the Company had $10.9 million of unrecognized tax benefits, which if recognized would affect the Company’s income tax expense. A reconciliation of the beginning and ending amount of the consolidated liability for unrecognized tax benefits during the year is as follows:

	Amount
	(In thousands)
Balance at July 31, 2008	$	3,666
Additions for tax positions related to current year		1,458
Balance at July 31, 2009		5,124
Additions for tax positions related to current year		1,212
Reductions for tax positions related to prior year		(16	)
Balance at July 31, 2010		6,320
Additions for tax positions related to current year		4,478
Additions for tax positions related to prior year		199
Reductions for tax positions related to prior year		(129	)
Balance at July 31, 2011	$	10,868

The Company recognizes interest and penalties related to income tax matters as part of the provision for income taxes. To date, these charges have been immaterial.

The Company files annual income tax returns in the U.S. federal jurisdiction, various U.S. state and local jurisdictions, and in various foreign jurisdictions. The Company remains subject to tax authority review for all material jurisdictions for all years.