10-Q 1 arun-2013131x10q.htm 10-Q ARUN-2013.1.31-10Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________________ 
FORM 10-Q
 _________________________________________________
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2013
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number: 001-33347
_________________________________________________ 
Aruba Networks, Inc.
(Exact name of registrant as specified in its charter)
 _________________________________________________
Delaware
 
02-0579097
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification Number)
1344 Crossman Ave.
Sunnyvale, California 94089-1113
(408) 227-4500
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
_________________________________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
x
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
The number of shares of the registrant’s common stock, par value $0.0001, outstanding as of March 1, 2013 was 113,946,497.
 



ARUBA NETWORKS, INC.
INDEX
 
 
Page
No.
 
 
PART 1. FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Exhibit 31.1
 
Exhibit 31.2
 
Exhibit 32.1
 
EX-101 INSTANCE DOCUMENT
 
EX-101 SCHEMA DOCUMENT
 
EX-101 CALCULATION LINKBASE DOCUMENT
 
EX-101 LABELS LINKBASE DOCUMENT
 
EX-101 PRESENTATION LINKBASE DOCUMENT
 
EX-101 DEFINITION LINKBASE DOCUMENT
 

2



 PART I. FINANCIAL INFORMATION

Item 1.
Consolidated Financial Statements
ARUBA NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
 
 
January 31,
2013
 
July 31,
2012
 
 
 
 
 
(in thousands, except per share data)
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
177,645

 
$
133,629

Short-term investments
224,671

 
212,601

Accounts receivable, net
70,129

 
80,190

Inventory, net
29,440

 
22,202

Deferred cost of revenue
10,162

 
11,241

Prepaids and other
19,997

 
18,996

Deferred income tax assets, current
36,216

 
34,584

Total current assets
568,260

 
513,443

Property and equipment, net
24,917

 
19,901

Goodwill
56,947

 
56,947

Intangible assets, net
23,199

 
27,036

Deferred income tax assets, non-current
20,000

 
20,664

Other non-current assets
10,022

 
10,905

Total assets
$
703,345

 
$
648,896

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities
 
 
 
Accounts payable
$
16,291

 
$
22,504

Accrued liabilities
59,700

 
52,375

Income taxes payable, current
1,071

 
2,032

Deferred revenue, current
89,910

 
80,602

Total current liabilities
166,972

 
157,513

Deferred revenue, non-current
28,200

 
22,375

Other non-current liabilities
7,089

 
2,118

Total liabilities
202,261

 
182,006

Commitments and contingencies (Note 13)

 

Stockholders’ equity
 
 
 
Common stock: $0.0001 par value; 350,000 shares authorized at January 31, 2013 and July 31, 2012; 113,659 and 111,529 shares issued and outstanding at January 31, 2013 and July 31, 2012, respectively
11

 
11

Additional paid-in capital
612,158

 
582,077

Accumulated other comprehensive loss
(1,456
)
 
(1,405
)
Accumulated deficit
(109,629
)
 
(113,793
)
Total stockholders’ equity
501,084

 
466,890

Total liabilities and stockholders’ equity
$
703,345

 
$
648,896

See Notes to Consolidated Financial Statements.

3


ARUBA NETWORKS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
 
 
Three months ended January 31,
 
Six months ended January 31,
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
 
(in thousands, except per share data)
Revenue
 
 
 
 
 
 
 
Product
$
130,901

 
$
105,970

 
$
250,123

 
$
207,101

Professional services and support
24,461

 
20,305

 
49,721

 
38,526

Total revenue
155,362

 
126,275

 
299,844

 
245,627

Cost of revenue
 
 
 
 
 
 
 
Product
37,665

 
30,452

 
73,826

 
62,521

Professional services and support
6,991

 
5,030

 
12,948

 
9,576

Total cost of revenue
44,656

 
35,482

 
86,774

 
72,097

Gross profit
110,706

 
90,793

 
213,070

 
173,530

Operating expenses
 
 
 
 
 
 
 
Research and development
34,688

 
27,926

 
66,651

 
52,393

Sales and marketing
57,398

 
49,720

 
111,317

 
95,335

General and administrative
12,399

 
12,698

 
24,350

 
23,798

Total operating expenses
104,485

 
90,344

 
202,318

 
171,526

Operating income
6,221

 
449

 
10,752

 
2,004

Other income, net
 
 
 
 
 
 
 
Interest income
293

 
299

 
609

 
575

Other income, net
978

 
2,731

 
1,254

 
3,558

Total other income, net
1,271

 
3,030

 
1,863

 
4,133

Income before provision for income taxes
7,492

 
3,479

 
12,615

 
6,137

Provision for income taxes
2,502

 
14,861

 
8,451

 
17,986

Net income (loss)
$
4,990

 
$
(11,382
)
 
$
4,164

 
$
(11,849
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation gain (loss), net of tax
(8
)
 
(2,571
)
 
11

 
(2,316
)
Unrealized gain (loss) on short-term investments, net of tax
(34
)
 
50

 
(62
)
 
4

Comprehensive income (loss)
$
4,948

 
$
(13,903
)
 
$
4,113

 
$
(14,161
)
Shares used in computing net income (loss) per common share—basic
112,584

 
108,084

 
112,280

 
107,010

Net income (loss) per common share—basic
$
0.04

 
$
(0.11
)
 
$
0.04

 
$
(0.11
)
Shares used in computing net income (loss) per common share—diluted
123,270

 
108,084

 
122,953

 
107,010

Net income (loss) per common share—diluted
$
0.04

 
$
(0.11
)
 
$
0.03

 
$
(0.11
)
See Notes to Consolidated Financial Statements.

4


ARUBA NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
Six months ended January 31,
 
2013
 
2012
 
 
 
 
 
(in thousands)
Cash flows from operating activities
 
 
 
Net income (loss)
$
4,164

 
$
(11,849
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization
10,859

 
8,974

Provision for doubtful accounts
183

 
(19
)
Write-downs for excess and obsolete inventory
3,214

 
2,696

Stock-based compensation expense
47,595

 
42,189

Accretion of purchase discounts on short-term investments
535

 
603

Loss on disposal of fixed assets

 
10

Change in carrying value of contingent rights liability
(1,665
)
 
(3,238
)
Deferred income taxes
(1,056
)
 
19,250

Recovery of escrow funds

 
(702
)
Excess tax benefit associated with stock-based compensation
(1,990
)
 
(12,066
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
9,877

 
(778
)
Inventory
(12,021
)
 
1,558

Prepaids and other
(272
)
 
(3,003
)
Deferred costs
1,078

 
(2,336
)
Other assets
2,376

 
(15,614
)
Accounts payable
(5,874
)
 
(6,814
)
Deferred revenue
15,134

 
22,322

Other current and non-current liabilities
5,819

 
(11,319
)
Income taxes payable
4,633

 
12,520

Net cash provided by operating activities
82,589

 
42,384

Cash flows from investing activities
 
 
 
Purchases of short-term investments
(124,012
)
 
(109,952
)
Proceeds from sales of short-term investments
50,502

 
26,525

Proceeds from maturities of short-term investments
60,098

 
24,500

Purchases of property and equipment
(10,807
)
 
(5,345
)
Investment in privately-held company
(1,500
)
 

Cash paid in acquisitions, net of cash acquired

 
(21,086
)
Net cash used in investing activities
(25,719
)
 
(85,358
)
Cash flows from financing activities
 
 
 
Proceeds from issuance of common stock
15,648

 
15,200

Repurchases of common stock under stock repurchase program
(30,511
)
 

Excess tax benefit associated with stock-based compensation
1,990

 
12,066

Net cash (used in) provided by financing activities
(12,873
)
 
27,266

Effect of exchange rate changes on cash and cash equivalents
19

 
(640
)
Net increase (decrease) in cash and cash equivalents
44,016

 
(16,348
)
Cash and cash equivalents, beginning of period
133,629

 
80,773

Cash and cash equivalents, end of period
$
177,645

 
$
64,425

Supplemental disclosure of cash flow information
 
 
 
Income taxes paid
$
2,134

 
$
3,410

Supplemental disclosure of non-cash investing and financing activities
 
 
 
Common stock issued for acquisitions
$

 
$
12,000

See Notes to Consolidated Financial Statements.

5


ARUBA NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1.
The Company and its Significant Accounting Policies
The Company
Aruba Networks, Inc. (the “Company”), incorporated in the state of Delaware on February 11, 2002, is a leading provider of next-generation network access solutions for the mobile enterprise. The Company's Mobile Virtual Enterprise (“MOVE”) architecture leverages its diverse products (including its ArubaOS operating system, controllers, wireless access points, switches, application software modules, access management solution, and multi-vendor management solution software) to unify wired and wireless network infrastructures into one seamless access solution for corporate headquarters, mobile business professionals, remote workers, branch offices, and guests. The Company derives its revenue from sales of its ArubaOS operating system, controllers, wireless access points, switches, application software modules, access management solution, multi-vendor management solution software, and professional services and support. The Company has offices in Americas, Europe, the Middle East and the Asia Pacific regions and employs staff around the world.
Basis of Presentation
The accompanying Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances, transactions and cash flows have been eliminated. The accompanying statements are unaudited and should be read in conjunction with the audited Consolidated Financial Statements and related notes contained in the Company’s Annual Report on Form 10-K filed with the United States Securities and Exchange Commissions ("SEC") on October 11, 2012. The July 31, 2012 Consolidated Balance Sheet data were derived from audited financial statements but do not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S.”).
The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), pursuant to the rules and regulations of the SEC. They do not include all of the financial information and footnotes required by GAAP for complete financial statements. The unaudited Consolidated Financial Statements have been prepared on the same basis as the Company's audited financial statements as of and for the year ended July 31, 2012 and include all adjustments necessary for the fair statement of the Company’s financial position as of January 31, 2013, its consolidated comprehensive income for the three and six months ended January 31, 2013 and 2012, and its cash flows for the six months ended January 31, 2013 and 2012. The results for the three and six months ended January 31, 2013 are not necessarily indicative of the results to be expected for any subsequent quarter or for the fiscal year ending July 31, 2013.
There have been no significant changes in the Company’s accounting policies during the six months ended January 31, 2013, as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended July 31, 2012.
Prior Period Adjustment
In the three months ended October 31, 2012, the Company recorded an out-of-period adjustment to correct an error that increases the provision for income taxes by $1.8 million which related to the three months ended July 31, 2012. The impact of this correction would have resulted in an increase in net loss of $1.8 million for the three months and fiscal year ended July 31, 2012. The Company has assessed the impact of this adjustment on previously reported financial statements and to projected fiscal 2013 results and concluded that the adjustment is not material, either individually, or in the aggregate. On that basis, the Company has recorded the adjustment in the three months ended October 31, 2012.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation. As of July 31, 2012 and 2011, accrued trade payables of $14.7 million and $16.7 million, respectively, have been reclassified from accrued liabilities to accounts payable in order to provide improved disclosure relating to invoices that have been received as of the reporting period-ends but have not yet been processed. The corresponding amount included within accounts payable as of January 31, 2013 is $7.7 million.

6

ARUBA NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) - Continued

The following table discloses the amounts as previously filed and the amounts after the reclassification.
 
 
As of July 31, 2012
 
As of July 31, 2011
 
As  Previously
Filed
 
Reclassified
Amount
 
As
Reclassified
 
As  Previously
Filed
 
Reclassified
Amount
 
As
Reclassified
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
 
(in thousands)
Current liabilities
 
 
 
 
 
 
 
 
 
 
 
Accounts payable
$
7,807

 
$
14,697

 
$
22,504

 
$
11,278

 
$
16,704

 
$
27,982

Accrued liabilities
67,072

 
(14,697
)
 
52,375

 
61,461

 
(16,704
)
 
44,757

In addition, the ratable product and related professional services and support revenue and the related cost of revenue in fiscal 2012 have been reclassified to professional services and support revenue and related cost of revenue, both of which are recorded in the revenue and cost of revenue sections of the Consolidated Statements of Comprehensive Income, respectively. We believe the ratable product and related professional services and support revenue and related cost of revenue are not material to total revenue and cost of revenue, and the nature of these amounts are consistent with professional services and support revenue and related cost of revenue. The amount for the prior period has been reclassified to conform with the current year presentation.
Recent Accounting Pronouncements
In July 2012, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update intended to simplify how an entity tests indefinite-lived intangible assets other than goodwill for impairment. This accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2014, and early adoption is permitted. The adoption of this accounting standard update is not expected to have a material impact on the Company's Consolidated Financial Statements.
In February 2013, the FASB issued an accounting standard update which requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in the net income if the amount being reclassified is required to be reclassified in its entirety to net income. Otherwise, an entity is required to provide other disclosures that will provide additional detail about those amounts. This accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2014, at which time the Company will include the required disclosures.
2.
Fair Value of Financial Instruments
Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be either recorded or disclosed at fair value, the Company considers the principal or most advantageous market in which it would transact, and it also considers assumptions that market participants would use when pricing the asset or liability.
The Company determines the fair values of its financial instruments based on a three-level fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The classification of a financial asset or liability within the hierarchy is based upon the lowest level input that is significant to the fair value measurement. The fair value hierarchy prioritizes the inputs into three levels that may be used to measure fair value:
Level 1 — Quoted prices in active markets for identical assets or liabilities.
Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument.
Level 3 — Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. Such unobservable inputs include an estimated discount rate used in our discounted present value analysis of future cash flows, which reflects our estimate of debt with similar terms in the current credit markets. As there is currently minimal activity in such markets, the actual rate could be materially different.

7

ARUBA NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) - Continued

Level 1 instruments are valued based on quoted market prices in active markets for identical instruments. Level 1 instruments consist primarily of bank deposits with third-party financial institutions and highly liquid money market securities with original maturities at date of purchase of 90 days or less and are stated at cost, which approximates fair value.
Level 2 securities are valued using quoted market prices for similar instruments, non-binding market prices that are corroborated by observable market data, or discounted cash flow techniques and include the Company’s investments in certain corporate bonds, U.S. government agency securities, U.S. treasury bills, and commercial paper.
Level 3 instruments are valued based on unobservable inputs that are supported by little or no market activity and reflect the Company’s own assumptions in measuring fair value. The Company classified its contingent rights liability as a Level 3 liability (See Note 3—Contingent Rights Liability Arising from Business Combinations, for details). This liability was estimated using a lattice model and was based on significant inputs not observable in the market and thus represented a Level 3 instrument. The inputs include stock price as of the valuation date, strike price of the contingent right, maximum payoff per share, number of shares held in escrow, exercise period, historical volatility of the Company's stock price based on weekly stock price returns, and risk-free interest rate interpolated from the Constant Maturity Treasury Rate.
There were no transfers between different levels during the three and six months ended January 31, 2013 and 2012.
The following tables present the Company’s fair value measurements that are measured at the estimated fair value, on a recurring basis, categorized in accordance with the fair value hierarchy:
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
 
 
 
 
 
 
 
(in thousands)
As of January 31, 2013
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Cash and cash equivalents:
 
 
 
 
 
 
 
Cash deposits with third-party financial institutions
$
177,645

 
$

 
$

 
$
177,645

Short-term investments:
 
 
 
 
 
 
 
Certificates of deposit
8,022

 

 

 
8,022

Corporate bonds

 
44,160

 

 
44,160

U.S. government agency securities

 
96,460

 

 
96,460

U.S. treasury bills

 
50,843

 

 
50,843

Commercial paper

 
25,186

 

 
25,186

Total assets measured and recorded at fair value
$
185,667

 
$
216,649

 
$

 
$
402,316


8

ARUBA NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) - Continued

 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
 
 
 
 
 
 
 
(in thousands)
As of July 31, 2012
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Cash and cash equivalents:
 
 
 
 
 
 
 
Cash deposits with third-party financial institutions
$
129,786

 
$

 
$

 
$
129,786

Money market funds
3,843

 

 

 
3,843

Short-term investments:
 
 
 
 
 
 
 
Certificates of deposit
8,832

 

 

 
8,832

Corporate bonds

 
47,128

 

 
47,128

U.S. government agency securities

 
105,429

 

 
105,429

U.S. treasury bills

 
43,930

 

 
43,930

Commercial paper

 
7,282

 

 
7,282

Total assets measured and recorded at fair value
$
142,461

 
$
203,769

 
$

 
$
346,230

Liabilities
 
 
 
 
 
 
 
Contingent rights liability related to the Azalea acquisition
$

 
$

 
$
1,665

 
$
1,665

Total liabilities measured and recorded at fair value
$

 
$

 
$
1,665

 
$
1,665


The following table represents the change in the contingent rights liability related to the Azalea acquisition (see Note 3 – Contingent Rights Liability Arising from Business Combinations, for details):
 
 
Level 3 Amount
 
(in thousands)
As of July 31, 2011
$
5,888

Changes to fair value
(2,318
)
Cash payments made
(1,905
)
As of July 31, 2012
$
1,665

Changes to fair value
(401
)
Release of liability upon expiration of the rights
(1,264
)
As of January 31, 2013
$

The change in fair value from the acquisition date was primarily driven by changes in the Company's stock price, the settlement date, and the claim activities that have taken place. During the three months ended January 31, 2013, the Company released the contingent rights liability as a result of the payment period expiring on December 31, 2012, resulting in a $1.3 million gain recorded in other income, net. For the six months ended January 31, 2013, the Company recorded other income, net, of $1.7 million consisting of a $0.4 million gain from revaluation of the contingent rights liability and a $1.3 million gain relating to the expiration of the payment period for the Contingent Rights.
The fair values of accounts receivable, accounts payable and accrued liabilities approximate their carrying values due to their short-term nature.
Assets and Liabilities Measured at Fair Value on a Non-recurring Basis
In December 2012, the Company invested $1.5 million in the form of a convertible security in a privately-held company. The investment is classified as a Level 3 asset, as the fair value was based on unobservable inputs, including changes in the privately-held company's financial metrics. There were no similar investments as of July 31, 2012.
As of January 31, 2013 and July 31, 2012, the Company had no other assets or liabilities measured at fair value on a non-recurring basis.

9

ARUBA NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) - Continued

3.
Contingent Rights Liability Arising from Business Combinations
On September 2, 2010, the Company completed its acquisition of Azalea Networks (“Azalea”) for a total purchase price of $42.0 million. As part of the purchase consideration for each share of the Company received by the Azalea shareholders, each Azalea shareholder also received a right ("Contingent Rights") to receive an amount of cash equal to the shortfall generated if a share was sold below the target value within the payment period, as specified in the arrangement. For shares not held in escrow, the payment period began August 1, 2011 and ended on December 31, 2011. The Contingent Rights related to these shares were settled in cash of $1.9 million in January 2012. For shares held in escrow, the payment period began on the later of January 2, 2012 or the date such shares are released from escrow to the Azalea shareholders, if at all, and ending on the earlier of thirty calendar days following such release date or December 31, 2012. The rights related to the escrow shares are subject to forfeiture in certain circumstances.
For shares held in escrow, the Company made claims against all of the escrow shares prior to the claim period expiration, which was April 1, 2012. Currently the escrow shares remain in escrow pending the resolution of the Company’s claims.
During the three months ended January 31, 2013, the Company released the contingent rights liability as a result of the payment period expiring on December 31, 2012, resulting in a $1.3 million gain recorded in other income, net. For the six months ended January 31, 2013, the Company recorded other income, net, of $1.7 million consisting of a $0.4 million gain from revaluation of the contingent rights liability and a $1.3 million gain relating to the expiration of the payment period for the Contingent Rights.
For the three and six months ended January 31, 2012, the Company recorded other income, net, of $2.3 million and $3.2 million, respectively as a result of the revaluation of the contingent rights liability for these periods.
4.
Goodwill and Intangible Assets
The following table presents details of the Company’s goodwill:
 
 
Amount
 
(in thousands)
As of July 31, 2011
$
33,143

Goodwill acquired in acquisitions
23,804

As of July 31, 2012
$
56,947

Changes in goodwill

As of January 31, 2013
$
56,947

The following table presents details of the Company’s total intangible assets:
 
 
Estimated
Useful Lives
 
Gross
Value
 
Accumulated
Amortization
 
Net
Value
 
 
 
 
 
 
 
 
 
(in thousands, except estimated useful lives)
As of January 31, 2013
 
 
 
 
 
 
 
Existing technology
2 to 7 years
 
$
35,183

 
$
(18,461
)
 
$
16,722

Patents/core technology
4 to 6 years
 
6,806

 
(4,382
)
 
2,424

Customer contracts
6 to 7 years
 
7,233

 
(4,923
)
 
2,310

Support agreements
5 to 6 years
 
2,917

 
(2,713
)
 
204

Tradenames/trademarks
1 to 5 years
 
750

 
(734
)
 
16

Non-compete agreements
2 years
 
912

 
(829
)
 
83

Sub-total
 
 
$
53,801

 
$
(32,042
)
 
$
21,759

In-process research and development
 
 
1,440

 

 
1,440

Total
 
 
$
55,241

 
$
(32,042
)
 
$
23,199


10

ARUBA NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) - Continued

 
Estimated
Useful Lives
 
Gross
Value
 
Accumulated
Amortization
 
Net
Value
 
 
 
 
 
 
 
 
 
(in thousands, except estimated useful lives)
As of July 31, 2012
 
 
 
 
 
 
 
Existing technology
2 to 7 years
 
$
35,183

 
$
(15,931
)
 
$
19,252

Patents/core technology
4 to 6 years
 
6,806

 
(4,041
)
 
2,765

Customer contracts
6 to 7 years
 
7,233

 
(4,321
)
 
2,912

Support agreements
5 to 6 years
 
2,917

 
(2,425
)
 
492

Tradenames/trademarks
1 to 5 years
 
750

 
(673
)
 
77

Non-compete agreements
2 years
 
912

 
(814
)
 
98

Sub-total
 
 
$
53,801

 
$
(28,205
)
 
$
25,596

In-process research and development
 
 
1,440

 

 
1,440

Total
 
 
$
55,241

 
$
(28,205
)
 
$
27,036

Amortization expense is recorded in the Consolidated Statements of Comprehensive Income under the following:
 
 
Three months ended January 31,
 
Six months ended January 31,
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
 
(in thousands)
 
(in thousands)
Cost of product revenues
$
1,436

 
$
1,360

 
$
2,871

 
$
2,713

Cost of professional services and support revenues
135

 
136

 
270

 
270

Sales and marketing
344

 
748

 
684

 
1,106

Research & development
6

 

 
12

 

Total amortization expense
$
1,921

 
$
2,244

 
$
3,837

 
$
4,089

The following table consists of estimated future amortization expense of intangible assets as of January 31, 2013, and excludes in-process research and development assets of $1.4 million as of January 31, 2013, which will be amortized when the projects related to those assets are complete. These assets are expected to be placed into service in the second half of fiscal 2013 and will be amortized over their remaining useful life upon completion.
 
Amount
 
(in thousands)
Remaining six months of fiscal 2013
$
3,593

Years ending July 31,
 
2014
6,710

2015
5,932

2016
2,806

2017
1,251

Thereafter
1,467

Total
$
21,759

5.
Net Income (Loss) Per Common Share
Basic net income (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per common share is calculated by giving effect to all potentially dilutive common shares, including stock options and awards, unless the result is anti-dilutive. The following tables set forth the computation of net income (loss) per share: 

11

ARUBA NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) - Continued

 
Three months ended January 31,
 
Six months ended January 31,
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
 
(in thousands, except per
 
(in thousands, except per
 
share data)
 
share data)
Net income (loss)
$
4,990

 
$
(11,382
)
 
$
4,164

 
$
(11,849
)
Weighted-average common shares outstanding—basic
112,584

 
108,084

 
112,280

 
107,010

Dilutive effect of potential common shares
10,686

 

 
10,673

 

Weighted-average common shares outstanding—diluted
123,270

 
108,084

 
122,953

 
107,010

Net income (loss) per share—basic
$
0.04

 
$
(0.11
)
 
$
0.04

 
$
(0.11
)
Net income (loss) per share—diluted
$
0.04

 
$
(0.11
)
 
$
0.03

 
$
(0.11
)
The following outstanding stock options and awards were excluded from the computation of diluted net income (loss) per common share for the periods presented because including them would have had an anti-dilutive effect.
 
 
Three months ended January 31,
 
Six months ended January 31,
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
 
(in thousands)
 
(in thousands)
Options to purchase common stock
1,472

 
12,696

 
1,578

 
12,963

Restricted stock awards
2,171

 
4,386

 
2,053

 
3,516

Contingently issuable shares

 
215

 

 
134

Employee stock purchase plan
180

 
34

 
1

 
38

6.
Short-Term Investments
Short-term investments consist of the following:
 
Cost Basis
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
 
 
 
 
 
 
 
 
(in thousands)
As of January 31, 2013
 
 
 
 
 
 
 
Corporate bonds
$
44,103

 
$
60

 
$
(3
)
 
$
44,160

U.S. government agency securities
96,400

 
61

 
(1
)
 
96,460

U.S. treasury bills
50,813

 
31

 
(1
)
 
50,843

Commercial paper
25,179

 
7

 

 
25,186

Certificates of deposit
8,005

 
17

 

 
8,022

Total short-term investments
$
224,500

 
$
176

 
$
(5
)
 
$
224,671

 
Cost Basis
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
 
 
 
 
 
 
 
 
(in thousands)
As of July 31, 2012
 
 
 
 
 
 
 
Corporate bonds
$
47,011

 
$
118

 
$
(1
)
 
$
47,128

U.S. government agency securities
105,358

 
79

 
(8
)
 
105,429

U.S. treasury bills
43,896

 
34

 

 
43,930

Commercial paper
7,280

 
2

 

 
7,282

Certificates of deposit
8,805

 
27

 

 
8,832

Total short-term investments
$
212,350

 
$
260

 
$
(9
)
 
$
212,601

The cost basis and fair value of the short-term investments by contractual maturity are presented below:
 

12

ARUBA NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) - Continued

 
Cost
Basis
 
Fair
Value
 
 
 
 
 
(in thousands)
As of January 31, 2013
 
 
 
One year or less
$
124,817

 
$
124,927

One to two years
99,683

 
99,744

Total short-term investments
$
224,500

 
$
224,671

 
Cost
Basis
 
Fair
Value
 
 
 
 
 
(in thousands)
As of July 31, 2012
 
 
 
One year or less
$
102,675

 
$
102,794

One to two years
109,675

 
109,807

Total short-term investments
$
212,350

 
$
212,601

The Company reviews the individual securities in its portfolio to determine whether a decline in a security’s fair value below the amortized cost basis is other-than-temporary. The Company determined that as of January 31, 2013 and July 31, 2012, there were no investments in its portfolio that were other-than-temporarily impaired.
The following table summarizes the fair value and gross unrealized losses of the Company’s investments with unrealized losses aggregated by type of investment instrument and the length of time that individual securities have been in a continuous unrealized loss position:
 
Less than 12 Months
 
Fair
Value
 
Unrealized
Loss
 
 
 
 
 
(in thousands)
As of January 31, 2013
 
 
 
Corporate bonds
$
9,198

 
$
(3
)
U.S. government agency securities
6,600

 
(1
)
U.S. treasury bills
5,507

 
(1
)
 
$
21,305

 
$
(5
)
 
Less than 12 Months
 
Fair
Value
 
Unrealized
Loss
 
 
 
 
 
(in thousands)
As of July 31, 2012
 
 
 
Corporate bonds
$
3,922

 
$
(1
)
U.S. government agency securities
44,105

 
(8
)
 
$
48,027

 
$
(9
)
As of January 31, 2013 and July 31, 2012, no securities were in a continuous unrealized loss position for more than twelve months.

13

ARUBA NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) - Continued

7.
Balance Sheet Components
The following tables provide details of selected balance sheet items:
 
 
January 31,
2013

 
July 31,
2012

 
 
 
 
 
(in thousands)
Inventory, net
 
 
 
Raw materials
$
365

 
$
269

Finished goods
29,075

 
21,933

Total
$
29,440

 
$
22,202

 
January 31,
2013
 
July 31,
2012
 
 
 
 
 
(in thousands)
Accrued Liabilities
 
 
 
Compensation and benefits
$
26,206

 
$
20,054

Marketing
23,730

 
15,191

Contingent rights

 
1,665

Other
9,764

 
15,465

Total
$
59,700

 
$
52,375

8.
Property and Equipment, Net
Property and equipment, net consists of the following:
 
 
Estimated
Useful Lives
 
January 31,
2013

 
July 31,
2012

 
 
 
 
 
 
 
(in thousands, except estimated useful lives)
Computer equipment
2 years
 
$
19,252

 
$
16,893

Computer software
2 to 5 years
 
9,826

 
7,560

Machinery and equipment
2 years
 
26,647

 
19,965

Furniture and fixtures
5 years
 
4,134

 
3,952

Leasehold improvements
1 to 6 years
 
5,310

 
4,847

Total property and equipment, gross
 
 
65,169

 
53,217

Less: Accumulated depreciation
 
 
(40,252
)
 
(33,316
)
Total property and equipment, net
 
 
$
24,917

 
$
19,901


Depreciation and amortization expense for property and equipment, net were $3.9 million and $2.7 million for the three months ended January 31, 2013 and January 31, 2012, respectively. Depreciation and amortization expense for property and equipment, net was $7.0 million and $4.9 million for the six months ended January 31, 2013 and January 31, 2012, respectively.


14

ARUBA NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) - Continued

9.
Deferred Revenue
Deferred revenue consists of the following:
 
 
January 31,
2013

 
July 31,
2012

 
 
 
 
 
(in thousands)
Product
$
30,705

 
$
28,215

Professional services and support
59,205

 
52,387

Total deferred revenue, current
89,910

 
80,602

Professional services and support, non-current
28,200

 
22,375

Total deferred revenue, non-current
28,200

 
22,375

Total deferred revenue
$
118,110

 
$
102,977

Deferred product revenue relates to arrangements where not all revenue recognition criteria have been met. Deferred professional services and support revenue primarily represents customer payments made in advance for support contracts. Support contracts are typically billed in advance and revenue is recognized ratably over the support period, typically one to five years.
10.
Income Taxes
The Company’s effective tax rate was 33.4% and 67.0% for the three and six months ended January 31, 2013, respectively. The Company's effective tax rate was 427.2% and 293.1% for the three and six months ended January 31, 2012, respectively. The Company’s income tax provision consists of federal, foreign, and state income taxes. The effective tax rate for the three and six months ended January 31, 2013 is lower than the effective tax rate for the three and six months ended January 31, 2012 primarily due to a difference in the mix of U.S. and international income, the increase in income before income tax in fiscal 2013 combined with the effect of fixed amortization of the deferred charge discussed below, and due to an extension of the Federal research credit by Congress during the period ended January 31, 2013. The Federal research credit extension applies retroactively to our fiscal year ended July 31, 2012 and prospectively to qualifying expenditures through December 31, 2013.
The extension of the Federal research credit resulted in a $1.9 million benefit for the fiscal year ending July 31, 2013 and is now included in the projected annual tax rate. An additional $1.9 million benefit relating to the fiscal year ended July 31, 2012, was recorded for the three months ended January 31, 2013. Without the additional research tax credits, the effective tax rate for the three months ended January 31, 2013 would have been 69.5%.
The Company's effective tax rate differs from the federal statutory rate of 35% due to state taxes and significant permanent differences. These permanent differences arise primarily from taxes in foreign jurisdictions with a tax rate different from the U.S. federal statutory rate, stock-based compensation expense, research and development (“R&D”) credits, certain acquisition-related items, and the amortization of deferred tax charges related to an intercompany sale of intellectual property rights discussed below.
In fiscal 2012, the Company implemented a new structure of its corporate organization to more closely align its corporate organization with the international nature of its business activities and to reduce its overall effective tax rate through changes in how it develops and uses its intellectual property and the structure of its international procurement and sales, including transfer-price arrangements for intercompany transactions.
The Company recorded a deferred charge during the first quarter of fiscal 2012 related to the deferral of income tax expense on intercompany profits that resulted from the sale of its intellectual property rights outside of North and South America to its Irish subsidiary. The deferred charge is included in prepaid and other assets and other non-current assets on the Consolidated Balance Sheets. As of January 31, 2013, the balance in prepaid and other assets was $7.6 million, and $5.5 million in other non-current assets. The deferred charge is amortized on a straight-line basis as a component of income tax expense over three to five years, based on the economic life of the intellectual property and will increase our effective tax rate during the amortization period. The deferred charge resulted in a 23.2 point increase to our projected annual effective tax rate before discrete tax items as of January 31, 2013 from 49.6% to 72.8%. While we have not realized any tax savings to date, we expect to realize a reduction in our effective tax rate as a result of our corporate reorganization after the deferred charges have been fully amortized.


15

ARUBA NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) - Continued

The Company evaluates the realization of its deferred tax assets based on the expiration period of the asset, projections of future taxable income in the relevant tax jurisdiction, the effect of tax planning strategies, and other factors. Both positive and negative evidence is weighed using significant judgment. Based on an evaluation of these factors, the Company believes that the realization of its deferred tax assets is more likely than not and therefore its deferred tax assets are without a valuation allowance. In future periods, positive and negative evidence can change due to revised projections of future taxable income in the relevant jurisdictions and other factors listed above. If negative evidence were to outweigh positive evidence, a valuation allowance would be recorded with an increase in tax expense in the Consolidated Statements of Comprehensive Income and without any change in net cash provided by operating activities in the Consolidated Statements of Cash Flows.
11.
Equity Incentive Plans
Stock Option Activity
The following table summarizes the information about shares available for grant and outstanding stock option activity:
 
 
 
 
Options Outstanding
 
 
 
 
 
Shares
Available for
Grant
 
Number of
Shares
 
Weighted
Average
Exercise
Price
per Share
 
Weighted
Average
Fair Value
per Share
 
Weighted
Average
Remaining
Contractual
Term (Years)
 
Aggregate
Intrinsic
Value
As of July 31, 2011
274,103

 
18,164,944

 
$
6.59

 
 
 
5.0
 
$
297,688,111

Shares reserved for issuance
5,245,243

 

 
 
 
 
 
 
 
 
Restricted stock awards granted
(7,713,936
)
 

 
 
 
 
 
 
 
 
Restricted stock awards forfeited
1,579,751

 

 
 
 
 
 
 
 
 
Options granted
(177,568
)
 
177,568

 
23.71

 
$
13.08

 
 
 
 
Options exercised

 
(3,753,478
)
 
5.71

 
 
 
 
 
$
56,578,795

Options cancelled
1,325,003

 
(1,325,003
)
 
10.87

 
 
 
 
 
 
As of July 31, 2012
532,596

 
13,264,031

 
$
6.63

 
 
 
3.9
 
$
112,867,587

Shares reserved for issuance
5,576,433

 

 
 
 
 
 
 
 
 
Restricted stock awards granted
(3,909,554
)
 

 
 
 
 
 
 
 
 
Restricted stock awards forfeited
631,989

 

 
 
 
 
 
 
 
 
Options exercised

 
(1,615,882
)
 
6.09

 
 
 
 
 
$
22,293,899

Options cancelled
210,875

 
(210,875
)
 
17.36

 
 
 
 
 
 
As of January 31, 2013
3,042,339

 
11,437,274

 
$
6.51

 
 
 
3.5
 
$
189,050,712

Restricted Stock Award Activity
The following table summarizes the non-vested restricted stock awards outstanding:
 

16

ARUBA NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) - Continued

 
Shares
 
Weighted Average
Grant Date
Fair Value
per Share
As of July 31, 2011
5,093,839

 
$
20.98

Awards granted
7,713,936

 
19.34

Awards vested
(2,805,343
)
 
20.29

Awards forfeited
(1,579,751
)
 
22.15

As of July 31, 2012
8,422,681

 
$
19.49

Awards granted
3,909,554

 
19.32

Awards vested
(1,769,697
)
 
19.63

Awards forfeited
(631,989
)
 
20.81

As of January 31, 2013
9,930,549

 
$
19.31

Fair Value Disclosures
There were no stock option grants during the three and six months ended January 31, 2013. The Company granted 27,568 and 177,568 stock options during the three and six months ended January 31, 2012, respectively.
The fair value of each option grant or purchase right for the Employee Stock Purchase Plan is estimated on the date of grant using the Black-Scholes model with the following weighted average assumptions:
Employee Stock Options
 
 
Three and six months ended January 31, 2012
Risk-free interest rate
1.2%
Expected term (in years)
4.0
Dividend yield
—%
Volatility
74%
Employee Stock Purchase Plan
 
 
Three and six months ended January 31,
 
2013
 
2012
Risk-free interest rates
0.1% to 0.2%
 
0.1% to 0.2%
Expected term (in years)
0.5 to 2.0
 
0.5 to 2.0
Dividend yield
—%
 
—%
Volatility
54% to 63%
 
58% to 77%
 
Purchase date
September 1, 2012
 
September 1, 2011
Shares issued
348,520

 
409,920

Weighted average purchase price per share
$
16.65

 
$
14.88

Stock-based Compensation Expense
Stock-based compensation expense consists primarily of expenses for stock options, restricted stock awards, and employee stock purchase rights granted to employees. The following table summarizes stock-based compensation expense:

17

ARUBA NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) - Continued

 
Three months ended January 31,
 
Six months ended January 31,
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
 
(in thousands)
 
(in thousands)
Cost of revenue
$
1,679

 
$
1,377

 
$
3,180

 
$
2,636

Research and development
9,212

 
8,188

 
17,639

 
15,605

Sales and marketing
10,039

 
9,948

 
18,784

 
17,886

General and administrative
4,103

 
3,411

 
7,992

 
6,062

Total
$
25,033

 
$
22,924

 
$
47,595

 
$
42,189

The following table presents stock-based compensation expense by award-type:
 
Three months ended January 31,
 
Six months ended January 31,
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
 
(in thousands)
 
(in thousands)
Stock options
$
2,510

 
$
5,037

 
$
5,233

 
$
9,412

Stock awards
19,673

 
15,593

 
36,973

 
28,702

Employee stock purchase plan
2,850

 
2,294

 
5,389

 
4,075

Total
$
25,033

 
$
22,924

 
$
47,595

 
$
42,189

Stock-based compensation expense for the three months ended January 31, 2013 and 2012 included $3.2 million and $2.2 million, respectively, for stock awards issuable under the Company's executive officer and corporate bonus plans. For the six months ended January 31, 2013 and 2012, stock-based compensation expense included $6.7 million and $5.0 million, respectively, for stock awards issuable under the bonus plans.
Stock Repurchase Program
On June 13, 2012, the Company announced a stock repurchase program for up to $100.0 million of the Company's common stock. The Company is authorized to make repurchases in the open market until June 6, 2014, and any such repurchases will be funded from available working capital. The number of share repurchases and the timing of repurchases are based on the price of its common stock, general business and market conditions, and other investment considerations. Shares are retired upon repurchase. The Company’s policy related to repurchases of its common stock is to charge any excess of cost over par value entirely to additional paid-in capital.
During the three and six months ended January 31, 2013, the Company repurchased a total of 1,014,001 and 1,604,142 shares for a total purchase price of $19.0 million and $30.5 million, respectively. As of January 31, 2013, the Company repurchased a cumulative total of 3,012,646 shares for a total purchase price of $50.4 million, with $49.6 million remaining authorized under the stock repurchase program. There was no such repurchase during the three and six months ended January 31, 2012.
12.
Segment Information and Significant Customers
The Company operates in one reportable segment—selling its ArubaOS operating system, controllers, wireless access points, switches, application software modules, access management solution, multi-vendor management solution software, and professional services and support.
A reportable segment is defined as a component of an enterprise for which separate financial information is available and is evaluated regularly by the chief operating decision maker, or decision making group, for resource allocation and for assessing performance. The Company’s chief operating decision maker is its chief executive officer (“CEO”), who reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. Because the Company has one business segment, the Company reports a single operating segment and the CEO evaluates performance based primarily on revenue in the geographic locations in which the Company operates. Revenue is attributed by geographic location based on the ship-to location of the Company’s customers. The Company’s assets are primarily located in the U.S. and not allocated to any specific region.
The following presents total revenue by geographic region:
 

18

ARUBA NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) - Continued

 
Three months ended January 31,
 
Six months ended January 31,
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
 
(in thousands)
 
(in thousands)
United States
$
94,005

 
$
76,728

 
$
186,757

 
$
157,647

Europe, Middle East and Africa
28,579

 
24,550

 
50,129

 
42,649

Asia Pacific and Japan
27,816

 
21,116

 
52,469

 
38,716

Rest of World
4,962

 
3,881

 
10,489

 
6,615

Total
$
155,362

 
$
126,275

 
$
299,844

 
$
245,627

The Company’s product revenue was $130.9 million and $106.0 million for the three months ended January 31, 2013 and 2012, respectively. The Company’s product revenue was $250.1 million and $207.1 million for the six months ended January 31, 2013 and 2012, respectively.
Professional services and support revenue was $24.5 million and $20.3 million for the three months ended January 31, 2013 and 2012, respectively. The Company’s professional services and support revenue was $49.7 million and $38.5 million for the six months ended January 31, 2013 and 2012, respectively.
The following table presents significant channel partners contributing revenue in excess of 10% of total revenue (* indicates less than 10%):
 
 
Three months ended January 31,
 
Six months ended January 31,
 
2013
 
2012
 
2013
 
2012
ScanSource, Inc. (“Catalyst”)
19.9
%
 
19.1
%
 
20.0
%
 
20.0
%
Synnex Corp.
10.0
%
 
*

 
*

 
*

Avnet Logistics U.S. LP
*

 
12.5
%
 
*

 
14.2
%
Alcatel-Lucent
*

 
10.1
%
 
*

 
*

The following table presents significant channel partners as a percentage of total gross accounts receivable (*indicates less than 10%):
 
 
January 31,
2013

 
July 31,
2012

ScanSource, Inc. (“Catalyst”)
25.5
%
 
15.7
%
Synnex Corp.
11.9
%
 
*

Avnet Logistics U.S. LP
*

 
19.0
%
13.
Commitments and Contingencies
Legal Matters
The Company is involved in disputes, litigation, and other legal actions. While the Company currently believes that there are no existing claims or proceedings that are likely to have a material adverse effect on its financial position, the outcome of these matters is currently not determinable. There are many uncertainties associated with any litigation and these actions or other third-party claims against the Company may cause the Company to incur costly litigation and/or substantial settlement charges. In addition, the resolution of any patent related litigation may require the Company to make royalty payments, which could adversely affect gross margins in future periods. If any of those events were to occur, the Company’s business, financial condition, results of operations, and cash flows could be adversely affected. The actual liability in any such matters may be materially different from the Company’s estimates, which could result in the need to adjust the liability and record additional expenses.
Lease Obligations
The Company leases office spaces under non-cancelable operating leases with various expiration dates through March 2018. The terms of certain operating leases provide for rental payments on a graduated scale. Future minimum lease payments under non-cancelable operating leases are as follows:
 

19

ARUBA NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) - Continued

 
Operating Leases
 
(in thousands)
Remaining six months of fiscal 2013
$
3,015

Year ending July 31,
 
2014
6,060

2015
5,688

2016
5,084

2017
881

thereafter
46

Total minimum payments
$
20,774

Non-cancelable purchase commitments
The Company outsources the production of its hardware to third-party contract manufacturers, and enters into various inventory-related purchase commitments with these contract manufacturers and other suppliers. In addition, from time to time, the Company also enters into significant information technology and marketing agreements with its vendors, which are non-cancelable. The Company had $25.0 million and $46.1 million in non-cancelable purchase commitments as of January 31, 2013 and July 31, 2012, respectively. The Company expects to sell all products that it has committed to purchase from its third-party contract manufacturers and other suppliers.
Warranties
The warranty liability is included as a component of accrued liabilities on the Consolidated Balance Sheets. Changes in the warranty liability are as follows:
 
 
Warranty
Amount
 
(in thousands)
As of July 31, 2012
$
818

Provision
539

Obligations fulfilled during period
(373
)
As of January 31, 2013
$
984

 
Warranty
Amount
 
(in thousands)
As of July 31, 2011
$
404

Provision
425

Obligations fulfilled during period
(231
)
As of January 31, 2012
$
598

Indemnification
In its sales agreements, the Company may agree to indemnify its indirect sales channels and end user customers for certain expenses or liabilities resulting from claimed infringements of patents, trademarks or copyrights of third parties. The terms of these indemnification provisions are generally perpetual any time after execution of the agreement. The agreements generally limit the scope of the available remedies in a variety of industry-standard methods, including, but not limited to, product usage and geography-based limitations, a right to control the defense or settlement of any claim, and a right to replace or modify the infringing products to make them non-infringing. In certain circumstances, the Company may be subject to uncapped indemnity obligations. To date the Company has not paid any amounts to settle claims or defend lawsuits pursuant to such indemnification provisions. The Company believes the likelihood of such claims is remote and is unable to reasonably estimate the maximum amount that could be payable under these provisions since these obligations are not capped but are conditional to the unique facts and circumstances involved. Accordingly, the Company has no liabilities recorded for these agreements as of January 31, 2013 and July 31, 2012.

20


Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
In addition to historical information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements include, among other things, statements concerning our expectations:
that revenue from our indirect channels will continue to constitute a significant majority of our future revenue;
that competition will intensify in the future as other companies introduce new products in the same markets we serve or intend to enter;
that our product offerings associated with our Mobile Virtual Enterprise (“MOVE”) architecture, including our new ClearPass and Aruba Instant products, will enable broader networking initiatives by both our current and potential customers;
regarding the growth of our offshore operations and the establishment of additional offshore capabilities for certain engineering and general and administrative functions;
that, within our indirect channel, sales through our value-added distributors (“VADs”) and original equipment manufacturers (“OEMs”) will continue to be significant;
regarding continued momentum in our “MOVE” architecture initiatives, including network rightsizing, and adoption of our ClearPass access management system and Aruba Instant;
that international revenue will increase in absolute dollars and increase as a percentage of total revenue in fiscal 2013 compared to fiscal 2012;
that research and development expenses for fiscal 2013 will increase on an absolute dollar basis and increase as a percentage of revenue compared to fiscal 2012;
that sales and marketing expenses for fiscal 2013 will continue to be our most significant operating expense and will increase on an absolute dollar basis as we continue to invest strategically in this area and decrease as a percentage of revenue compared to fiscal 2012;
that general and administrative expenses for fiscal 2013 will increase in absolute dollars and decrease as a percentage of revenue compared to fiscal 2012;
that our existing cash, cash equivalents, short-term investments and cash generated from operations will be sufficient to meet our needs;
that we will ensure the safety and preservation of our invested funds by limiting default risk, market risk and reinvestment risk; and
that we will increase our market penetration and extend our geographic reach through our network of channel partners,
as well as other statements regarding our future operations, financial condition, prospects and business strategies. These forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this report, and in particular, the risks discussed under the heading “Risk Factors” in Part II, Item 1A of this report and those discussed in other documents we file with the Securities and Exchange Commission. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
The following discussion and analysis of our financial condition and results of operations should be read together with our Consolidated Financial Statements and related notes included elsewhere in this report.
Overview
We are a leading provider of next-generation network access solutions for the mobile enterprise. Our MOVE architecture leverages Aruba’s diverse products (including our ArubaOS operating system, controllers, wireless access points, switches, application software modules, access management solution, and multi-vendor management solution software) to unify wired

21


and wireless network infrastructures into one seamless access solution for traveling business professionals, remote workers, branch offices, corporate headquarters employees and guests. With the Aruba MOVE architecture, access privileges are linked to a user’s identity and context. That means an enterprise workforce has consistent, secure access to network resources based on who they are, where they are, what devices and applications they are using, and how they are connected.
Demand for our products is driven by mobility and the proliferation of Wi-Fi-enabled mobile devices. These devices – which have no Ethernet port – are connecting to enterprise networks in unprecedented numbers and we expect they will quickly surpass desktop connections. Aruba meets this challenge by designing and selling products intended to eliminate the cost and complexity of managing separate wired and wireless access policies. By implementing our solutions, our customers need fewer ports and consequently less equipment in the wiring closet – effectively rightsizing our customers’ access infrastructure.
Aruba’s MOVE architecture provides context-aware networking for the post-PC era. Mobility network services are delivered centrally from the data center across thin network access devices or on-ramps. At the heart of Aruba MOVE, a single set of mobility network services manages security, policy and network performance for every user and device on the network. This mobility- and user-centric approach makes it possible to re-architect the access network to simultaneously provide workforce mobility and reduce costs. To connect users into the network, whether at work, home, or on the road, Aruba access on-ramps include wireless, wired, and VPN products. Device configuration, security policies, and reporting are centrally managed, effectively making installation a zero-touch experience.
A key new addition to our MOVE architecture is our ClearPass Access Management System. ClearPass is designed to make it easy for IT-issued and personal mobile devices to securely connect to any network, which we believe makes ClearPass an attractive solution for "bring you own device", or BYOD, provisioning and onboarding. By centralizing access policies across the entire network, ClearPass automates differentiated user and device access, policy management and the provisioning of devices for secure network access and posture assessment. This ensures that each user has the right access privileges based on who they are and what device they are using. Given the increasing numbers of consumer devices – Windows, Mac OS X, iOS, Android and Linux – attempting to connect to enterprise networks and the increasing demand for access to those networks by a broader range of users – employees, visitors, customers and contractors – we believe ClearPass provides a compelling solution to these customer needs.
Another addition to the MOVE architecture is Aruba Instant, a controller-less Wi-Fi solution that is designed to combine ease-of-use and cost-effectiveness with best-in-class security, resiliency and intelligence. In Aruba Instant mode, a single access point manages the other Aruba Instant APs in the WLAN, while the free Aruba Activate service offers zero-touch provisioning and cloud-based inventory management. This allows our customers to power-up one Aruba Instant AP, which will then automatically obtain its configuration and become operational. To grow the network, customers simply plug in additional access points. The deployment process is thereby substantially simplified, saving our customers’ time and operational expenses.
Our products have been sold to over 20,000 customers worldwide, including some of the largest and most complex global organizations. We have implemented a two-tier distribution model in most areas of the world, including the U.S., with value added distributors (“VADs”) and original equipment manufacturers (“OEMs”) selling our portfolio of products, including a variety of our support services, to a diverse number of value added resellers (“VARs”) and managed service providers. Our focus continues to be management of our channel including selection and growth of high prospect partners, activation of our VARs and VADs through active training and field collaboration, and evolution of our channel programs in consultation with our partners.
Major Trends Affecting Our Financial Results
Worldwide Economic Conditions
Our business depends on the overall demand for IT initiatives and on the economic health and general willingness of our current and prospective customers to make capital commitments. If the conditions in the U.S., European and global economic environments remain uncertain or continue to be volatile, or if they deteriorate further, our business, operating results, and financial condition may be materially adversely affected. Economic weakness, customer financial difficulties and constrained spending on IT initiatives have resulted, and may in the future result, in challenging and delayed sales cycles and could negatively impact our ability to forecast future periods. Sequestration or other significant cuts in U.S. government spending could adversely affect our future results. We cannot be assured of the level of IT spending, the deterioration of which could have a material adverse effect on our results of operations and growth rates.
Revenue
Our ability to increase our product revenue will depend significantly on continued growth in the market for enterprise mobility and remote networking solutions, continued acceptance of our products in the marketplace, our ability to continue to

22


attract new customers, our ability to compete, the willingness of customers to displace wired networks with wireless LANs, our ability to retain existing distribution partners, and our ability to continue to sell into our installed base of existing customers. Our growth in support revenue is dependent upon increasing the number of products under support contracts, which is dependent on both growing our installed base of customers and renewing existing support contracts. Our future profitability and rate of growth, if any, will also be directly affected by the timing and size of orders, product and channel mix, average selling prices, costs of our products, our ability to effectively manage our two-tier distribution model, general economic conditions, and the extent to which we invest in our sales and marketing, research and development, and general and administrative resources.
The revenue growth that we have experienced has been driven primarily by an expansion of our customer base coupled with increased purchases from existing customers. We believe the growth we have experienced is the result of business enterprises and other organizations needing to provide secure mobility to their users in a manner that we believe is more cost effective than the traditional approach of using port-centric networks. While we have experienced a slower revenue growth rate compared to the previous fiscal year, our revenue grew 23% and 22% in the three and six months ended January 31, 2013, respectively, compared to the comparable periods in fiscal 2012. We believe that our product offerings associated with our Mobile Virtual Enterprise (“MOVE”) architecture, including our new ClearPass and Aruba Instant products, will enable broader networking initiatives by both our current and potential customers. Each quarter, our ability to meet our product revenue expectations is dependent upon (1) new orders received, shipped, and recognized in a given quarter, (2) the amount of orders booked but not shipped in prior quarters that are shipped in the current quarter, and (3) the amount of deferred revenue entering a given quarter. Our product deferred revenue is comprised of:
product orders that have shipped but where the terms of the agreement, typically with our large customers, contain acceptance terms and conditions or other terms that require that the revenue be deferred until all revenue recognition criteria are met; and
product orders shipped to our VADs and OEMs for which we have not yet received persuasive evidence of sell-through from the VADs or OEMs.
We typically ship products within 10 days after the receipt of an order.
Costs and Expenses
Operating expenses consist of research and development, sales and marketing, and general and administrative expenses. The largest component of our operating expenses in each of these categories is personnel costs. Personnel costs consist of salaries, benefits and incentive compensation for our employees, including commissions for sales personnel and stock-based compensation for employees. As of January 31, 2013, we had 1,407 employees worldwide compared to 1,293 employees at October 31, 2012, and 1,223 employees at July 31, 2012. The increase in employees is the most significant driver behind the increase in costs and operating expenses in the three and six months ended January 31, 2013. Going forward, we expect to continue to hire employees throughout the company.
Stock Repurchase
On June 13, 2012, we announced a stock repurchase program for up to $100.0 million of our common stock. We are authorized to make repurchases in the open market until June 6, 2014, and any such repurchases will be funded from available working capital. The number of share repurchases and the timing of repurchases are based on the price of our common stock, general business and market conditions, and other investment considerations. Shares are retired upon repurchase. Our policy related to repurchases of our common stock is to charge any excess of cost over par value entirely to additional paid-in capital.
During the three and six months ended January 31, 2013, we repurchased a total of 1,014,001 and 1,604,142 shares for a total purchase price of $19.0 million and $30.5 million, respectively. As of January 31, 2013, we repurchased a cumulative total of 3,012,646 shares for a total purchase price of $50.4 million, with $49.6 million remaining authorized under the stock repurchase program. There was no such repurchase during the three and six months ended January 31, 2012.
Revenue, Cost of Revenue and Operating Expenses
Revenue
We derive our revenue from sales of our ArubaOS operating system, controllers, wired and wireless access points, switches, application software modules, access-management solution, multi-vendor management solution software, and professional services and support.

23


We sell our products directly through our sales force and indirectly through partners including VADs, VARs, service providers and OEMs. We expect revenue from indirect channels to continue to constitute a significant majority of our future revenue.
We sell our products to channel partners and end customers located in the United States, Europe, Middle East, Africa, Asia Pacific, Japan and other parts of the world. We continue to expand into international locations and introduce our products in new markets, and we expect international revenue to increase in absolute dollars and increase as a percentage of total revenue in fiscal 2013 compared to fiscal 2012. For more information about our international revenue, see Note 12 of the Notes to Consolidated Financial Statements.
Professional services revenue consists of consulting and training services. Consulting services primarily consist of installation support services. Training services are typically instructor led courses on the use of our products. Support services typically consist of software updates, on a when-and-if available basis, telephone and internet access to technical support personnel and hardware support. We provide customers with rights to unspecified software product upgrades and to maintenance releases and patches released during the term of the support period.
Cost of Revenue
Cost of product revenue consists primarily of manufacturing costs for our products, shipping and logistics costs, and expenses for inventory obsolescence and warranty obligations. We utilize third parties to manufacture our products and perform shipping logistics. We have outsourced the substantial majority of our manufacturing, repair and supply chain operations. Accordingly, the substantial majority of our cost of product revenue consists of payments to our contract manufacturers. Our contract manufacturers produce our products in China and Singapore using quality assurance programs and standards that we jointly established. Manufacturing, engineering and documentation controls are conducted at our facilities in Sunnyvale, California, Bangalore, India and Beijing, China. Cost of product revenue also includes amortization expense from our intangible assets.
Cost of professional services and support revenue is primarily comprised of personnel costs, including stock-based compensation, of providing technical support. In addition, we engage third-party support vendors to complement our internal support resources, the costs of which are included within costs of professional services and support revenue.
Gross Margin
Our gross margin has been, and will continue to be, affected by a variety of factors, including:
the proportion of our products that are sold through direct versus indirect channels;
product mix and average selling prices;
new product introductions, such as ClearPass and Aruba Instant additions to our MOVE architecture, and product enhancements made by us as well as those made by our competitors;
pressure to discount our products in response to our competitors’ discounting practices;
mix of revenue attributed to our international regions and vertical markets;
demand for our products and services;
our ability to attain volume manufacturing pricing from our contract manufacturers and our component suppliers;
losses associated with excess and obsolete inventory;
growth in our headcount and other related costs incurred in our customer support organization;
costs associated with manufacturing overhead;
our ability to manage freight costs; and
amortization expense from our intangible assets.
Due to higher net effective discounts for products sold through our indirect channel, our overall gross margins for indirect channel sales are typically lower than those associated with direct sales. We expect product revenue from our indirect channel to continue to constitute a significant majority of our total revenue, which, by itself, negatively impacts our gross margins. Further, we expect that within our indirect channel, sales through our VADs and OEMs will continue to be significant, which

24


will negatively impact our gross margins as VADs and OEMs generally experience a larger net effective discount than our other channel partners.
Research and Development Expenses
Research and development expenses primarily consist of personnel costs and facilities costs. We expense research and development expenses as incurred. We are devoting substantial resources to the continued 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 it is essential to maintaining our competitive position. For fiscal 2013, we expect research and development expenses to increase on an absolute dollar basis and increase as a percentage of revenue compared to fiscal 2012.
Sales and Marketing Expenses
Sales and marketing expenses represent the largest component of our operating expenses and primarily consist of personnel costs, sales commissions, marketing programs and facilities costs. A portion of the amortization expense related to our intangible assets is also included in sales and marketing expenses. Marketing programs are intended to generate revenue from new and existing customers and are expensed as incurred. We plan to continue to invest strategically in sales and marketing with the intent to add new customers and increase penetration within our existing customer base, expand our domestic and international sales and marketing activities, build brand awareness and sponsor additional marketing events. We expect future sales and marketing expenses to continue to be our most significant operating expense. Generally, sales personnel are not immediately productive, and thus, the increase in sales and marketing expenses that we experience as we hire additional sales personnel is not expected to immediately result in increased revenue. As a result, these expenses will reduce our operating margin until such sales personnel become productive and generate revenue. Accordingly, the timing of sales personnel hiring and the rate at which they become productive will affect our future performance. For fiscal 2013, we expect sales and marketing expenses to increase on an absolute dollar basis and decrease as a percentage of revenue compared to fiscal 2012.
General and Administrative Expenses
General and administrative expenses primarily consist of personnel and facilities costs related to our executive, finance, human resource, information technology and legal organizations, as well as insurance, investor relations, and IT infrastructure costs related to our enterprise resource planning (“ERP”) system. Further, our general and administrative expenses include professional services consisting of outside legal, audit, Sarbanes-Oxley and IT consulting costs. We have incurred in the past, and may continue to incur, significant legal costs defending ourselves against claims made by third parties. These expenses are expected to continue as part of our ongoing operations and depending on the timing and outcome of lawsuits and the legal process, could have a significant impact on our financial statements. For fiscal 2013, we expect general and administrative expenses to increase in absolute dollars and decrease as a percentage of revenue compared to fiscal 2012. However, fluctuations in third-party professional services can cause an increase in any particular quarter.
Other Income, net
Other income, net includes interest income on cash balances, accretion of discount or amortization of premium on short-term investments, losses or gains on foreign exchange rate changes, and in connection with our acquisition of Azalea Networks ("Azalea") in September 2010, changes in the fair value or gains from the release of our contingent rights liability.
Critical Accounting Policies
Our Consolidated Financial Statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). These accounting principles require us to make estimates and judgments that affect the reported amounts of assets and liabilities as of the date of the Consolidated Financial Statements, as well as the reported amounts of revenue and expenses during the periods presented. We believe that the estimates and judgments upon which we rely are reasonable based upon information available to us at the time that these estimates and judgments are made. To the extent there are material differences between these estimates and actual results, our Consolidated Financial Statements will be affected. The accounting policies that reflect our more significant estimates and judgments and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include revenue recognition, share-based compensation, inventory valuation, allowance for doubtful accounts, impairment of goodwill and intangible assets, and accounting for income taxes. Our critical accounting policies are disclosed in our Form 10-K for the fiscal year ended July 31, 2012. There were no changes to our critical accounting policies during the three and six months ended January 31, 2013.


25


Results of Operations
The following table presents our historical operating results as a percentage of revenue for the periods indicated:
 
 
Three months ended January 31,
 
Six months ended January 31,
 
2013
 
2012
 
2013
 
2012
Revenue
 
 
 
 
 
 
 
Product
84.3
%
 
83.9
 %
 
83.4
%
 
84.3
 %
Professional services and support
15.7
%
 
16.1
 %
 
16.6
%
 
15.7
 %
Total revenue
100.0
%
 
100.0
 %
 
100.0
%
 
100.0
 %
Cost of revenue
 
 
 
 
 
 
 
Product
24.2
%
 
24.1
 %
 
24.6
%
 
25.5
 %
Professional services and support
4.5
%
 
4.0
 %
 
4.3
%
 
3.9
 %
Gross profit
71.3
%
 
71.9
 %
 
71.1
%
 
70.6
 %
Operating expenses
 
 
 
 
 
 
 
Research and development
22.3
%
 
22.1
 %
 
22.3
%
 
21.3
 %
Sales and marketing
37.0
%
 
39.4
 %
 
37.1
%
 
38.8
 %
General and administrative
8.0
%
 
10.0
 %
 
8.1
%
 
9.7
 %
Total operating expenses
67.3
%
 
71.5
 %
 
67.5
%
 
69.8
 %
Operating income
4.0
%
 
0.4
 %
 
3.6
%
 
0.8
 %
Other income, net
 
 
 
 
 
 
 
Interest income
0.2
%
 
0.2
 %
 
0.2
%
 
0.2
 %
Other income, net
0.6
%
 
2.2
 %
 
0.4
%
 
1.5
 %
Total other income, net
0.8
%
 
2.4
 %
 
0.6
%
 
1.7
 %
Income before provision for income taxes
4.8
%
 
2.8
 %
 
4.2
%
 
2.5
 %
Provision for income taxes
1.6
%
 
11.8
 %
 
2.8
%
 
7.3
 %
Net income (loss)
3.2
%
 
(9.0
)%
 
1.4
%
 
(4.8
)%

26


Revenue
The following table presents our revenue, by revenue source, for the periods presented:
 
<
 
Three months ended January 31,
 
Six months ended January 31,
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
 
(in thousands)
 
(in thousands)
Total revenue
$
155,362

 
$
126,275

 
$
299,844

 
$
245,627

Type of revenue:
 
 
 
 
 
 
 
Product
$
130,901

 
$
105,970

 
$
250,123

 
$
207,101

Professional services and support
24,461

 
20,305

 
49,721

 
38,526

Total revenue
$
155,362

 
$
126,275

 
$
299,844

 
$