10-Q 1 arun-2013430x10q.htm 10-Q ARUN-2013.4.30-10Q

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 April 30, 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 June 4, 2013 was 114,167,932.
 



ARUBA NETWORKS, INC.
INDEX
 
 
Page
No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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)
 
 
April 30,
2013
 
July 31,
2012
 
 
 
 
 
(in thousands, except per share data)
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
177,446

 
$
133,629

Short-term investments
263,436

 
212,601

Accounts receivable, net
71,014

 
80,190

Inventory, net
27,873

 
22,202

Deferred cost of revenue
8,148

 
11,241

Prepaids and other
20,665

 
18,996

Deferred income tax assets, current
36,064

 
34,584

Total current assets
604,646

 
513,443

Property and equipment, net
26,607

 
19,901

Goodwill
56,947

 
56,947

Intangible assets, net
21,341

 
27,036

Deferred income tax assets, non-current
15,062

 
20,664

Other non-current assets
6,417

 
10,905

Total assets
$
731,020

 
$
648,896

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities
 
 
 
Accounts payable
$
16,936

 
$
22,504

Accrued liabilities
56,570

 
52,375

Income taxes payable, current
4,428

 
2,032

Deferred revenue, current
89,342

 
80,602

Total current liabilities
167,276

 
157,513

Deferred revenue, non-current
29,108

 
22,375

Other non-current liabilities
7,544

 
2,118

Total liabilities
203,928

 
182,006

Commitments and contingencies (Note 13)

 

Stockholders’ equity
 
 
 
Common stock: $0.0001 par value; 350,000 shares authorized at April 30, 2013 and July 31, 2012; 115,677 and 111,529 shares issued and outstanding at April 30, 2013 and July 31, 2012, respectively
12

 
11

Additional paid-in capital
658,402

 
582,077

Accumulated other comprehensive loss
(1,502
)
 
(1,405
)
Accumulated deficit
(129,820
)
 
(113,793
)
Total stockholders’ equity
527,092

 
466,890

Total liabilities and stockholders’ equity
$
731,020

 
$
648,896

See Notes to Consolidated Financial Statements.

3


ARUBA NETWORKS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
 
 
Three months ended April 30,
 
Nine months ended April 30,
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
 
(in thousands, except per share data)
Revenue
 
 
 
 
 
 
 
Product
$
121,195

 
$
110,531

 
$
371,318

 
$
317,632

Professional services and support
25,941

 
21,363

 
75,662

 
59,889

Total revenue
147,136

 
131,894

 
446,980

 
377,521

Cost of revenue
 
 
 
 
 
 
 
Product
36,782

 
34,014

 
110,608

 
96,535

Professional services and support
7,190

 
5,497

 
20,138

 
15,073

Total cost of revenue
43,972

 
39,511

 
130,746

 
111,608

Gross profit
103,164

 
92,383

 
316,234

 
265,913

Operating expenses
 
 
 
 
 
 
 
Research and development
34,983

 
27,383

 
101,634

 
79,776

Sales and marketing
57,199

 
49,974

 
168,516

 
145,309

General and administrative
13,405

 
11,723

 
37,755

 
35,521

Total operating expenses
105,587

 
89,080

 
307,905

 
260,606

Operating income (loss)
(2,423
)
 
3,303

 
8,329

 
5,307

Other income (loss), net
 
 
 
 
 
 
 
Interest income
266

 
301

 
875

 
876

Other income (loss), net
(114
)
 
(675
)
 
1,140

 
2,883

Total other income (loss), net
152

 
(374
)
 
2,015

 
3,759

Income (loss) before income taxes
(2,271
)
 
2,929

 
10,344

 
9,066

Provision for (benefit from) income taxes
17,920

 
(3,099
)
 
26,371

 
14,887

Net income (loss)
$
(20,191
)
 
$
6,028

 
$
(16,027
)
 
$
(5,821
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation gain (loss), net of tax

 
770

 
11

 
(1,546
)
Unrealized gain (loss) on short-term investments, net of tax
(46
)
 
14

 
(108
)
 
18

Comprehensive income (loss)
$
(20,237
)
 
$
6,812

 
$
(16,124
)
 
$
(7,349
)
Shares used in computing net income (loss) per common share—basic
114,411

 
110,236

 
112,975

 
108,086

Net income (loss) per common share—basic
$
(0.18
)
 
$
0.05

 
$
(0.14
)
 
$
(0.05
)
Shares used in computing net income (loss) per common share—diluted
114,411

 
121,895

 
112,975

 
108,086

Net income (loss) per common share—diluted
$
(0.18
)
 
$
0.05

 
$
(0.14
)
 
$
(0.05
)
See Notes to Consolidated Financial Statements.

4


ARUBA NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
Nine months ended April 30,
 
2013
 
2012
 
 
 
 
 
(in thousands)
Cash flows from operating activities
 
 
 
Net loss
$
(16,027
)
 
$
(5,821
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation and amortization
16,976

 
14,217

Provision for doubtful accounts
313

 
17

Write-downs for excess and obsolete inventory
4,891

 
3,845

Stock-based compensation expense
70,995

 
61,973

Accretion of purchase discounts on short-term investments
888

 
869

Loss on disposal of fixed assets
205

 
539

Change in carrying value of contingent rights liability
(1,665
)
 
(2,992
)
Deferred income taxes
4,033

 
20,862

Recovery of escrow funds

 
(702
)
Excess tax benefit associated with stock-based compensation
(6,274
)
 
(11,648
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
8,862

 
(14,635
)
Inventory
(13,098
)
 
3,694

Prepaids and other
(939
)
 
(11,214
)
Deferred costs
3,092

 
(2,113
)
Other assets
5,982

 
(11,572
)
Accounts payable
(5,234
)
 
(7,206
)
Deferred revenue
15,473

 
22,884

Other current and non-current liabilities
6,704

 
(273
)
Income taxes payable
12,726

 
10,051

Net cash provided by operating activities
107,903

 
70,775

Cash flows from investing activities
 
 
 
Purchases of short-term investments
(246,406
)
 
(136,524
)
Proceeds from sales of short-term investments
75,806

 
48,030

Proceeds from maturities of short-term investments
118,023

 
44,200

Purchases of property and equipment
(15,990
)
 
(8,805
)
Investment in privately-held company
(1,500
)
 

Cash paid in acquisitions, net of cash acquired

 
(21,086
)
Net cash used in investing activities
(70,067
)
 
(74,185
)
Cash flows from financing activities
 
 
 
Proceeds from issuance of common stock
30,199

 
31,186

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

Excess tax benefit associated with stock-based compensation
6,274

 
11,648

Net cash provided by financing activities
5,962

 
42,834

Effect of exchange rate changes on cash and cash equivalents
19

 
(143
)
Net increase in cash and cash equivalents
43,817

 
39,281

Cash and cash equivalents, beginning of period
133,629

 
80,773

Cash and cash equivalents, end of period
$
177,446

 
$
120,054

Supplemental disclosure of cash flow information
 
 
 
Income taxes paid
$
2,933

 
$
4,986

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 its customers, enabling them to provide network access to traveling business professionals, remote workers and employees and guests of branch offices and corporate headquarters. 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 the Americas, Europe, the Middle East and the Asia Pacific and Japan 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 Commission ("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 April 30, 2013, its consolidated comprehensive income for the three and nine months ended April 30, 2013 and 2012, and its cash flows for the nine months ended April 30, 2013 and 2012. The results for the three and nine months ended April 30, 2013 are not necessarily indicative of the results to be expected for any subsequent quarter or for the fiscal year ending July 31, 2013.
Significant Accounting Policies
There have been no significant changes in the Company’s accounting policies during the nine months ended April 30, 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 except for the inclusion of the software development cost policy which became a significant accounting policy during the nine months ended April 30, 2013.
Software Development Costs
The Company capitalizes certain costs incurred to develop software for internal use and amortizes the capitalized costs on a straight-line basis over the estimated useful life of two to five years. Such capitalized costs include external direct costs utilized in developing or obtaining the applications and payroll and payroll-related expenses for employees who are directly associated with the applications. Capitalization of such costs begins when the internal-use software system has reached the application development stage and ceases at the point in which the project is substantially complete and ready for its intended purpose. Capitalized internal-use software is included in the computer software category within property and equipment, net, in the Company's Consolidated Balance Sheets. The Company capitalized costs associated with internal-use software totaling $2.2 million as of April 30, 2013. There were no capitalized costs as of July 31, 2012.
The Company expenses costs to develop software products or the software component of products to be marketed to external users, before technological feasibility of such products is reached. The Company assesses whether the development costs incurred after the establishment of technological feasibility but before the release of its products should be capitalized. As of April 30, 2013, the Company has determined that technological feasibility was reached shortly before the release of these products and as a result, the development costs were not material, and accordingly, were expensed as incurred.

6

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

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 April 30, 2013 is $3.7 million.
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. The Company believes 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 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.

7

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

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 the Company's discounted present value analysis of future cash flows, which reflects the Company's 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.
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 nine months ended April 30, 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:

8

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

 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
 
 
 
 
 
 
 
(in thousands)
As of April 30, 2013
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Cash and cash equivalents:
 
 
 
 
 
 
 
Cash deposits with third-party financial institutions
$
160,251

 
$

 
$

 
$
160,251

Money market funds
13,695

 

 

 
13,695

U.S. government agency securities

 
2,000

 

 
2,000

Commercial paper

 
1,500

 

 
1,500

Short-term investments:
 
 
 
 
 
 
 
Certificates of deposit
5,013

 

 

 
5,013

Corporate bonds

 
80,791

 

 
80,791

U.S. government agency securities

 
125,090

 

 
125,090

U.S. treasury bills

 
41,946

 

 
41,946

Commercial paper

 
8,991

 

 
8,991

Municipal notes and bonds

 
1,605

 

 
1,605

Total assets measured and recorded at fair value
$
178,959

 
$
261,923

 
$

 
$
440,882

 
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):
 

9

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

 
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 April 30, 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 nine months ended April 30, 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 April 30, 2013 and July 31, 2012, the Company had no other assets or liabilities measured at fair value on a non-recurring basis.

10

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 nine months ended April 30, 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 nine months ended April 30, 2012, the Company recorded other expense of $0.2 million and other income, net of $3.0 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 April 30, 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 April 30, 2013
 
 
 
 
 
 
 
Existing technology
2 to 7 years
 
$
35,183

 
$
(19,726
)
 
$
15,457

Patents/core technology
4 to 6 years
 
7,046

 
(4,568
)
 
2,478

Customer contracts
6 to 7 years
 
7,233

 
(5,224
)
 
2,009

Support agreements
5 to 6 years
 
2,917

 
(2,797
)
 
120

Tradenames/trademarks
1 to 5 years
 
750

 
(750
)
 

Non-compete agreements
2 years
 
912

 
(835
)
 
77

Sub-total
 
 
$
54,041

 
$
(33,900
)
 
$
20,141

In-process research and development
 
 
1,200

 

 
1,200

Total
 
 
$
55,241

 
$
(33,900
)
 
$
21,341


11

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 April 30,
 
Nine months ended April 30,
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
 
(in thousands)
 
(in thousands)
Cost of product revenues
$
1,451

 
$
1,723

 
$
4,322

 
$
4,436

Cost of professional services and support revenues
61

 
135

 
331

 
405

Sales and marketing
340

 
353

 
1,024

 
1,459

Research & development
6

 

 
18

 

Total amortization expense
$
1,858

 
$
2,211

 
$
5,695

 
$
6,300

The following table consists of estimated future amortization expense of intangible assets as of April 30, 2013, and excludes in-process research and development assets of $1.2 million as of April 30, 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 fourth quarter of fiscal 2013 and will be amortized over their remaining useful life upon completion.
 
Amount
 
(in thousands)
Remaining three months of fiscal 2013
$
1,767

Years ending July 31,
 
2014
6,768

2015
5,992

2016
2,866

2017
1,281

Thereafter
1,467

Total
$
20,141

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: 

12

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

 
Three months ended April 30,
 
Nine months ended April 30,
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
 
(in thousands, except per
 
(in thousands, except per
 
share data)
 
share data)
Net income (loss)
$
(20,191
)
 
$
6,028

 
$
(16,027
)
 
$
(5,821
)
Weighted-average common shares outstanding—basic
114,411

 
110,236

 
112,975

 
108,086

Dilutive effect of potential common shares

 
11,659

 

 

Weighted-average common shares outstanding—diluted
114,411

 
121,895

 
112,975

 
108,086

Net income (loss) per share—basic
$
(0.18
)
 
$
0.05

 
$
(0.14
)
 
$
(0.05
)
Net income (loss) per share—diluted
$
(0.18
)
 
$
0.05

 
$
(0.14
)
 
$
(0.05
)
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 April 30,
 
Nine months ended April 30,
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
 
(in thousands)
 
(in thousands)
Options to purchase common stock
9,021

 
1,673

 
9,334

 
12,556

Restricted stock awards
3,159

 
2,587

 
3,332

 
3,583

Contingently issuable shares
549

 

 
533

 
272

Employee stock purchase plan
60

 
226

 
223

 
60

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 April 30, 2013
 
 
 
 
 
 
 
Corporate bonds
$
80,785

 
$
40

 
$
(34
)
 
$
80,791

U.S. government agency securities
125,033

 
63

 
(6
)
 
125,090

U.S. treasury bills
41,900

 
46

 

 
41,946

Commercial paper
8,986

 
5

 

 
8,991

Certificates of deposit
5,000

 
13

 

 
5,013

Municipal notes and bonds
1,608

 

 
(3
)
 
1,605

Total short-term investments
$
263,312

 
$
167

 
$
(43
)
 
$
263,436

 
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:
 

13

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

 
Cost
Basis
 
Fair
Value
 
 
 
 
 
(in thousands)
As of April 30, 2013
 
 
 
One year or less
$
149,953

 
$
150,037

One to two years
113,359

 
113,399

Total short-term investments
$
263,312

 
$
263,436

 
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 April 30, 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 April 30, 2013
 
 
 
Corporate bonds
$
38,778

 
$
(34
)
U.S. government agency securities
37,937

 
(6
)
U.S. treasury bills
1,605

 
(3
)
 
$
78,320

 
$
(43
)
 
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 April 30, 2013 and July 31, 2012, no securities were in a continuous unrealized loss position for more than twelve months.

14

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

7.
Balance Sheet Components
The following tables provide details of selected balance sheet items:
 
 
April 30,
2013
 
July 31,
2012

 
 
 
 
 
(in thousands)
Inventory, net
 
 
 
Raw materials
$
329

 
$
269

Finished goods
27,544

 
21,933

Total
$
27,873

 
$
22,202

 
April 30,
2013
 
July 31,
2012
 
 
 
 
 
(in thousands)
Accrued Liabilities
 
 
 
Compensation and benefits
$
17,887

 
$
20,054

Marketing
24,052

 
15,191

Contingent rights

 
1,665

Other
14,631

 
15,465

Total
$
56,570

 
$
52,375

8.
Property and Equipment, Net
Property and equipment, net consists of the following:
 
 
Estimated
Useful Lives
 
April 30,
2013
 
July 31,
2012

 
 
 
 
 
 
 
(in thousands, except estimated useful lives)
Computer equipment
2 years
 
$
20,413

 
$
16,893

Computer software
2 to 5 years
 
12,295

 
7,560

Machinery and equipment
2 years
 
28,025

 
19,965

Furniture and fixtures
5 years
 
4,266

 
3,952

Leasehold improvements
1 to 6 years
 
5,810

 
4,847

Total property and equipment, gross
 
 
70,809

 
53,217

Less: Accumulated depreciation
 
 
(44,202
)
 
(33,316
)
Total property and equipment, net
 
 
$
26,607

 
$
19,901


Depreciation and amortization expense for property and equipment, net were $4.3 million and $3.0 million for the three months ended April 30, 2013 and April 30, 2012, respectively. Depreciation and amortization expense for property and equipment, net was $11.3 million and $7.9 million for the nine months ended April 30, 2013 and April 30, 2012, respectively.


15

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

9.
Deferred Revenue
Deferred revenue consists of the following:
 
 
April 30,
2013
 
July 31,
2012

 
 
 
 
 
(in thousands)
Product
$
26,066

 
$
28,215

Professional services and support
63,276

 
52,387

Total deferred revenue, current
89,342

 
80,602

Professional services and support, non-current
29,108

 
22,375

Total deferred revenue, non-current
29,108

 
22,375

Total deferred revenue
$
118,450

 
$
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
Income tax expense is recognized based on management's best estimate of the annual income tax rate expected for the full fiscal year. The estimated annual effective tax rate used for the year ending July 31, 2013 is 252.7%, which has been applied to the income before taxes for the nine months ended April 30, 2013. The Company's estimated annual 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 the amortization of deferred tax charges related to an intercompany sale of intellectual property rights, non-deductible stock-based compensation expense, a valuation allowance on California research and development (“R&D”) tax credits, and U.S. tax reserves on foreign tax matters. The estimated annual effective tax rate for the year ending July 31, 2012, applied to income before taxes for the nine months ended April 30, 2012, was 173.7%.
The actual tax rate for the three and nine months ended April 30, 2013 was (789.1)% and 254.9%, respectively. The significant negative tax rate for the three months ended April 30, 2013 is caused primarily by the decrease in the Company's annual forecasted income for income taxes as of April 30, 2013 compared to its prior forecast as of January 31, 2013. This decrease in annual forecasted income before income taxes, combined with the effect of fixed amortization of the deferred charge on the sale of intellectual property increased the Company's annual effective tax rate to 252.7% and resulted in a significant tax expense adjustment in the three months ended April 30, 2013.
The actual tax rate for the three and nine months ended April 30, 2012 was (105.8)% and 164.2%, respectively. The actual tax rate for the three and nine months ended April 30, 2012 was impacted by permanent differences which arose primarily from the amortization of deferred tax charges related to an intercompany sale of intellectual property rights, non-deductible stock-based compensation expense, and U.S. tax reserves on foreign tax matters.
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 April 30, 2013, the balance in prepaid and other assets was $7.6 million, and $0.7 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 the Company's effective tax rate during the amortization period. The deferred charge resulted in a 95.2 point increase to the Company's projected annual effective tax rate before discrete tax items as of April 30, 2013 from 157.5% to 252.7%. While the Company has not realized

16

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

any tax savings to date, it expects to realize a reduction in its effective tax rate as a result of its corporate reorganization after the deferred charges have been fully amortized.
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; therefore, its deferred tax assets are without a valuation allowance. However, the Company believes it is more likely than not that certain California R&D tax credits will not be realized. Therefore, the Company has recorded a valuation allowance on certain California R&D tax credit carryforward generated in prior fiscal years , and a full valuation on the current fiscal year generated California R&D tax credit carryforward generated in prior fiscal years. 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, the Company would record a higher valuation allowance 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
(4,641,401
)
 

 
 
 
 
 
 
 
 
Restricted stock awards forfeited
987,626

 

 
 
 
 
 
 
 
 
Options exercised

 
(2,315,239
)
 
7.00

 
 
 
 
 
$
33,168,956

Options cancelled
255,642

 
(255,642
)
 
17.24

 
 
 
 
 
 
As of April 30, 2013
2,710,896

 
10,693,150

 
$
6.29

 
 
 
3.2
 
$
173,463,844

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

17

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
4,641,401

 
20.11

Awards vested
(2,603,130
)
 
22.70

Awards forfeited
(987,626
)
 
19.98

As of April 30, 2013
9,473,326

 
$
18.86

Fair Value Disclosures
There were no stock option grants during the three and nine months ended April 30, 2013 and during the three months ended April 30, 2012. The Company granted 177,568 stock options during the nine months ended April 30, 2012.
Employee Stock Options
The fair value of each option grant is estimated on the date of grant using the Black-Scholes model with the following weighted average assumptions:
 
Nine months ended
April 30, 2012
Risk-free interest rate
1.2%
Expected term (in years)
4.0
Dividend yield
—%
Volatility
74%
Employee Stock Purchase Plan
The fair value of the 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:
 
Three months ended April 30,
 
Nine months ended April 30,
 
2013
 
2012
 
2013
 
2012
Risk-free interest rates
0.1% to 0.3%
 
0.1% to 0.3%
 
0.1% to 0.3%
 
0.1% to 0.3%
Expected term (in years)
0.5 to 2.0
 
0.5 to 2.0
 
0.5 to 2.0
 
0.5 to 2.0
Dividend yield
—%
 
—%
 
—%
 
—%
Volatility
54% to 61%
 
56% to 77%
 
54% to 63%
 
56% to 77%
 
Purchase date
March 1, 2013
 
March 1, 2012
Shares issued
489,587

 
442,758

Weighted average purchase price per share
$
16.74

 
$
16.37

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:

18

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

 
Three months ended April 30,
 
Nine months ended April 30,
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
 
(in thousands)
 
(in thousands)
Cost of revenue
$
1,585

 
$
1,208

 
$
4,765

 
$
3,844

Research and development
9,052

 
7,090

 
26,691

 
22,696

Sales and marketing
9,358

 
8,415

 
28,142

 
26,301

General and administrative
3,405

 
3,071

 
11,397

 
9,132

Total
$
23,400

 
$
19,784

 
$
70,995

 
$
61,973

The following table presents stock-based compensation expense by award-type:
 
Three months ended April 30,
 
Nine months ended April 30,
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
 
(in thousands)
 
(in thousands)
Stock options
$
2,358

 
$
3,982

 
$
7,591

 
$
13,393

Stock awards
18,822

 
13,775

 
55,795

 
42,477

Employee stock purchase plan
2,220

 
2,027

 
7,609

 
6,103

Total
$
23,400

 
$
19,784

 
$
70,995

 
$
61,973

Stock-based compensation expense for the three months ended April 30, 2013 included $2.4 million for stock awards issuable under the Company's executive officer and corporate bonus plans. No stock-based compensation expense related to stock awards issuable under the bonus plan was recorded for the three months ended April 30, 2012. For the nine months ended April 30, 2013 and April 30, 2012, stock-based compensation expense included $9.1 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 nine months ended April 30, 2013, the Company repurchased a total 1,604,142 shares for a total purchase price of $30.5 million. As of April 30, 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. The Company did not make any stock repurchases during the three months ended April 30, 2013 or during the three and nine months ended April 30, 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:
 

19

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

 
Three months ended April 30,
 
Nine months ended April 30,
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
 
(in thousands)
 
(in thousands)
United States
$
90,978

 
$
77,445

 
$
277,735

 
$
235,092

Europe, Middle East and Africa
28,165

 
24,443

 
78,294

 
67,092

Asia Pacific and Japan
22,794

 
25,646

 
75,263

 
64,362

Rest of World
5,199

 
4,360

 
15,688

 
10,975

Total
$
147,136

 
$
131,894

 
$
446,980

 
$
377,521

The Company’s product revenue was $121.2 million and $110.5 million for the three months ended April 30, 2013 and April 30, 2012, respectively. The Company’s product revenue was $371.3 million and $317.6 million for the nine months ended April 30, 2013 and April 30, 2012, respectively.
Professional services and support revenue was $25.9 million and $21.4 million for the three months ended April 30, 2013 and 2012, respectively. The Company’s professional services and support revenue was $75.7 million and $59.9 million for the nine months ended April 30, 2013 and April 30, 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 April 30,
 
Nine months ended April 30,
 
2013
 
2012
 
2013
 
2012
ScanSource, Inc. (“Catalyst”)
19.2
%
 
21.0
%
 
19.8
%
 
20.3
%
Synnex Corp.
12.3
%
 
*

 
10.3
%
 
*

Avnet Logistics U.S. LP
*

 
12.8
%
 
*

 
13.7
%
The following table presents significant channel partners as a percentage of total gross accounts receivable (* indicates less than 10%):
 
 
April 30, 2013
 
July 31,
2012

ScanSource, Inc. (“Catalyst”)
20.0
%
 
15.7
%
Avnet Logistics U.S. LP
*

 
19.0
%
13.
Commitments and Contingencies
Legal Matters
The Company is involved in disputes, claims, litigation, investigations, proceedings and other legal actions, consisting of intellectual property, commercial, securities, and employment matters from time to time that arise in the ordinary course of business, including the legal matters identified below.
U.S. Federal Court Class Action Litigation. On May 23, 2013, a purported stockholder class action lawsuit captioned Mazzafero v. Aruba Networks, Inc., et al., was filed in the United States District Court for the Northern District of California against the Company and certain of its officers. The purported class action alleges claims for violations of the federal securities laws, and seeks unspecified compensatory damages and other relief. The Company believes that it has meritorious defenses to these claims and intends to defend the litigation vigorously. Based on information currently available, the Company has determined that the amount of any possible loss is not reasonably estimable.
Nomadix, Inc v. Aruba Networks, Inc. In November 2009, Nomadix, Inc. filed a lawsuit against multiple defendants including Aruba Networks. The suit is filed in the United States District Court for the Central District of California. The plaintiff claims that the defendants infringe several of their patents; however, only one patent has been asserted against Aruba, U.S. Patent No. 6,636,894. The Company believes that it has meritorious defenses to these claims and intends to defend the litigation vigorously. Based on information currently available, the Company has determined that the amount of any possible loss is not reasonably estimable.

20

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

The Company reviews all legal matters at least quarterly and assesses whether an accrual for loss contingencies needs to be recorded. The assessment reflects the impact of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. The Company records an accrual for loss contingencies when management believes that it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Legal matters are subject to uncertainties and are inherently unpredictable; however, the Company believes that it has valid defenses with respect to its pending legal matters. 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. If an unfavorable resolution were to occur, there exists the possibility of a material adverse impact on the Company's consolidated financial condition, results of operations or cash flows of the period in which the resolution occurs or on future periods. As of April 30, 2013, the Company has accrued loss contingencies for certain legal matters; however, the accrual for loss contingencies associated with such matters is not material.
In addition, these actions or other third-party claims against the Company may cause the Company to incur costly litigation and/or substantial settlement charges. Furthermore, 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 in any particular period by an unfavorable resolution of one or more of these contingencies.
Lease Obligations
The Company leases office spaces under non-cancelable operating leases with various expiration dates through June 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:
 
Operating Leases
 
(in thousands)
Remaining three months of fiscal 2013
$
1,809

Year ending July 31,
 
2014
7,164

2015
6,812

2016
6,926

2017
2,600

Thereafter
1,341

Total minimum payments
$
26,652

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 $31.5 million and $46.1 million in non-cancelable purchase commitments as of April 30, 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:
 

21

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

 
Warranty
Amount
 
(in thousands)
As of July 31, 2012
$
818

Provision
539

Obligations fulfilled during period
(678
)
As of April 30, 2013
$
679


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

Provision
645

Obligations fulfilled during period
(374
)
As of April 30, 2012
$
675

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 because 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 April 30, 2013 and July 31, 2012.
14. Subsequent Event
Business Combinations
On May 13, 2013, the Company acquired Meridian Apps, Inc. (“Meridian”), a privately-held mobile-software company providing indoor location-based software. As a result of the acquisition, Meridian became a wholly owned subsidiary of the Company.
The purchase price was $15.7 million, all of which was paid in cash. In addition, the Company is obligated to make additional cash consideration of up to $10.2 million to certain former Meridian employees who became the Company’s employees, which will be made over a period of approximately three years from the closing date, subject to certain continued employment restrictions. Acquisition-related costs, included in general and administrative expenses, were not material.
As a result of the acquisition, the Company expects to offer new location-based services by combining its unique, network-based contextual information about users, devices and applications with Meridian's Wi-Fi based wayfinding solution for smartphones and tablets.
The initial accounting for the business combination is still ongoing as of June 6, 2013, the date which this Form 10-Q is issued. It is expected that intangible assets and goodwill will be recorded on the consolidated balance sheets; however, as the initial accounting for the business combination has not been completed at the time of the issuance of these consolidated financial statements, further details have not yet been disclosed. Based on the evaluation of the significance of the acquisition, the Company determined that the acquisition does not meet the conditions needed to file separate financial statements and related pro-forma financial statements.

22

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

Legal Matters
U.S. Federal Court Class Action Litigation. On May 23, 2013, a purported stockholder class action lawsuit captioned Mazzafero v. Aruba Networks, Inc., et al., was filed in the United States District Court for the Northern District of California against the Company and certain of its officers. The purported class action alleges claims for violations of the federal securities laws, and seeks unspecified compensatory damages and other relief. The Company believes that it has meritorious defenses to these claims and intends to defend the litigation vigorously. Based on information currently available, the Company has determined that the amount of any possible loss is not reasonably estimable.





23


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 mobile devices will surpass desktop connections;
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;
that we will increase offshore operations by establishing 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;
that our momentum in our MOVE architecture initiatives, including network rightsizing and adoption of our ClearPass access management system and Aruba Instant will continue;
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 remain consistent or 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,

24


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 our customers, enabling them to provide network access to traveling business professionals, remote workers and employees and guests of branch offices and corporate headquarters. 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 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. We also sell our products and support services directly through our own sales force. In addition to direct sales, our sales force is engaged with our VARs and VADs to provide solutions for our end customers. 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 global economic environment remain uncertain or continue to be volatile, or if it deteriorates further, our business, operating results, and financial condition may be adversely affected in a material way. 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

25


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 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 our revenue growth rate was slower than that in the previous fiscal year, our revenue grew 11.6% and 18.4% in the three and nine months ended April 30, 2013, respectively, compared to our revenue for the same periods in fiscal 2012. We believe that our slower revenue growth was attributable to overall weakness in the global macroeconomic conditions, particularly in the Asia Pacific and Japan region, as well as increased competition during the third quarter of fiscal 2013.
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 that is recognized as revenue in the 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 April 30, 2013, we had 1,460 employees worldwide compared to 1,407 employees at January 31, 2013, 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 nine months ended April 30, 2013. Despite the slowdown in our revenue growth, we expect to continue investing in our infrastructure and operations, including continuation of hiring of 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 nine months ended April 30, 2013, we repurchased a total of 1,604,142 shares for a total purchase price of $30.5 million. As of April 30, 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. We made no stock repurchase during the three months ended April 30, 2013, and no repurchases during the three and nine months ended April 30, 2012.

26


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.
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 and/or product bundling 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;

27


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 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 except for costs associated with the development of internal-use software, which meet certain capitalization criteria. 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 remain consistent or 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 information technology ("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 (Loss), Net
Other income (loss), 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

28


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 nine months ended April 30, 2013.

Results of Operations
The following table presents our historical operating results as a percentage of revenue for the periods indicated: 
 
Three months ended April 30,
 
Nine months ended April 30,
 
2013
 
2012
 
2013
 
2012
Revenue
 
 
 
 
 
 
 
Product
82.4
 %
 
83.8
 %
 
83.1
 %
 
84.1
 %
Professional services and support
17.6
 %
 
16.2
 %
 
16.9
 %
 
15.9
 %
Total revenue
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of revenue
 
 
 
 
 
 
 
Product
25.0
 %
 
25.8
 %
 
24.8
 %
 
25.6
 %
Professional services and support
4.9
 %
 
4.2
 %
 
4.5
 %
 
4.0
 %
Gross profit
70.1
 %
 
70.0
 %
 
70.7
 %
 
70.4
 %
Operating expenses
 
 
 
 
 
 
 
Research and development
23.7
 %
 
20.7
 %
 
22.7
 %
 
21.1
 %
Sales and marketing
38.9
 %
 
37.9
 %
 
37.7
 %
 
38.5
 %
General and administrative
9.1
 %
 
8.9
 %
 
8.4
 %
 
9.4
 %
Total operating expenses
71.7
 %
 
67.5
 %
 
68.8
 %
 
69.0
 %
Operating income (loss)
(1.6
)%
 
2.5
 %
 
1.9
 %
 
1.4
 %
Other income (loss), net
 
 
 
 
 
 
 
Interest income
0.2
 %
 
0.2
 %
 
0.2
 %
 
0.2
 %
Other income (loss), net
(0.1
)%
 
(0.4
)%
 
0.2
 %
 
0.8
 %
Total other income (loss), net