10-Q 1 q2-13form10xq.htm FORM 10-Q Q2-13 Form 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
[ 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: 001-35507
INFOBLOX INC.
(Exact name of registrant as specified in its charter)
Delaware
 
20-0062867
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 

4750 Patrick Henry Drive
Santa Clara, California 95054
(Address of principal executive offices)
(408) 625-4200
(Registrant’s telephone number, including area code)
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  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    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.
Large accelerated filer
 
¨
  
Accelerated filer
 
¨
Non-accelerated filer
 
x  (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  ý
Shares outstanding of the registrant’s common stock:
Class
 
Outstanding at February 28, 2013
Common Stock, $0.0001 par value per share
 
48,869,084



INFOBLOX INC.
INDEX
 
 
 
 
PART I – FINANCIAL INFORMATION
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.


2




PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
INFOBLOX INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
 
 
January 31, 2013
 
July 31, 2012
 
 
(Unaudited)
 
 
ASSETS
 
 
 
 
CURRENT ASSETS:
 
 
 
 
Cash and cash equivalents
 
$
84,544

 
$
156,613

Short-term investments
 
95,269

 

Accounts receivable, net
 
31,652

 
26,819

Inventory
 
2,985

 
2,560

Deferred tax assets
 
1,545

 
1,577

Prepaid expenses and other current assets
 
5,618

 
4,159

Total current assets
 
221,613

 
191,728

Property and equipment, net
 
12,693

 
6,498

Restricted cash
 
3,501

 
3,803

Intangible assets, net
 
6,655

 
7,817

Goodwill
 
32,726

 
32,726

Other assets
 
355

 
411

TOTAL ASSETS
 
$
277,543

 
$
242,983

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
CURRENT LIABILITIES:
 
 
 
 
Accounts payable and accrued liabilities
 
$
13,040

 
$
11,607

Accrued compensation
 
11,355

 
10,295

Deferred revenue, net
 
61,798

 
56,184

Total current liabilities
 
86,193

 
78,086

Deferred revenue, net
 
24,332

 
20,483

Deferred tax liability
 
1,494

 
1,494

Other liabilities
 
6,358

 
845

TOTAL LIABILITIES
 
118,377

 
100,908

Commitments and contingencies (Note 5)
 

 

STOCKHOLDERS’ EQUITY:
 
 
 
 
Convertible preferred stock, $0.0001 par value per share—5,000,000 shares authorized as of January 31, 2013 and July 31, 2012; no shares issued or outstanding as of January 31, 2013 and July 31, 2012
 

 

Common stock, $0.0001 par value per share—100,000,000 shares authorized; 48,452,234 shares and 45,737,770 shares issued and outstanding as of January 31, 2013 and July 31, 2012
 
5

 
5

Additional paid-in capital
 
272,937

 
250,206

Accumulated other comprehensive loss
 
(4
)
 

Accumulated deficit
 
(113,772
)
 
(108,136
)
TOTAL STOCKHOLDERS’ EQUITY
 
159,166

 
142,075

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
 
$
277,543

 
$
242,983



See accompanying Notes to Condensed Consolidated Financial Statements.

3


INFOBLOX INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
 
 
Three Months Ended January 31,
 
 Six Months Ended January 31,
 
 
2013
 
2012
 
2013
 
2012
Net revenue:
 
 
 
 
 
 
 
 
Products and licenses
 
$
30,807

 
$
23,547

 
$
57,905

 
$
46,238

Services
 
23,632

 
17,840

 
46,039

 
34,504

Total net revenue
 
54,439

 
41,387

 
103,944

 
80,742

Cost of revenue:
 
 
 
 
 
 
 
 
Products and licenses
 
7,100

 
5,030

 
12,940

 
9,724

Services
 
4,542

 
3,736

 
8,791

 
7,307

Total cost of revenue
 
11,642

 
8,766

 
21,731

 
17,031

Gross profit
 
42,797

 
32,621

 
82,213

 
63,711

Operating expenses:
 
 
 
 
 
 
 
 
Research and development
 
10,593

 
8,979

 
20,807

 
17,885

Sales and marketing
 
29,108

 
20,605

 
54,739

 
40,278

General and administrative
 
5,493

 
3,716

 
11,151

 
7,393

Total operating expenses
 
45,194

 
33,300

 
86,697

 
65,556

Loss from operations
 
(2,397
)
 
(679
)
 
(4,484
)
 
(1,845
)
Other expense, net
 
(220
)
 
(171
)
 
(326
)
 
(339
)
Loss before provision for income taxes
 
(2,617
)
 
(850
)
 
(4,810
)
 
(2,184
)
Provision for income taxes
 
629

 
226

 
826

 
661

Net loss
 
$
(3,246
)
 
$
(1,076
)
 
$
(5,636
)
 
$
(2,845
)
 
 
 
 
 
 
 
 
 
Net loss per share - basic and diluted
 
$
(0.07
)
 
$
(0.10
)
 
$
(0.12
)
 
$
(0.26
)
 
 
 
 
 
 
 
 
 
Weighted-average shares used in computing net loss per share - basic and diluted
 
47,827

 
11,137

 
46,940

 
11,087

See accompanying Notes to Condensed Consolidated Financial Statements.


4


INFOBLOX INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)
 
 
Three Months Ended January 31,
 
 Six Months Ended January 31,
 
 
2013
 
2012
 
2013
 
2012
Net loss
 
$
(3,246
)
 
$
(1,076
)
 
$
(5,636
)
 
$
(2,845
)
Other comprehensive loss
 
 
 
 
 
 
 
 
Unrealized holding gains (losses) on short-term investments arising during the period, net of tax and reclassification adjustments for amounts included in net loss
 
56

 

 
(4
)
 

Comprehensive loss
 
$
(3,190
)
 
$
(1,076
)
 
$
(5,640
)
 
$
(2,845
)

See accompanying Notes to Condensed Consolidated Financial Statements.


5


INFOBLOX INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
 
 Six Months Ended January 31,
 
 
2013
 
2012
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
Net loss
 
$
(5,636
)
 
$
(2,845
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
 
Stock-based compensation
 
10,540

 
3,737

Depreciation and amortization
 
2,929

 
2,864

Excess tax benefits from employee stock plans
 
(218
)
 

Amortization of investment premium
 
132

 

Change in fair value of convertible preferred stock warrant liability
 

 
80

Other
 
57

 

Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable, net
 
(4,833
)
 
(1,740
)
Inventory
 
(425
)
 
(158
)
Prepaid expenses, other current assets and other assets
 
(1,604
)
 
(1,947
)
Accounts payable and accrued liabilities
 
784

 
63

Accrued compensation
 
1,060

 
58

Deferred revenue, net
 
9,463

 
9,007

Other liabilities
 
5,513

 
(73
)
Net cash provided by operating activities
 
17,762

 
9,046

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
Purchases of short-term investments
 
(96,125
)
 

Proceeds from maturities of short-term investments
 
720

 

Purchases of property and equipment
 
(6,736
)
 
(1,786
)
Decrease in restricted cash
 
532

 

Net cash used in investing activities
 
(101,609
)
 
(1,786
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
Proceeds from issuance of common stock under the employee stock plans
 
11,795

 
516

Payment of remaining unpaid initial public offering costs
 
(235
)
 

Excess tax benefits from employee stock plans
 
218

 

Net cash provided by financing activities
 
11,778

 
516

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
 
(72,069
)
 
7,776

CASH AND CASH EQUIVALENTS—Beginning of period
 
156,613

 
42,207

CASH AND CASH EQUIVALENTS—End of period
 
$
84,544

 
$
49,983

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
 
Purchases of property and equipment not yet paid
 
$
1,538

 
$

Cash paid for income taxes, net
 
$
487

 
$
625

Change in liability due to vesting of early exercised stock options, net
 
$
192

 
$
95

See accompanying Notes to Condensed Consolidated Financial Statements.

6

INFOBLOX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



NOTE 1. DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business
Infoblox Inc. (together with our subsidiaries, “we,” “us” or “our”) was originally incorporated in the State of Illinois in February 1999 and was reincorporated in the State of Delaware in May 2003. We are headquartered in Santa Clara, California and have subsidiaries and representative offices located throughout the world. We provide a broad family of enterprise and service provider-class solutions to automate management of the critical network infrastructure services needed for secure, scalable and fault-tolerant connections between applications, devices and users.

Initial Public Offering
On April 25, 2012, we completed our initial public offering of our common stock whereby 6,869,343 shares of common stock were sold by us (inclusive of 1,125,000 shares of common stock from the full exercise of the overallotment option of shares granted to the underwriters) and 1,755,657 shares of common stock were sold by selling stockholders. The public offering price of the shares sold in the offering was $16.00 per share. The aggregate offering price for shares sold by us in the offering was approximately $109.9 million. The net proceeds from the offering were $98.2 million after deducting underwriting discounts of approximately $7.7 million and commissions and offering expenses of approximately $4.0 million. We did not receive any proceeds from the sales of shares by the selling stockholders.

Secondary Offering
On October 11, 2012, we closed a secondary offering, in which certain stockholders of our company offered 5,000,000 shares of common stock at a price to the public of $20.00 per share. The aggregate offering price for shares sold in the offering was $96.0 million, net of underwriting discounts and commissions. The underwriters did not exercise their option to purchase 750,000 additional shares of common stock from our selling stockholders. We did not receive any proceeds from the sale of shares in this offering. In connection with this offering, we incurred approximately $0.8 million expenses, which were included in general and administrative expenses in the condensed consolidated statement of operations for the three months ended October 31, 2012.
Basis of Presentation
The condensed consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries. Intercompany transactions and balances have been eliminated. The accompanying condensed consolidated balance sheet as of January 31, 2013, the condensed consolidated statements of operations and the condensed consolidated statements of comprehensive loss for the three and six months ended January 31, 2013 and 2012 and the condensed consolidated statements of cash flows for the six months ended January 31, 2013 and 2012 are unaudited. The condensed consolidated balance sheet as of July 31, 2012 was derived from the audited consolidated balance sheet as of July 31, 2012. These unaudited condensed consolidated financial statements and accompanying notes should be read together with the audited consolidated financial statements in Item 8 of our Annual Report on Form 10-K for the fiscal year ended July 31, 2012.
The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or 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. We believe the unaudited condensed consolidated financial statements have been prepared on the same basis as the audited financial statements and include all adjustments necessary for the fair presentation of our balance sheet as of January 31, 2013, our results of operations and comprehensive loss for the three and six months ended January 31, 2013 and 2012 and cash flows for the six months ended January 31, 2013 and 2012. All adjustments are of a normal recurring nature. 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 year ending July 31, 2013.

7

INFOBLOX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Significant Accounting Policies
We describe our significant accounting policies in Note 1 to the consolidated financial statements in Item 8 of our Annual Report on Form 10-K for the fiscal year ended July 31, 2012. Except for the fair value and cash, cash equivalents and short-term investments policies described below, there have been no other significant changes in our accounting policies during the three and six months ended January 31, 2013, as compared to the significant accounting policies described in our Annual Report on Form 10-K for the year ended July 31, 2012.

Cash, Cash Equivalents and Short-term Investments

Cash and Cash Equivalents

All highly liquid investments purchased with an original maturity of three months or less are classified as cash and cash equivalents. Cash and cash equivalents consist of cash on hand, demand deposits with banks, highly liquid investments in money market funds, U.S. Treasury securities and certificates of deposit which are readily convertible into cash.

Short-term Investments
 
Investments with original maturities at purchase of greater than three months are classified as short-term or long-term investments. Management determines the appropriate classification of securities at the time of purchase and re-evaluates such classification as of each balance sheet date.

Our investments in publicly-traded debt securities are classified as available-for-sale. Available-for-sale investments are initially recorded at cost and periodically adjusted to fair value in the condensed consolidated balance sheets. Unrealized gains and losses on these investments are reported as a separate component of accumulated other comprehensive income (loss). Realized gains and losses are determined based on the specific identification method and are reported in the condensed consolidated statements of operations. The investments are adjusted for amortization of premiums and discounts to maturity and such amortization is included in other expense, net.

We recognize an impairment charge for available-for-sale investments when a decline in the fair value of our investments below the cost basis is determined to be other than temporary. We consider various factors in determining whether to recognize an impairment charge, including the length of time the investment has been in a loss position, the extent to which the fair value has been less than the cost basis, the investment's financial condition and near-term prospects, and our intent to sell, or whether it is more likely than not we will be required to sell, the investment before recovery of the investment's amortized cost basis. If we determine that the decline in an investment's fair value is other than temporary, the difference is recognized as an impairment loss in our condensed consolidated statements of operations. During the three and six months ended January 31, 2013, we did not consider any of our investments to be other-than-temporarily impaired.


8

INFOBLOX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Fair Value
Fair value is defined as the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining fair value, we consider the principal or most advantageous market in which we transact, and consider assumptions that market participants would use when pricing the asset or liability. We apply the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
Level I - Quoted prices in active markets for identical assets or liabilities.
Level II - 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. These inputs are valued using market based approaches.
Level III - Inputs are unobservable inputs based on management assumptions. These inputs, if any, are valued using internal financial models.
Use of Estimates
The preparation of the accompanying condensed consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Those management estimates and assumptions affect revenue recognition, allowances for doubtful accounts and sales returns, valuation of inventory, determination of fair value of stock-based awards, valuation of goodwill and intangible assets acquired, impairment of goodwill and other intangible assets, amortization of intangible assets, contingencies and litigation and accounting for income taxes, including the valuation reserve on deferred tax assets and uncertain tax positions. We evaluate our estimates and assumptions on an ongoing basis using historical experience and other factors and adjust those estimates and assumptions when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ from these estimates and assumptions, and those differences could be material to the condensed consolidated financial statements.

Concentrations of Risk
Financial instruments that potentially subject us to concentrations of credit risk consist of cash, cash equivalents, short-term investments, restricted cash and accounts receivable. Our cash, cash equivalents, short-term investments and restricted cash are invested in high-credit quality financial instruments with banks and financial institutions. Such deposits may be in excess of insured limits provided on such deposits.
We mitigate credit risk in respect to accounts receivable by performing ongoing credit evaluations of our customers and maintaining a reserve for potential credit losses. In addition, we generally require our customers to prepay for maintenance and support services to mitigate the risk of uncollectible accounts receivable.
Significant customers are those which represent more than 10% of our total net revenue or gross accounts receivable balance at each respective balance sheet date. For the three and six months ended January 31, 2013, one distributor, Exclusive Networks, accounted for 13.2% and 12.1% of our total net revenue. For the three and six months ended January 31, 2012, no customer represented more than 10% of our total net revenue. As of January 31, 2013, Exclusive Networks and Intelligent Decisions Inc., a reseller, accounted for 16.4% and 10.4% of our total gross accounts receivable. As of July 31, 2012, Exclusive Networks accounted for 10.5% of our total gross accounts receivable. We believe it is unlikely that the loss of any of our channel partners would have a long term material adverse effect on our total net revenue as we believe end-users would likely purchase our products from a different channel partner. However, a loss of any one of these channel partners could have a material adverse impact during the transition period.


9

INFOBLOX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Recently Issued Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2011-05, Presentation of Comprehensive Income (“ASU 2011-05”), which requires an entity to present total comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements and eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. In addition, in December 2011, the FASB issued ASU No. 2011-12, Topic 220 - Comprehensive Income ("ASU 2011-12"), which defers the requirement to present components of reclassifications of other comprehensive income on the face of the statement of income. We adopted both standards during the first quarter of fiscal 2013 and the adoption did not have any impact on our financial position or results of operations. We now present comprehensive loss in a separate statement following the condensed consolidated statements of operations.

In August 2011, the FASB issued ASU No. 2011-08, Testing Goodwill for Impairment (“ASU 2011-08”) to simplify how an entity tests goodwill for impairment. The amendment will allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. An entity no longer will be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. ASU 2011-08 is effective for us in fiscal 2013.  We adopted this standard during the first quarter of fiscal 2013 and the adoption did not have a material impact on our condensed consolidated financial statements.

In January 2013, the FASB issued ASU No. 2013-02, Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income ("ASU No. 2013-02"), 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. For other amounts that are not required to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required that provide additional detail about those amounts. The amendments in ASU No. 2013-02 supersede the presentation requirements for reclassifications out of accumulated other comprehensive income in ASU No. 2011-05 and ASU No. 2011-12. ASU No. 2013-02 is effective for us in the third quarter of fiscal 2013. We do not expect the adoption of this standard to have a material impact on our financial condition and results of operations.


NOTE 2. NET INCOME (LOSS) PER SHARE
We compute basic net income (loss) per share using the weighted average number of common shares outstanding during the period. We compute diluted net income per share using the weighted average number of common shares and dilutive potential common shares outstanding during the period. Dilutive potential common shares include shares issuable upon the exercise of stock options or warrants, upon the conversion of convertible preferred stock and upon the vesting of restricted stock units, or RSUs, under the treasury stock method.
In loss periods, basic net loss per share and diluted net loss per share are the same since the effect of potential common shares is anti-dilutive and therefore excluded.
The following outstanding weighted-average shares of common stock equivalents were excluded from the computation of diluted net loss per share for the periods presented because including them would have been antidilutive:
 
 
 
Three Months Ended January 31,
 
 Six Months Ended January 31,
 
 
2013
 
2012
 
2013
 
2012
 
 
(In thousands)
Stock options to purchase common stock
 
5,497

 
7,458

 
6,449

 
7,069

Restricted stock units
 
858

 

 
38

 

Common stock warrants
 
18

 
336

 
18

 
336

Convertible preferred stock
 

 
26,841

 

 
26,841

Convertible preferred stock warrants
 

 
57

 

 
57

 

10

INFOBLOX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



NOTE 3. CASH EQUIVALENTS, SHORT-TERM INVESTMENTS, RESTRICTED CASH AND FAIR VALUE MEASUREMENTS

Cash Equivalents, Short-term Investments and Restricted Cash

The following table summarizes our cash equivalents, short-term investments and restricted cash as of January 31, 2013:
 
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Estimated Fair Value
 
 
(In thousands)
Cash equivalents:
 
 
 
 
 
 
 
 
Money market funds
 
$
5,120

 
$

 
$

 
$
5,120

FDIC-backed certificates of deposit
 
240

 

 

 
240

Total cash equivalents
 
5,360

 

 

 
5,360

Short-term investments:
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
65,685

 
2

 
(5
)
 
65,682

U.S. government agency securities
 
20,504

 
5

 
(3
)
 
20,506

FDIC-backed certificates of deposit
 
9,081

 
5

 
(5
)
 
9,081

Total short-term investments
 
95,270

 
12

 
(13
)
 
95,269

Restricted cash:
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
3,403

 

 
(3
)
 
3,400

Total cash equivalents, short-term investments and restricted cash
 
$
104,033

 
$
12

 
$
(16
)
 
$
104,029


The following table presents the maturities of our short-term investments which are classified as available-for-sale securities as of January 31, 2013:
 
 
Amortized Cost
 
Estimated Fair Value
 
 
(In thousands)
Due within one year
 
$
64,842

 
$
64,841

Due after one year through two years
 
30,428

 
30,428

Total
 
$
95,270

 
$
95,269



11

INFOBLOX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Fair Value Measurements
The following table sets forth the fair value of our financial assets by level within the fair value hierarchy:
 
 
 
Fair Value Measurements at January 31, 2013 Using:
 
 
Quoted Prices in Active Markets For Identical Assets
 
Significant Other Observable Remaining Inputs
 
Significant Other Unobservable Remaining Inputs
 
 
 
 
(Level I)
 
(Level II)
 
(Level III)
 
Total
 
 
(In thousands)
Financial Assets
 
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
Money market funds
 
$
5,120

 
$

 
$

 
$
5,120

FDIC-backed certificates of deposit
 

 
240

 

 
240

Total cash equivalents
 
5,120

 
240

 

 
5,360

Short-term investments:
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
65,682

 

 

 
65,682

U.S. government agency securities
 

 
20,506

 

 
20,506

FDIC-backed certificates of deposit
 

 
9,081

 

 
9,081

Total short-term investments
 
65,682

 
29,587

 

 
95,269

 
 
 
 
 
 
 
 
 
Restricted cash:
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
3,400

 

 

 
3,400

Time deposits
 
201

 

 

 
201

Total restricted cash
 
3,601

 

 

 
3,601

Total financial assets
 
$
74,403

 
$
29,827

 
$

 
$
104,230

 
Of the $3.6 million total restricted cash as of January 31, 2013, $3.5 million is presented as restricted cash and $0.1 million is included as part of prepaid expenses and other current assets in the condensed consolidated balance sheet.

12

INFOBLOX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


 
 
Fair Value Measurements at July 31, 2012 Using:
 
 
Quoted Prices in Active Markets For Identical Assets
(Level I)
 
Significant Other Observable Remaining Inputs (Level II)
 
Significant Other Unobservable Remaining Inputs (Level III)
 
Total
 
 
(In thousands)
Financial Assets
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
Money market funds
 
$
100,723

 
$

 
$

 
$
100,723

Restricted cash:
 
 
 
 
 
 
 
 
Money market funds
 
3,400

 

 

 
3,400

Time deposits
 
733

 

 

 
733

Total restricted cash
 
4,133

 

 

 
4,133

Total financial assets
 
$
104,856

 
$

 
$

 
$
104,856


Of the $4.1 million total restricted cash as of July 31, 2012, $3.8 million is presented as restricted cash and $0.3 million is included as part of prepaid expenses and other current assets in the condensed consolidated balance sheet.

We value our Level I assets, consisting primarily of money market funds, U.S. Treasury securities and restricted cash, using quoted prices in active markets for identical instruments. Financial assets whose fair values we measure on a recurring basis using Level II inputs consist of U.S. government agency securities and Federal Deposit Insurance Corporation, or FDIC-backed certificates of deposit. We measure the fair values of these assets with the help of a pricing service that either provides quoted market prices in active markets for identical or similar securities or uses observable inputs for their pricing without applying significant adjustments because the inputs used in the valuation model, such as interest rates and volatility, can be corroborated by readily observable market data for substantially the full term of the financial assets.
There were no transfers between Level I, Level II and Level III fair value hierarchies during the three and six months ended January 31, 2013.

     

13

INFOBLOX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



NOTE 4. INVENTORY AND DEFERRED REVENUE

Inventory
Inventory consists of the following:
 
 
 
January 31, 2013
 
July 31, 2012
 
 
(In thousands)
Raw materials
 
$
164

 
$
132

Finished goods
 
2,821

 
2,428

Total inventory
 
$
2,985

 
$
2,560


Deferred Revenue, Net
Deferred revenue, net consists of the following:
 
 
 
January 31, 2013
 
July 31, 2012
 
 
(In thousands)
Deferred revenue:
 
 
Products and licenses
 
$
8,996

 
$
10,044

Services
 
78,374

 
68,256

Total deferred revenue
 
87,370

 
78,300

Deferred cost of revenue:
 
 
 
 
Products and licenses
 
1,080

 
1,445

Services
 
160

 
188

Total deferred cost of revenue
 
1,240

 
1,633

Total deferred revenue, net
 
86,130

 
76,667

Less current portion
 
61,798

 
56,184

Noncurrent portion
 
$
24,332

 
$
20,483

 

14

INFOBLOX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



NOTE 5. COMMITMENTS AND CONTINGENCIES
Contract Manufacturer Commitments
The independent contract manufacturer that provides substantially all of our manufacturing, repair and supply chain operations procures components and builds our products based on our forecasts. These forecasts are based on estimates of future demand for our products, which are in turn based on historical trends and an analysis from our sales and marketing organizations, adjusted for overall market conditions. In order to reduce manufacturing lead times and plan for adequate component supply, we may issue purchase orders to this independent contract manufacturer which may not be cancelable. As of January 31, 2013 and July 31, 2012, we had $2.9 million and $3.1 million of open purchase orders that may not be cancellable with this independent contract manufacturer.
Guarantees
We have entered into agreements with some of our customers that contain indemnification provisions relating to potential situations where claims could be alleged that our products infringe the intellectual property rights of a third party. We have, at our option and expense, the ability to repair any infringement, replace product with a non-infringing functionally equivalent product, or refund our customers the unamortized value of the product based on its estimated useful life, typically five years. Other guarantees or indemnification arrangements include guarantees of product and service performance and standby letters of credit for lease facilities and corporate credit cards. We have not recorded a liability related to these indemnification and guarantee provisions, and our guarantees and indemnification arrangements have not had any significant impact on our condensed consolidated financial statements to date.
Loss Contingencies and Legal Proceedings
We are subject to the possibility of various loss contingencies arising in the ordinary course of business. An estimated loss contingency is accrued when it is probable that an asset has been impaired or a liability has been incurred and the range of loss can be reasonably estimated. However, the actual loss in any such contingency may be materially different from our estimates, which could result in the need to record additional expenses. If the amount of liability is not probable or the amount cannot be reasonably estimated, no accruals have been made. However, where a liability is reasonably possible and material, such matters have been disclosed. We regularly evaluate current information available to management to determine whether such accruals should be adjusted and whether new accruals are required in the periods presented.
From time to time, we are subject to various legal proceedings, claims and litigation arising in the ordinary course of business. We do not believe we are party to any currently pending legal proceedings the outcome of which would have a material adverse effect on our financial position, results of operations or cash flows. There can be no assurance that existing or future legal proceedings arising in the ordinary course of business or otherwise will not have a material adverse effect on our financial position, results of operations or cash flows.
    
    

15

INFOBLOX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



NOTE 6. STOCKHOLDERS' EQUITY AND EMPLOYEE BENEFIT PLANS
Stock-based Compensation
The following table summarizes stock-based compensation expense for stock option grants, employee stock purchase plan, or ESPP, purchase rights and restricted stock units recorded in our condensed consolidated statements of operations:
 
 
 
Three Months Ended January 31,
 
 Six Months Ended January 31,
 
 
2013
 
2012
 
2013
 
2012
 
 
(In thousands)
Cost of revenue
 
$
376

 
$
104

 
$
804

 
$
203

Research and development
 
1,184

 
408

 
2,396

 
766

Sales and marketing
 
3,203

 
1,035

 
5,687

 
1,845

General and administrative
 
855

 
498

 
1,653

 
923

 
 
$
5,618

 
$
2,045

 
$
10,540

 
$
3,737

    
The following table summarizes stock-based compensation expense by award type:
 
 
Three Months Ended January 31,
 
 Six Months Ended January 31,
 
 
2013
 
2012
 
2013
 
2012
 
 
(In thousands)
Stock options
 
$
2,718

 
$
2,045

 
$
4,859

 
$
3,737

ESPP
 
1,619

 

 
3,806

 

RSUs
 
1,281

 

 
1,875

 

 
 
$
5,618

 
$
2,045

 
$
10,540

 
$
3,737

The following table summarizes the unrecognized stock-based compensation balance, net of estimated forfeitures, by type of awards as of January 31, 2013:
 
 
 As of January 31, 2013
 
Weighted-Average Amortization Period
 
 
(In thousands)
 
(In years)
Stock options
 
$
20,268

 
2.53
RSUs
 
17,233

 
3.59
ESPP
 
4,417

 
1.07
Total unrecognized stock-based compensation balance
 
$
41,918

 
2.81

16

INFOBLOX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Determination of Fair Value
The fair value of all our equity-based awards was estimated at the date of grant using the following assumptions:
 
 
 
Three Months Ended January 31,
 
 Six Months Ended January 31,
Stock Options:
 
2013
 
2012
 
2013
 
2012
Expected term (in years)
 
6.08

 
6.08

 
6.08

 
6.24

Risk-free interest rate
 
0.88
%
 
0.91
%
 
0.88
%
 
0.95
%
Expected volatility
 
54
%
 
57
%
 
54
%
 
56
%
Dividend rate
 
%
 
%
 
%
 
%
Weighted average fair value per share
 
$
8.80

 
$
5.21

 
$
8.91

 
$
4.90

Employee Stock Purchase Plan:
 
 
 
 
 
 
 
 
Expected term (in years)
 
0.5-2.0

 

 
0.5-2.0

 

Risk-free interest rate
 
0.12% - 0.26%

 
%
 
0.12% - 0.26%

 
%
Expected volatility
 
53% - 58%

 
%
 
53% - 58%

 
%
Dividend rate
 
%
 
%
 
%
 
%

Under our ESPP, employees purchased approximately 0.3 million shares at an average price per share of $13.60 for the three and six months ended January 31, 2013.

Stock Option Activities
A summary of the option activity under our stock plans during the six months ended January 31, 2013 is presented below:

 
 
Number of
Shares
Underlying
Outstanding
Options
 
Weighted-
Average
Exercise Price
 
Weighted-
Average
Remaining
Contractual
Term
 
Aggregate Intrinsic Value
 
 
(In thousands)
 
 
 
(In years)
 
(In thousands)
Outstanding as of July 31, 2012
 
11,847

 
$
6.16

 
 
 
 
Options granted
 
361

 
$
17.59

 
 
 
 
Options exercised
 
(2,404
)
 
$
3.24

 
 
 
 
Options canceled due to forfeitures
 
(421
)
 
$
7.94

 
 
 
 
Outstanding as of January 31, 2013
 
9,383

 
$
7.27

 
7.26
 
$
108,834

Vested and expected to vest as of January 31, 2013
 
9,063

 
$
7.14

 
7.21
 
$
106,282

Vested and exercisable as of January 31, 2013
 
4,745

 
$
4.54

 
6.06
 
$
67,997

 

17

INFOBLOX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Restricted Stock Units Activities
A summary of the restricted stock unit activity during the six months ended January 31, 2013 is presented below:
 
 
Number of Units
 
Weighted-Average Grant Date Fair Value Per Share
 
 
(In thousands)
 
 
Outstanding as of July 31, 2012
 
36

 
$
18.68

Granted
 
1,116

 
$
19.53

Vested
 
(14
)
 
$
18.23

Cancellations due to forfeitures
 
(38
)
 
$
19.87

Outstanding as of January 31, 2013
 
1,100

 
$
19.50


NOTE 7. INCOME TAXES
The provisions for income taxes for the three months ended January 31, 2013 and 2012 were $0.6 million and $0.2 million. The provision for income taxes consists primarily of state and foreign income taxes. The increase in the provision for income taxes for the three months ended January 31, 2013 compared to the same period in prior year was principally attributable to higher foreign income taxes as a result of higher foreign earnings and higher state income taxes as a result of higher non-deductible items, primarily stock-based compensation expense.
The provisions for income taxes for the six months ended January 31, 2013 and 2012 were $0.8 million and $0.7 million. The provision for income taxes consists of state and foreign income taxes. The increase in the provision for income taxes for the six months ended January 31, 2013 compared to the same period in prior year was principally attributable to higher state income taxes due to higher non-deductible items offset by smaller prior year foreign income tax adjustments.
For the three and six months ended January 31, 2013 and 2012, our provisions for income taxes differed from the statutory amount primarily due to state and foreign taxes currently payable, and we realized no benefit for current year losses due to maintaining a full valuation allowance against the U.S. net deferred tax assets.
The realization of tax benefits of deferred tax assets is dependent upon future levels of taxable income, of an appropriate character, in the periods the items are expected to be deductible or taxable. Based on the available objective evidence, management does not believe it is more likely than not that the domestic net deferred tax assets will be realizable. Accordingly, we have provided a full valuation allowance against our domestic net deferred tax assets as of January 31, 2013 and July 31, 2012. In determining future taxable income, we make assumptions to forecast the reversal of temporary differences, the implementation of any feasible and prudent tax planning strategies and federal, state and international operating income. The assumptions require significant judgment regarding the forecasts of future taxable income and are consistent with the forecasts used to manage our business. We intend to maintain the remaining valuation allowance until sufficient positive evidence exists to support a reversal of, or decrease in, the valuation allowance. During the three and six months ended January 31, 2013, there have been no material changes to the total amount of unrecognized tax benefits.

18


INFOBLOX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)


NOTE 8. SEGMENT INFORMATION
We operate in one single segment. The following table represents net revenue based on the customer’s location, as determined by the customer’s shipping address:
 
 
 
Three Months Ended January 31,
 
 Six Months Ended January 31,
 
 
2013
 
2012
 
2013
 
2012
 
 
(In thousands)
Americas
 
$
34,400

 
$
25,307

 
$
67,043

 
$
50,415

Europe, Middle East and Africa ("EMEA")
 
14,831

 
10,985

 
26,534

 
19,789

Asia Pacific ("APAC")
 
5,208

 
5,095

 
10,367

 
10,538

Total net revenue
 
$
54,439

 
$
41,387

 
$
103,944

 
$
80,742

Included within the Americas total in the above table is revenue from sales in the U.S. of $32.3 million and $23.5 million for the three months ended January 31, 2013 and 2012 and $63.3 million and $46.0 million for the six months ended January 31, 2013 and 2012. Aside from the U.S., no other country comprised more than 10% of our net revenue for the three and six months ended January 31, 2013 and 2012.
Our property and equipment, net by location is summarized as follows:
 
 
 
January 31, 2013
 
July 31, 2012
 
 
(In thousands)
Americas
 
$
12,357

 
$
6,180

APAC
 
238

 
194

EMEA
 
98

 
124

Total property and equipment, net
 
$
12,693

 
$
6,498

Included within the Americas total in the above table is property and equipment, net in the U.S. of $12.3 million and $6.1 million as of January 31, 2013 and July 31, 2012. 

19



Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q, including this Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements regarding future events and our future results that are subject to the safe harbors created under the Securities Act of 1933 (the “Securities Act”) and the Securities Exchange Act of 1934 (the “Exchange Act”). All statements other than statements of historical facts are statements that could be deemed forward-looking statements. These statements are based on current expectations, estimates, forecasts, and projections about the industries in which we operate and the beliefs and assumptions of our management. Words such as “expects,” “anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “continues,” “endeavors,” “strives,” “may,” “assumes,” and variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements. Readers are cautioned that these forward-looking statements are subject to risks, uncertainties, and assumptions that are difficult to predict, including those identified below, under “Part II, Item 1A. Risk Factors,” and elsewhere herein. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. We undertake no obligation to revise or update any forward-looking statements for any reason.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and related notes to audited consolidated financial statements included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on September 14, 2012. In this Quarterly Report, unless otherwise specified or the context otherwise requires, “Infoblox,” “we,” “us,” and “our” refer to Infoblox and its consolidated subsidiaries.
Overview
We are a leader in automated network control and provide an appliance-based solution that enables dynamic networks and next-generation data centers. Our solution combines real-time IP address management with the automation of key network control and network change and configuration management processes in purpose-built physical and virtual appliances. It is based on our proprietary software that is highly scalable and automates vital network functions, such as IP address management, device configuration, compliance, network discovery, policy implementation, security and monitoring. Our solution enables our end customers to create dynamic networks, address burgeoning growth in the number of network-connected devices and applications, manage complex networks efficiently and capture more fully the value from virtualization and cloud computing. Our physical appliances are built by third-party manufacturers and primarily utilize readily available components. Our virtual appliances are designed to approximate their physical counterparts in functionality, scalability and performance and currently operate in VMware virtual environments and are integrated within certain Cisco and Riverbed products.
We derive revenue from sales and licensing of our products and sales of our services. We generate products and licenses revenue primarily from sales of perpetual licenses to our software installed on our physical and virtual appliances. We generate services revenue primarily from sales of maintenance and support and, to a lesser extent, from sales of training and consulting services. End customers typically purchase maintenance and support in conjunction with purchases of our products, and generally renew their maintenance and support contracts upon expiration. Maintenance and support provide a significant source of recurring revenue for us. For the three months ended January 31, 2013 and 2012 services revenue was 43.4% and 43.1% of our net revenue and was 44.3% and 42.7% for the six months ended January 31, 2013 and 2012.
We sell our products and services to enterprises and government entities primarily through our channel partners, including distributors, systems integrators, managed service providers and value-added resellers in the United States and internationally. We also have a field sales force that sells our solution directly to certain end customers, and typically works closely with our channel partners in all phases of initial sales of our products and services. Our sales are in three geographic regions: Americas, EMEA and APAC. During the three months ended January 31, 2013 and 2012, 63.2% and 61.1% of our net revenue was generated from the Americas, 27.2% and 26.6% was generated from EMEA, and 9.6% and 12.3% was generated from APAC. We expect revenues from EMEA to represent a smaller percentage of total net revenue in the three months ending April 30, 2013 than it did during the three months ended January 31, 2013. During the six months ended January 31, 2013 and 2012, 64.5% and 62.4% of our net revenue was generated from the Americas, 25.5% and 24.5% was generated from EMEA, and 10.0% and 13.1% was generated from APAC.

20


Results of Operations
The following tables provide condensed consolidated statements of operations data in dollars and as a percentage of our net revenue for the three and six months ended January 31, 2013 and 2012.
 
 
 
Three Months Ended January 31,
 
 Six Months Ended January 31,
 
 
2013
 
2012
 
2013
 
2012
 
 
(In thousands)
Net revenue:
 
 
 
 
 
 
 
 
Products and licenses
 
$
30,807

 
$
23,547

 
$
57,905

 
$
46,238

Services
 
23,632

 
17,840

 
46,039

 
34,504

Total net revenue
 
54,439

 
41,387

 
103,944

 
80,742

Cost of revenue(1):
 
 
 
 
 
 
 
 
Products and licenses(2)
 
7,100

 
5,030

 
12,940

 
9,724

Services
 
4,542

 
3,736

 
8,791

 
7,307

Total cost of revenue
 
11,642

 
8,766

 
21,731

 
17,031

Gross profit
 
42,797

 
32,621

 
82,213

 
63,711

Operating expenses:
 
 
 
 
 
 
 
 
Research and development(1)
 
10,593

 
8,979

 
20,807

 
17,885

Sales and marketing(1) (2)
 
29,108

 
20,605

 
54,739

 
40,278

General and administrative(1)
 
5,493

 
3,716

 
11,151

 
7,393

Total operating expenses
 
45,194

 
33,300

 
86,697

 
65,556

Loss from operations
 
(2,397
)
 
(679
)
 
(4,484
)
 
(1,845
)
Other expense, net
 
(220
)
 
(171
)
 
(326
)
 
(339
)
Loss before provision for income taxes
 
(2,617
)
 
(850
)
 
(4,810
)
 
(2,184
)
Provision for income taxes
 
629

 
226

 
826

 
661

Net loss
 
$
(3,246
)
 
$
(1,076
)
 
$
(5,636
)
 
$
(2,845
)
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended January 31,
 
 Six Months Ended January 31,
 
 
2013
 
2012
 
2013
 
2012
 
 
(As a % of net revenue)
Net revenue:
 
 
 
 
 
 
 
 
Products and licenses
 
56.6
 %
 
56.9
 %
 
55.7
 %
 
57.3
 %
Services
 
43.4

 
43.1

 
44.3

 
42.7

Total net revenue
 
100.0

 
100.0

 
100.0

 
100.0

Cost of revenue(1):
 
 
 
 
 
 
 
 
Products and licenses(2)
 
13.0

 
12.2

 
12.4

 
12.0

Services
 
8.4

 
9.0

 
8.5

 
9.1

Total cost of revenue
 
21.4

 
21.2

 
20.9

 
21.1

Gross margin
 
78.6

 
78.8

 
79.1

 
78.9

Operating expenses:
 
 
 
 
 
 
 
 
Research and development(1)
 
19.4

 
21.7

 
20.0

 
22.2

Sales and marketing(1) (2)
 
53.5

 
49.7

 
52.7

 
49.8

General and administrative(1)
 
10.1

 
9.0

 
10.7

 
9.2

Total operating expenses
 
83.0

 
80.4

 
83.4

 
81.2

Operating margin
 
(4.4
)
 
(1.6
)
 
(4.3
)
 
(2.3
)
Other expense, net
 
(0.4
)
 
(0.4
)
 
(0.3
)
 
(0.4
)
Loss before provision for income taxes
 
(4.8
)
 
(2.0
)
 
(4.6
)
 
(2.7
)
Provision for income taxes
 
1.2

 
0.6

 
0.8

 
0.8

Net loss
 
(6.0
)%
 
(2.6
)%
 
(5.4
)%
 
(3.5
)%

21



(1)
Results above include stock-based compensation as follows:
 
 
Three Months Ended January 31,
 
 Six Months Ended January 31,
 
 
2013
 
2012
 
2013
 
2012
 
 
(In thousands)
Stock-based compensation:
 
 
 
 
 
 
 
 
Cost of revenue
 
$
376

 
$
104

 
$
804

 
$
203

Research and development
 
1,184

 
408

 
2,396

 
766

Sales and marketing
 
3,203

 
1,035

 
5,687

 
1,845

General and administrative
 
855

 
498

 
1,653

 
923

Total stock-based compensation
 
$
5,618

 
$
2,045

 
$
10,540

 
$
3,737


(2)
Results above include intangible asset amortization expense as follows:
 
 
Three Months Ended January 31,
 
 Six Months Ended January 31,
 
 
2013
 
2012
 
2013
 
2012
 
 
(In thousands)
Intangible asset amortization:
 
 
 
 
 
 
 
 
Cost of products and licenses revenue
 
$
254

 
$
325

 
$
508

 
$
655

Sales and marketing
 
327

 
327

 
654

 
906

Total intangible asset amortization expense
 
$
581

 
$
652

 
$
1,162

 
$
1,561

Results of Operations for the Three and Six Months Ended January 31, 2013 and 2012
The following table presents our net revenue for the three and six months ended January 31, 2013 and related changes from the same periods in prior year:
Net Revenue
 
 
 
Three Months Ended January 31,
 
Change in
 
 Six Months Ended January 31,
 
Change in
 
 
2013
 
2012
 
$
 
%
 
2013
 
2012
 
$
 
%
 
 
(Dollars in thousands)
Products and licenses
 
$
30,807

 
$
23,547

 
$
7,260

 
30.8
%
 
$
57,905

 
$
46,238

 
$
11,667

 
25.2
%
Services
 
23,632

 
17,840

 
5,792

 
32.5
%
 
46,039

 
34,504

 
11,535

 
33.4
%
Total net revenue
 
$
54,439

 
$
41,387

 
$
13,052

 
31.5
%
 
$
103,944

 
$
80,742

 
$
23,202

 
28.7
%

Three Months Ended January 31, 2013 Compared to Three Months Ended January 31, 2012
Our net revenue increased by $13.1 million, or 31.5%, to $54.4 million during the three months ended January 31, 2013 from $41.4 million during the three months ended January 31, 2012.
Products and licenses revenue increased by $7.3 million, or 30.8%, to $30.8 million during the three months ended January 31, 2013 from $23.5 million during the three months ended January 31, 2012. The change was due primarily to an increase in average selling prices, which was driven by increased sales of our higher capacity and higher performance products, and to a lesser extent, higher unit sales.
 

22


Services revenue increased $5.8 million, or 32.5%, to $23.6 million during the three months ended January 31, 2013 from $17.8 million during the three months ended January 31, 2012. The change was primarily attributable to the growth of our established base of maintenance and support contracts. As our end customer base grows, we expect our revenue generated from maintenance and support services to increase.

Six Months Ended January 31, 2013 Compared to Six Months Ended January 31, 2012
Our net revenue increased by $23.2 million, or 28.7%, to $103.9 million during the six months ended January 31, 2013 from $80.7 million during the six months ended January 31, 2012.
Products and licenses revenue increased by $11.7 million, or 25.2%, to $57.9 million during the six months ended January 31, 2013 from $46.2 million during the six months ended January 31, 2012. The change was due primarily to an increase in average selling prices which was driven by increased sales of our higher capacity and higher performance products, and to a lesser extent, higher unit sales.
Services revenue increased $11.5 million, or 33.4%, to $46.0 million during the six months ended January 31, 2013 from $34.5 million during the three months ended January 31, 2012. The increase in our services revenue reflects the growth in our customer base and the strength of our renewals business.
Gross Profit
 
 
Three Months Ended January 31,
 
Change in
 
 Six Months Ended January 31,
 
Change in
 
 
2013
 
2012
 
$
 
%
 
2013
 
2012
 
$
 
%
 
 
(Dollars in thousands)
Products and Licenses Gross Profit:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Products and licenses gross profit
 
$23,707
 
$18,517
 
$
5,190

 
28.0
 %
 
$44,965
 
$36,514
 
$
8,451

 
23.1
 %
Products and licenses gross margin
 
77.0
%
 
78.6
%
 
 
 
(1.6
)
 
77.7
%
 
79.0
%
 
 
 
(1.3
)
Services Gross Profit:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Services gross profit
 
$19,090
 
$14,104
 
$
4,986

 
35.4
 %
 
$37,248
 
$27,197
 
$
10,051

 
37.0
 %
Services gross margin
 
80.8
%
 
79.1
%
 
 
 
1.7

 
80.9
%
 
78.8
%
 
 
 
2.1

Total Gross Profit:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total gross profit
 
$42,797
 
$32,621
 
$10,176
 
31.2
 %
 
$82,213
 
$63,711
 
$
18,502

 
29.0
 %
Total gross margin
 
78.6
%
 
78.8
%
 
 
 
(0.2
)
 
79.1
%
 
78.9
%
 
 
 
0.2


Three Months Ended January 31, 2013 Compared to Three Months Ended January 31, 2012
Total gross margin remained relatively flat during the three months ended January 31, 2013 compared to the same period in prior year. Products and licenses gross margin decreased by 1.6 percentage point primarily due to more shipments of our next generation appliances which have a higher cost. Services gross margin increased by 1.7 percentage point principally due to personnel costs growing at a slower rate than services revenue.

Six Months Ended January 31, 2013 Compared to Six Months Ended January 31, 2012
Total gross margin for the six months ended January 31, 2013 was essentially unchanged compared to the six months ended January 31, 2012. The 1.3 percentage point decrease in products and licenses gross margin was primarily due to shipments of our next generation appliances, which have a higher cost. The 2.1 percentage point increase in services gross margin was principally the result of personnel costs growing at a slower rate than services revenue.

23


Operating Expenses
 
 
 
Three Months Ended January 31,
 
Change in
 
 Six Months Ended January 31,
 
Change in
 
 
2013
 
2012
 
$
 
%
 
2013
 
2012
 
$
 
%
 
 
(Dollars in thousands)
Research and development
 
$
10,593

 
$
8,979

 
$
1,614

 
18.0
%
 
$
20,807

 
$
17,885

 
$
2,922

 
16.3
%
Sales and marketing
 
29,108

 
20,605

 
8,503

 
41.3
%
 
54,739

 
40,278

 
14,461

 
35.9
%
General and administrative
 
5,493

 
3,716

 
1,777

 
47.8
%
 
11,151

 
7,393

 
3,758

 
50.8
%
Total operating expenses
 
$
45,194

 
$
33,300

 
$
11,894

 
35.7
%
 
$
86,697

 
$
65,556

 
$
21,141

 
32.2
%
Three Months Ended January 31, 2013 Compared to Three Months Ended January 31, 2012
Research and Development Expenses
Research and development expenses increased by $1.6 million, or 18.0%, to $10.6 million during the three months ended January 31, 2013 from $9.0 million during the three months ended January 31, 2012. The change was primarily attributable to a $1.0 million increase in personnel costs, of which $0.8 million was related to the increase in stock-based compensation associated with our ESPP, RSU and stock option programs. We intend to continue to invest in our research and development organization but expect research and development expense as a percentage of revenue to remain relatively consistent for the remainder of fiscal 2013.
Sales and Marketing Expenses
Sales and marketing expenses increased by $8.5 million, or 41.3%, to $29.1 million during the three months ended January 31, 2013 from $20.6 million during the three months ended January 31, 2012. The change was primarily related to a $7.4 million increase in personnel costs due to increased headcount and higher sales commissions driven by higher revenues. This increase includes a $2.2 million increase in stock-based compensation related to our ESPP, RSU and stock option programs. The change was also attributable to a $0.5 million increase in marketing expenses related to increased participation in marketing events with channel and technology partners. We intend to continue to make investments in our sales resources and infrastructure, which are critical to support sustainable growth, but expect sales and marketing expense as a percentage of revenue to remain at relatively consistent levels for the remainder of fiscal 2013.
General and Administrative Expenses
General and administrative expenses increased by $1.8 million, or 47.8%, to $5.5 million during the three months ended January 31, 2013 from $3.7 million during the three months ended January 31, 2012. The change was principally attributable to a $0.8 million increase in personnel costs associated primarily with increased headcount. This increase included a $0.4 million increase in stock-based compensation related to our ESPP, RSU and stock option programs. In addition, there was a $0.4 million increase in consulting, professional accounting, tax and advisory services associated with our organizational growth and operations as a public company. We expect general and administrative expense as a percentage of revenue to remain relatively consistent during the remainder of fiscal 2013.
Six Months Ended January 31, 2013 Compared to Six Months Ended January 31, 2012
Research and Development Expenses
Research and development expenses increased by $2.9 million, or 16.3%, to $20.8 million during the six months ended January 31, 2013 from $17.9 million during the six months ended January 31, 2012. The change was primarily attributable to a $2.3 million increase in personnel costs, of which $1.6 million was related to the increase in stock-based compensation associated with our ESPP, RSU and stock option programs.

24


Sales and Marketing Expenses
Sales and marketing expenses increased by $14.5 million, or 35.9%, to $54.7 million during the six months ended January 31, 2013 from $40.3 million during the six months ended January 31, 2012. The change was primarily related to a $12.7 million increase in personnel costs due to increased headcount and higher sales commissions driven by higher revenues. This increase includes a $3.8 million increase in stock-based compensation related to our ESPP, RSU and stock option programs and a $0.5 million increase in travel-related costs. The change was also attributable to a $0.8 million increase in marketing expenses related to increased participation in marketing events with channel and technology partners.
General and Administrative Expenses
General and administrative expenses increased by $3.8 million, or 50.8%, to $11.2 million during the six months ended January 31, 2013 from $7.4 million during the six months ended January 31, 2012. The change was principally attributable to a $2.1 million increase in personnel costs associated with increased headcount. This increase included a $0.7 million increase in stock-based compensation related to our ESPP, RSU and stock option programs. In addition, we incurred $0.8 million in professional legal, accounting and advisory services fees associated with our secondary offering during the first quarter of fiscal 2013 and there was also a $0.2 million increase in our recurring professional accounting, tax and advisory services associated with our organizational growth and operations as a public company.
Provision for Income Taxes
 
 
Three Months Ended January 31,
 
Change in
 
 Six Months Ended January 31,
 
Change in
 
 
2013
 
2012
 
$
 
%
 
2013
 
2012
 
$
 
%
 
 
(Dollars in thousands)
Provision for income taxes
 
$
629

 
$
226

 
$
403

 
178.3
%
 
$
826

 
$
661

 
$
165

 
25.0
%
Due to the full valuation allowance recorded against our domestic net deferred tax assets, our provisions for income taxes during the three and six months ended January 31, 2013 and 2012 consisted of foreign income taxes, state taxes for states in which we have no net operating loss carryforwards, and state minimum taxes. Our provisions for income taxes for the three months ended January 31, 2013 and 2012 were $0.6 million and $0.2 million and were $0.8 million and $0.7 million for the six months ended January 31, 2013 and 2012. The increase in our provisions for income taxes for the three and six months ended January 31, 2013 compared to the same periods in prior year was principally attributable to higher state income taxes as a result of higher non-deductible items, primarily stock-based compensation expense.



25


Liquidity and Capital Resources
 
 
January 31, 2013
 
July 31, 2012
 
 
(In thousands)
Cash and cash equivalents
 
$
84,544

 
$
156,613

Short-term investments
 
95,269

 

Total cash, cash equivalents and short-term investments
 
$
179,813

 
$
156,613

 
 
 
 
 
Working Capital
 
$
135,420

 
$
113,642


 
 
 Six Months Ended January 31,
 
 
2013
 
2012
 
 
(In thousands)
Net cash provided by operating activities
 
$
17,762

 
$
9,046

Net cash used in investing activities
 
$
(101,609
)
 
$
(1,786
)
Net cash provided by financing activities
 
$
11,778

 
$
516

Cash, Cash Equivalents and Short-term Investments
As of January 31, 2013, we had cash, cash equivalents and short-term investments of $179.8 million, including $2.5 million held by our foreign subsidiaries. We intend to permanently reinvest our earnings from foreign operations, and do not anticipate that we will need funds generated from foreign operations to fund our domestic operations. In the event funds from foreign operations are needed to fund operations in the United States and if U.S. tax has not already been previously provided, we would be required to accrue and pay additional U.S. taxes in order to repatriate these funds. Cash, cash equivalents and short-term investments exclude $3.6 million of money market funds and time deposits maintained in connection with various letters of credit, which are classified as restricted cash. Cash, cash equivalents and short-term investments consist of cash, money market funds, U.S. Treasury securities, U.S. government agency securities and FDIC-backed certificates of deposit. We believe that our existing cash, cash equivalents and short-term investments, together with cash generated from operations, will be sufficient to meet our working capital expenditure requirements for at least the next 12 months. We expect to incur a total of approximately $13.8 million in capital expenditures through the end of our third fiscal quarter in connection with the relocation of our corporate headquarters. As of January 31, 2013, we had paid approximately $5.8 million in connection with this relocation. Of the $6.0 million that we expect to be refunded by our landlord as leasehold improvement incentives, we had collected approximately $4.2 million as of January 31, 2013. In the event that we require additional financing from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, operating results and financial condition would be adversely affected.
Cash Flows from Operating Activities
Our cash provided by operating activities is driven primarily by sales and licenses of our products and, to a lesser extent, by up-front payments from end customers under maintenance and support contracts. Our primary uses of cash from operating activities have been for personnel-related expenditures, manufacturing costs, marketing and promotional expenses and costs related to our facilities. Our cash flows from operating activities will continue to be affected principally by our working capital requirements and the extent to which we increase spending on personnel and sales and marketing activities as our business grows.
Cash provided by operating activities of $17.8 million during the six months ended January 31, 2013 was primarily attributable to a net loss of $5.6 million, which was more than offset by non-cash charges of $10.5 million for stock-based compensation, $2.9 million for depreciation and amortization and a $10.0 million cash inflow from the change in our net operating assets and liabilities. The $10.0 million change in our net operating assets and liabilities was primarily the result of a $9.5 million increase in deferred revenue attributable to an increase in our established base of maintenance and support contracts, a $5.5 million increase in other liabilities primarily driven by the collection of leasehold improvement incentives related to our new corporate headquarters and a $1.1 million increase in accrued compensation, partially offset by a $4.8 million increase in accounts receivable due to increased revenue and timing of invoicing and a $1.6 million increase in prepaid expenses, other current assets and other assets primarily due to certain deposits we made related to future purchases of furniture and fixtures and equipment and the receivable from the landlord related to the leasehold improvement incentives associated with our new corporate headquarters.

26


.
Cash provided by operating activities of $9.0 million during the six months ended January 31, 2012 was primarily attributable to a net loss of $2.8 million, which was more than offset by non-cash charges of $3.7 million for stock-based compensation, $2.9 million for depreciation and amortization and a $5.2 million cash inflow from the change in our net operating assets and liabilities. The $5.2 million change in our net operating assets and liabilities was primarily a result of an increase in net deferred revenue of $9.0 million, which was attributable to an increase in our established base of maintenance and support contracts, partially offset by a $1.7 million increase in accounts receivable, a $0.2 million increase in inventory and a $1.9 million increase in prepaid expenses, other current assets and other assets.
Cash Flows from Investing Activities
The $101.6 million cash used in our investing activities during the six months ended January 31, 2013 was primarily due to $96.1 million in cash used to purchase short-term investments and $6.7 million in cash used for purchases of leasehold improvements for our new corporate headquarters and computer equipment and software, partially offset by a $0.7 million proceeds from maturities of short-term investments and a $0.5 million decrease in restricted cash.
During the six months ended January 31, 2012, cash used in investing activities was approximately $1.8 million primarily for purchases of computer equipment and software.
Cash Flows from Financing Activities
Cash provided by financing activities during the six months ended January 31, 2013 and 2012 consisted primarily of net proceeds from the issuance of common stock under our employee stock plans which amounted to $11.8 million and $0.5 million.
Critical Accounting Policies
Our condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States and include our accounts and the accounts of our wholly-owned subsidiaries. The preparation of these condensed consolidated financial statements requires our management to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the applicable periods. We base our estimates, assumptions and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances. Different assumptions and judgments would change the estimates used in the preparation of our consolidated financial statements, which, in turn, could change the results from those reported. We evaluate our estimates, assumptions and judgments on an ongoing basis.
There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in our Annual Report on Form 10-K for the fiscal year ended July 31, 2012.

27


Contractual Obligations
Our contractual commitments will have an impact on our future liquidity. The following table summarizes our contractual obligations that represent material expected or contractually committed future obligations, as of January 31, 2013. We believe that we will be able to fund these obligations through cash generated from operations and from our existing cash and cash equivalents balances.
 
 
 
Payments Due by Period
  
 
Total
 
Remainder of 2013
 
2014
 
2015
 
2016
 
2017
 
2018 and
Thereafter
Contractual Obligations(1):
 
(In thousands)
Operating lease obligations(2)
 
$
32,328

 
$
2,158

 
$
4,576

 
$
4,212

 
$
4,094

 
$
4,062