10-K 1 gimo201410-k.htm 10-K GIMO 2014 10-K


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 (Mark One)
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 27, 2014
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 001-35957
 
 
Gigamon Inc.
(Exact name of Registrant as specified in its Charter)
 
 
Delaware
 
26-3963351
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
3300 Olcott Street, Santa Clara, California
 
95054
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (408) 831-4000
 
 

Securities registered pursuant to Section 12(b) of the Act: Common Stock, Par Value $0.0001 Per Share; Common stock traded on the New York Stock Exchange LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES  ¨ NO  ý
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES  ¨ NO  ý
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨
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 definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): 
 
 
 
 
 
 
 
Large accelerated filer  ¨
  
Accelerated filer  x
  
Non-accelerated filer  ¨
 
Smaller reporting company  ¨
 
  
 
  
(Do not check if a 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
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, based on the closing price of the shares of common stock on the New York Stock Exchange on June 28, 2014, was $427.6 million.
The number of shares of Registrant’s Common Stock outstanding as of February 27, 2015 was 33,153,664 shares.
Portions of the Registrant’s Definitive Proxy Statement relating to the Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission no later than 120 days after the Registrant’s fiscal year ended on December 27, 2014, are incorporated by reference into Part III of this Report.




Gigamon Inc.
TABLE OF CONTENTS
 
 
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PART I
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K, including the sections titled “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements within the meaning of the federal securities laws, which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. Forward-looking statements contained in this Annual Report on Form 10-K include, but are not limited to, statements about: 
our expectations regarding our results of operations and financial condition;
anticipated trends and challenges in our business and in the markets in which we operate;
the impact of seasonality on our business;
our anticipated growth strategies;
maintaining and expanding our end-user customer base and our relationships with our channel partners;
our ability to anticipate market needs and develop new and enhanced products and services to meet those needs;
our ability to manage the introduction of new products and the effects of such new product introductions on our existing product portfolio;
our sales cycles and the results of our sales efforts;
our relationships with our third-party manufacturers and suppliers;
our management of inventory and backlog;
the evolution of technology affecting our products, services and markets;
our ability to retain and hire necessary employees and to staff our operations appropriately;
our liquidity and working capital requirements;
our need to obtain additional funding and our ability to obtain future funding on acceptable terms;
our valuation allowance of deferred tax assets and the assumptions and estimates underpinning our determination;
our ability to stay abreast of new or modified laws and regulations that currently apply or become applicable to our business both in the United States and internationally; and
the estimates and estimate methodologies used in preparing our consolidated financial statements and determining option exercise prices.
We caution you that the foregoing list may not contain all of the forward-looking statements made in this Annual Report on Form 10-K.
You should not rely upon forward-looking statements as projections of future events. We have based the forward-looking statements contained in this Annual Report on Form 10-K primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section titled “Risk Factors” and elsewhere in this Annual Report on Form 10-K. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Annual Report on Form 10-K. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.

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The forward-looking statements made in this Annual Report on Form 10-K relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Annual Report on Form 10-K to reflect events or circumstances after the date of this Annual Report on Form 10-K or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.
GIGAMON®, Flow Mapping®, Visibility Fabric™, GigaSMART® and GigaVUE® and all related trademarks, names and logos are the property of Gigamon Inc. in the United States and other countries.  All rights reserved.

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Item 1. Business
Overview
We have developed an innovative solution that delivers pervasive and dynamic intelligent visibility and control of traffic across networks. Our solution, which we refer to as our Unified Visibility Fabric, consists of a distributed system of nodes (or a "Fabric") that enable an advanced level of visibility, modification and control of network traffic. The Visibility Fabric spans physical appliances, virtual nodes, and traffic from remote sites to enable pervasive visibility of network infrastructures. Our Fabric enables IT organizations to gain advanced visibility into infrastructure by dynamically forwarding selected traffic of interest from network and server infrastructure to management, analysis, compliance and security tools in a manner that is optimized for specific uses or functions.
Our patented Flow Mapping technology identifies and directs incoming traffic to single or multiple tools based on user-defined rules that can be managed from a centralized management console. Our GigaSMART platform extends the value and intelligence of the Fabric by providing a range of software applications to modify, manipulate, transform, filter, correlate and sample network traffic. Our Fabric is designed to help organizations optimize the reliability, performance and security of their physical and virtual network infrastructure, minimize capital investment in management, analysis, compliance and security tools, reduce operating expenses and realize greater value from existing tools that are deployed throughout their networks.
Security, virtualization and cloud computing, software defined networking or "SDN", and network functions virtualization or "NFV" are fundamentally reshaping the way enterprises and service providers manage their infrastructure. As these forces combine to enable significant benefits to be realized from IT innovation, they also create major challenges in how enterprises and service providers design, operate, secure and manage their networks. For example, the increasing number of security breaches and continuing threats facing enterprises has put focus on expanding the envelope of security by obtaining intelligent visibility to traffic flowing through networks. Empowered with such visibility, security architects can implement architectures that increase the effectiveness of the security appliances and strategies they deploy. Likewise, the disaggregation of hardware and software, as well as separation of control plane intelligence and packet forwarding in SDN and NFV models, enhances the need for visibility and control of network infrastructure without degrading network performance or reliability. As networks migrate to 40Gb and 100Gb speeds, traditional approaches to deploying operational tools are constrained by their limited throughput.
Together, these challenges have forced organizations to rethink traditional approaches that have created operational complexity without delivering either the desired intelligence or security in the management of network infrastructure. Our Fabric provides the pervasive and dynamic intelligent visibility and control over network traffic, regardless of its physical or virtual origin, that organizations need to successfully manage, analyze and secure their environments.
Our Unified Visibility Fabric is deployed by enterprises data center operators, and service providers as a highly scalable infrastructure layer. Our Fabric has typically operated “out of band,” or in parallel to, the production network that is supporting primary business activities, and facilitates the transmission of network traffic between the network infrastructure and one or more network management, analysis, compliance or security tools. In 2014, we launched a new product called GigaVUE-HC2, which has significantly expanded the ability of customers to deploy the Visibility Fabric "in-line". In an in-line deployment, the Visibility Fabric node is placed in the production network and enables intelligent distribution of traffic to multiple in-line and out-of-band tools concurrently.
Our Unified Visibility Fabric is deployed using our GigaVUE family of products. GigaVUE products are both purpose-built physical appliances that are integrated with our custom software, and also an increasing breadth of software-only products. Our products enable our end-user customers to design Unified Visibility Fabric architectures optimized for a range of scale and performance requirements from monitoring in virtual server environments, to 1 Gigabit appliances to multi-Terabit chassis-based solutions. The majority of our GigaVUE products are modular and extensible, enabling our Fabric to be deployed on any size network and to scale as the network grows.
We sell our products directly through our own sales force and indirectly through our channel partners. As of December 27, 2014, our end-user customers included 67 of the Fortune 100 and we had sold products to over 1,600 end-user customers across many vertical markets.

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Our Solution
We offer both purpose-built physical appliances that are integrated with our custom software and a range of software-only products that enable our end-user customers to design Unified Visibility Fabric architectures optimized for a range of scale and performance requirements. The key benefits of our solution include: 
Providing Pervasive Visibility and Control. Our Visibility Fabric inspects and intelligently filters network traffic from concurrent traffic streams in accordance with a set of user-defined criteria before delivering the traffic to management, analysis, compliance and security tools. This provides IT organizations with pervasive visibility and intelligent control over how traffic from the network is selected, transformed and delivered to management, analysis, compliance and security tools, and what modification or manipulation of the traffic is required to improve the performance and efficiency of the management, analysis, compliance or security tools.
Enhanced Network Security. Our Visibility Fabric is a key enabler for multi-tiered security architecture deployment. Our solutions provide a common architecture for security administrators to obtain intelligent, non-obtrusive access to real-time traffic anywhere in their infrastructure to identify security violations beyond perimeter defenses. We believe network architects are increasingly adopting a "zero-trust" model in their approach to securing their networks, which we believe will increasingly require an expanded scope of visibility in order to provide pervasive security.
Delivering Scalable, High-Throughput Capacity. Our Visibility Fabric provides increased visibility and intelligent traffic filtering without impeding the delivery of traffic to management, analysis, compliance or security tools. At the top end of our GigaVUE family of products, we offer modular chassis products that deliver multi-Terabit performance enabling the Fabric to effectively extend to networks of significant scale and performance requirements.
Improving Network Efficiency and Economy. Our Visibility Fabric improves the longevity and associated return on investment of existing tools by both obviating their need to examine all network traffic and increasing their network coverage. Our Fabric mitigates the need to purchase more tools or to upgrade older tools to accommodate network growth. Our solution reduces capital and operating costs by decreasing the necessary outlays associated with new or more advanced tools, limiting the infrastructure footprints in space-constrained data centers and curtailing the staff required to monitor and maintain the network.
Enhancing Network Reliability. By reducing the need for tools to process non-relevant traffic, which can lead to discarded network traffic and as a result a compromised analysis, our Fabric increases the reliability of attached tools and the associated management of critical business processes running on production networks. When our Fabric is deployed “out of band,” modifications to the configuration of the traffic Visibility Fabric do not require network downtime while changes are implemented, which helps organizations achieve or maintain 99.999% uptime. When deployed inline, the use of a Visibility Fabric enhances an organization's ability to rapidly manage upgrades of security appliances or add/remove security appliances for maintenance.
Agility to Enable Rapid Response to Dynamic Change. Our Visibility Fabric significantly improves network flexibility by enabling static tools to connect to virtualized applications, dynamic infrastructure and mobile machines, which allows our end-user customers to efficiently and securely address their business needs. Our Visibility Fabric is designed to have full interoperability with a broad range of tools, allowing IT organizations maximum architectural flexibility in the design, modification and evolution of their infrastructure.
Ease of Deployment and Use. We have designed our Visibility Fabric to be easy to install, configure and maintain. Our Fabric can be composed of a single appliance or multiple appliances controlled locally or remotely from a simple centralized interface, enabling our end-user customers to reduce management and maintenance of unmanned, or dark, data centers.
Evolution to Next-Generation Infrastructure. As enterprises embark on initiatives to transition to next-generation infrastructure, they have a business imperative to maintain visibility through this evolution. Examples of such transitions include outsourcing to a private or public cloud for an enterprise, the migration to a highly virtualized infrastructure, or the adoption of SDN or NFV. Our Visibility Fabric provides the framework to allow organizations to monitor key performance indicators of interest to maintain visibility through such a transformation.

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Growth Strategy
Our goal is to continue to develop the nascent market for network traffic visibility solutions, enhance the functionality of our Visibility Fabric products, extend our market leadership position and support the ongoing adoption of our innovative Unified Visibility Fabric by enterprises and service providers. Key elements of our growth strategy include: 
Continuous Innovation. We intend to enhance the functionality and scalability of our Fabric to address new use cases, tool capabilities, deployment environments, performance levels and the drive for greater software definition of network infrastructure. We will continue to invest in our technology to maintain our competitive advantage and market leadership, and we will build on our consistent track record of technical innovation. For example, in 2011, we were the first to market with a 1 Terabit chassis solution, the GigaVUE H Series. In 2012, we launched our first 100 Gigabit connectivity solution as well as our GigaVUE-VM and GigaVUE-FM products; in 2013, we launched our GigaVUE-HB1 platform for smaller environments and mid-size enterprises, and several new software applications, including Adaptive Packet Filtering (content-based filtering), FlowVUE and GTP Correlation (subscriber-based sampling). In 2014, we introduced the GigaVUE-HC2 platform enabling customers to deploy a Visibility Fabric inline and introduced an integrated SSL decryption capability as part of our GigaSMART portfolio. In January 2015, we announced our intent to make our feature-rich visibility software, GigaVUE-OS, available on select, third party “white box" hardware to enable customers to choose new deployment models for a Visibility Fabric.
Increase Awareness of Our Value Proposition. We believe awareness of the value proposition of our Unified Visibility Fabric and its technological capabilities in this emerging market is critical to our success and will help us grow our business and market opportunity. We plan to invest in our brand and develop awareness of the benefits of our Fabric by expanding our presence online and at major trade events, extending our relationship with industry analysts and increasing investment in our channel-partner marketing efforts.
Expand Our Relationships with Existing End-User Customers. We have over 1,600 end-user customers and intend to increase the depth of these existing relationships by offering new products that help them increase the value of their new and existing management, analysis, compliance and security tools, adopt virtualization and cloud technologies and efficiently scale their network environments.
Invest in our Global Distribution Network and Value Added Reseller partners. Our sales and marketing strategy consists of a hybrid, two-tier sales model that combines a high-touch direct sales force with fulfillment and incremental demand creation handled by active channel partners that distribute or resell our products. We will continue to invest in our sales and marketing strategy both domestically and internationally to further strengthen our existing relationships with channel partners and expand our network by adding new channel partners to target new end-user customers and broaden our reach.
Technology
Our Unified Visibility Fabric combines purpose-built hardware with custom software that together provide an advanced level of network traffic intelligence, including proprietary traffic selection, forwarding, manipulation, modification, de-duplication, correlation and sampling capabilities. We design physical appliances based upon a combination of commercially available hardware components, processing resources and storage devices. The vast majority of our intellectual property is found in our custom software that provides the full benefits of our Fabric. Centralized control across the Visibility Fabric can be provided using GigaVUE-FM, our multi-node Fabric management system, or node-based management solution.
We have developed our Fabric to provide our end-user customers with a solution to not only meet the demands of today’s network architecture, enable the evolution of infrastructure and adoption of cloud technologies and also to provide the flexibility to meet the performance demands of future network architecture as scale and complexity increases. The core technology of our solution leverages the following primary elements: 
Traffic Control. At the core of our Fabric is our patented traffic selection and filtering technology called Flow Mapping. Flow Mapping allows incoming traffic to be forwarded to single or multiple egress ports based on a set of user-defined map rules. Each map rule consists of a combination of packet selection criteria that can include certain protocol fields or packet “bit patterns” in ISO layer 2, 3 or 4 of the packet, and a required action to be performed on the packet. This allows the

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replication of traffic to a second destination, or egress port, even though the traffic has been selected and forwarded to another egress port. Actions can include the forwarding of the packet, across the Fabric, the duplication of the packet or, in some cases, the intentional discarding of the packet. The Fabric, and the associated appliances, can support many complex and concurrent maps that execute when ingress traffic is received into any port on the Fabric. One primary value of Flow Mapping is that it enables management and analysis tools that have lower packet processing capacity to monitor higher bandwidth network connections through the intelligent selection of the traffic that is forwarded to the tool. For example, a 10 Gigabit network can be monitored by a collection of 1 Gigabit tools through the segregation of traffic based upon a range of criteria and forwarding of traffic to different tools depending on those criteria.
We also offer additional traffic control technology with our GigaStream products that provide a traffic-distribution capability enabling traffic to be spread across a number of egress ports based on an operator-selected distribution algorithm. There are two primary GigaStream products: Stack GigaStream that distributes traffic across an intra-Fabric connection between two appliances, allowing multiple connections to be bundled to form a single higher bandwidth stacking connection; and Tool GigaStream that allows traffic to be distributed across a number of tools. Furthermore, an inter-site traffic ‘tunneling’ capability is available to allow traffic to be captured at a remote location, and then tunneled to a central location for analysis, inspection and/or monitoring. 
Packet Modification and Transformation. Our GigaSMART packet processing technology extends the intelligence and value of the Unified Visibility Fabric by allowing network traffic to be modified during transit through the Fabric. The modifications include:
Packet Slicing reduces the size of a packet by eliminating trailing packet components that are not relevant to the management analysis, compliance or security tool.
Source Port Labeling adds labels to network traffic to enable the easy identification of the associated ingress port.
Masking allows for specific portions of the network packet to be replaced or modified, thus masking the contents from any tools or employees reviewing or analyzing the traffic. With the increasing focus and compliance demand for credit card and personal records to be protected, masking allows for sensitive data to be protected while still allowing for full analysis to be undertaken.
Tunneling encapsulates and forwards network traffic to monitoring tools between networks on separate routed paths, enabling routing of traffic from ‘lights-out’ facilities to centralized monitoring locations.
Header Stripping enables third-party proprietary packet headers (such as Cisco FabricPath, VXLAN, GTP-U) to be removed from each individual packet for tools that are unable to interpret these format headers so that the network traffic can be appropriately processed by the tools. Furthermore, GigaSMART has the ability to replace removed headers with non-proprietary fields to enable subsequent analysis by network tools.
Time stamping adds a precise time stamp to a packet, which is an essential traffic characteristic required for successful latency measurement and analysis, and together with ingress port labeling, allows a permanent record to be added to packet as it arrives at a specific GigaVUE appliance in the Fabric, enabling deeper analysis by network tools.
Adaptive Packet Filtering provides enhanced visibility into tunneled, encapsulated traffic flows such as those deployed in virtualized environments, using flexible pattern-matching regular expression filters to make routing decisions based on application-level packet content, and not just packet headers. 
Traffic Intelligence. Our patented GigaSMART technology extends the intelligence and value of the Unified Visibility Fabric architecture with the capabilities to optimize traffic flows or correlate traffic from sessions and users flowing through a network before delivering them to monitoring infrastructure. A range of such GigaSMART applications are available that enable the modification, manipulation, transformation, and transport of traffic from a network to the tools used for management, monitoring, and security. These applications include:
Packet De-Duplication establishes a time window during which any duplicates of a packet that ingress the Fabric are discarded. By eliminating network traffic not relevant to the analysis

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being completed, an organization can significantly reduce wasted bandwidth, storage capacity and associated tool processing resources.
GTP (GPRS Tunneling Protocol) Correlation correlates mobile subscriber sessions (control and data) to increase analytics accuracy, enable reliable accounting, billing and subscriber management, improve end user quality of experience, and proactively identify service-affecting issues in 3G/4G/LTE mobile service provider environments.
FlowVUE provides flow-aware sampling of active subscriber devices to selectively reduce the volume of traffic delivered to monitoring and analytic tools without negatively impacting the quality of the resulting analysis. Network operators can use this application to enhance end-users’ quality of experience, optimize pricing strategies based on subscriber usage patterns and extend the life of existing tools.
NetFlow Generation improves both the performance of the production network, and the volume, quality and availability of accurate NetFlow data delivered to the tools, by offloading NetFlow Generation from the production network switches and routers and generating NetFlow data directly from the Unified Visibility Fabric. The higher compute capacity within our GigaSMART platform allows a higher rate of sampling that increases the fidelity and predictability of generated NetFlow records.
SSL Decryption provides a decryption capability to security and operational tools that either cannot perform decryption or incur a severe performance penalty in doing so. Existing solutions to decrypt SSL traffic on tools tend to cause a severe performance degradation and are also very expensive. Offloading SSL Decryption not only allows the tool to return to full performance, but also eliminates the need to have multiple decryption licenses for multiple tools. By delivering SSL Decryption as a common capability in our Fabric to the connected monitoring and security tools, the overall efficiency, security and performance of the infrastructure can be maximized.
Fabric Performance. Our appliances are designed around a core of packet-forwarding hardware components. When forwarding traffic through the Fabric and depending upon the configuration, topology and requirements, network traffic can move from an ingress network port to an egress tool port at line rate through the hardware even when complex selection and filtering is applied during the transit process. Our GigaVUE products support packet ingress and egress at speeds of 10 Megabit, 100 Megabit, 1 Gigabit, 10 Gigabit, 40 Gigabit and 100 Gigabit concurrently, and the GigaVUE H Series have a back-plane design allowing concurrent traffic packet transfer from any line card to any other line card at multi-Terabit performance. Our GigaVUE products are designed with failover protection mechanisms that include dual power-supplies and dual fan trays, and our GigaVUE H Series utilizes back-to-front airflow to comply with data center cooling design requirements. 
Fabric Scalability. Our custom software, GigaVUE-OS, provides several "Fabric services" for the Visibility Fabric. One such Fabric service is a capability called clustering that allows multiple appliances in the Fabric to be combined to form a larger scale "logical unit" while maintaining line rate processing performance of traffic flowing through the Fabric. Traffic can enter at an ingress port on one of our appliances and be forwarded to one or more egress ports on the Fabric. Our software allows a master-subordinate control architecture to be configured, where one Fabric appliance is designated as the “master” and all other appliances assume the role of “subordinate.” The Fabric can be configured and managed by the operator through the “master” using GigaVUE-FM, our Fabric management system or our node-based management solution. This architecture assures the ability to add additional subordinates, or appliances, in order to scale the Fabric, without needing complex configuration changes.
Access and Reporting. Our Fabric provides granular access controls that can be applied to support compliance with applicable regulations such as the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act. Our solution enables network segmentation, segregation of duties imposed via role-based access control, auditing of network activities and the tracking of access rights and privileges associated with individual users. In addition, the Fabric management system GigaVUE-FM also provides several summarized and customizable dashboards that are useful for administrators to generate reports or a summary of traffic processed by the Visibility Fabric. The enhanced reporting enables administrators to visualize the most/least utilized network/tool ports

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and traffic maps across the Visibility Fabric, audit trail support for security compliance and the ability to export reports for offline review.
Products
Our product portfolio enables customers to deploy a Unified Visibility Fabric architecture that delivers pervasive and active visibility of traffic across their networks. The product portfolio has several key components including a distributed set of physical and virtual Visibility Fabric nodes that collect and move traffic, GigaSMART software applications that provide traffic intelligence and a Fabric management software layer called GigaVUE-FM.
GigaVUE fabric nodes are high-performance appliances that form the foundation of a distributed fabric. The fabric nodes are modular and extensible for a range of scale and performance requirements from 1 Gigabit 1RU nodes to 2.4 Terabit chassis-based solutions.
In larger visibility infrastructures, these nodes are typically organized into an edge-core architecture. The core layer of visibility is characterized by scale and intelligence capabilities that are essential to operators as network traffic diversity, complexity and volume continues to increase. Typically, this function is provided by the GigaVUE H Series products which, when combined with the traffic intelligence and flow processing provided by GigaSMART, power the core of any visibility architecture. The edge layer is characterized by form factor (either physical or virtual) and provides the ‘reach’ of the management, monitoring and security instrumentation. This virtual edge layer in the visibility infrastructure is provided by the GigaVUE-VM family and the physical edge layer is provided by the GigaVUE-TA family. To further simplify the management of these edge-core layers, we offer the ability to “cluster” multiple nodes in the edge and core layers. Our proprietary “clustering” software allows all the traffic intelligence offered by a core node, including GigaSMART, to be extended to any port on the edge, even if the edge device does not natively have the resources required for such intelligence. This ability to mix-and-match multiple nodes allows flexible designs that maximize the reach of visibility without compromising the intelligence required for rich visibility.
The GigaVUE H Series was introduced in 2011 and utilizes a robust Linux-based operating platform called GigaVUE-OS that enables high-density, high-scale configurations. The series includes both large blade-based modular chassis products such as the HC-2, HD-4, and HD-8, as well as fixed-configuration appliances such as the HB-1. Our modular appliances share control and line cards providing flexibility across systems. Line cards come in multiple variants including a range of physical media (copper and fiber optic), a range of connection speeds from 1 Gigabit to 100 Gigabit, and a GigaSMART processing blade. The H Series supports hundreds of network port connections and multiple appliances that can be clustered together creating a fabric of more than a thousand network and tool connections. With the backplane capacity of the GigaVUE-HD8 exceeding 2 Terabits, a recent line card addition to the family has delivered 100 Gigabit connectivity on a single card. In 2013, we introduced the GigaVUE-HB1 platform, a small form-factor fabric node that can extend traffic visibility to more remote portions of the network and provide the Unified Visibility Fabric solutions to smaller environments and mid-size enterprises.
In 2014, we expanded the GigaVUE H Series portfolio with the addition of the GigaVUE-HC2 product. The GigaVUE-HC2 is a compact 2 RU modular appliance that has an attractive package of traffic intelligence powered by GigaSMART and all the fabric services offered by GigaVUE-OS visibility software. Unlike our traditional visibility deployments that are typically deployed out-of-band, customers can purchase modules to enable this appliance to be deployed in-line. The bypass protection is designed to support two-way traffic communications and allow traffic to be distributed to multiple inline security appliances. The GigaVUE-HC2 also features integrated (internal) TAP modules that consolidate access points for secure backplane connectivity. Internal TAP modules prevent unauthorized users from attaching local packet capture devices to capture or view traffic.
We provide customers with products that deliver visibility at the edge of the Visibility Fabric in a variety of form factors:
The GigaVUE-TA series forms the physical edge of the visibility infrastructure. The GigaVUE TA-1 has a low profile 1RU design intended to be deployed at the top of rack or end of row in data centers with multiple low utilization links for aggregating traffic into H Series and G Series nodes. Although the GigaVUE-TA series appliances do not natively support GigaSMART functionality in the hardware, the clustering capability in the software allows the intelligence in the GigaVUE H Series appliances to be extended to ports on a GigaVUE-TA series.
GigaVUE-VM forms the virtual edge of the visibility infrastructure and extends visibility within virtual networks and monitors traffic between virtual machines. The GigaVUE-VM resides within the server and is able to extract traffic that matches the filtering criteria and forward it to the physical Fabric for delivery to management, analysis and security tools. This software-only product is installed on

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servers running VMware’s hypervisor (ESXi), and provides intelligent selection, filtering and forwarding of traffic from within a server to an external GigaVUE appliance. GigaVUE-VM, together with GigaSMART applications such as Adaptive Packet Filtering and Header Stripping, provides visibility into network virtualization deployments powered by VMware NSX, and enables VMware NSX customers to extend the value of their physical tools to virtual networks. GigaVUE-VM is sold as a licensed product, and customers can buy packs of 5, 10, 50, 100 and 250 licenses (where each license allows for the installation of one GigaVUE-VM instance).
The GigaVUE-HB1 is a low cost, entry level visibility appliance that can extend traffic visibility to more remote portions of the network running critical applications where GigaSMART intelligence may be required.
Our G-TAP series of TAPs provide non-intrusive access to physical traffic at various network interface speeds-1Gb (Copper or Fiber), 10Gb, 40Gb (including Cisco 40Gb BiDi) and 100Gb. Customers can deploy our G-TAP series products to provide economical connectivity between network traffic and the Visibility Fabric
The GigaVUE G Series was introduced in 2005 and is the original series of visibility appliances introduced by Gigamon. The series is comprised of a range of purpose-built, small form-factor traffic visibility appliances with some having network equipment building systems, or NEBS, certification based on compliance guidelines regarding power management, electrical shielding, disaster preparation and hardware interfaces aimed at ensuring network integrity. Each chassis is modular, providing support for optional line cards (port modules), TAP modules or advanced traffic manipulation or modification blades (the GigaSMART and GigaSECURE modules). The optional GigaSMART card offers de-duplication, tunneling, masking, slicing, time stamping and header stripping capabilities that are enabled through software licenses. Our GigaSECURE products were introduced in 2011 and provide in-line packet distribution specifically designed for use with security-based tools such as Intrusion Prevention Systems, or IPS.
Together, the Visibility Fabric nodes provide traffic aggregation, filtering, replication, and intelligent packet and flow manipulation optimized for the tools that manage, analyze and secure the network. Changes can be made dynamically without impacting the production network so IT organizations can be agile and responsive to threats, events or anomalies on the network.
We also offer a series of software applications called GigaSMART that can intelligently modify the network traffic of information managed by our Visibility Fabric. GigaSMART applications include:
packet slicing/masking;
header stripping;
de-duplication;
GTP;
correlation;
SSL decryption;
NetFlow generation; and
FlowVUE
GigaVUE-FM is a software application that provides centralized management and a common policy framework for the Visibility Fabric. GigaVUE-FM delivers a single pane-of-glass view of all the physical and virtual nodes across the Visibility Fabric, while also providing an easy-to-use wizard-based approach for configuring patented Flow Mapping and GigaSMART traffic policies.
In addition to centralized management and control, GigaVUE-FM features fabric-wide reporting, scheduling capabilities, backup and restore functions and enhanced monitoring capabilities to proactively monitor and troubleshoot hot spots in the visibility infrastructure. GigaVUE-FM is sold as a licensed product that can manage up to 250 discrete physical GigaVUE Fabric appliances
To complement our fabric nodes and software applications, we offer a range of supplemental components and accessories including modules, cables and transceivers. The transceivers are offered in a variety of form factors, including SFP, SFP+, QSFP+ and CFP.

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Customer Support
We offer ongoing technical support with our hardware and software products, including those sold directly to our end-user customers and through our channel partners. Our primary support offering provides two-tiered support levels, including premium-level support coverage. Certain channel partners offer their own additional support services to the end-user customer and then rely on our support organization for more complex support requests. We offer our end-user customers ongoing maintenance services for both hardware and software, which enable them to receive ongoing software updates, bug fixes and repairs. These services are sold to end-user customers typically for one-year terms at the time of the initial product sale, and customers may choose to renew for successive annual or multi-year periods. We also provide end-user customers with expedited replacement for any defective hardware. All of our hardware products are sold with a limited 5-year warranty service.Our support personnel are based in Santa Clara, California, Bracknell, United Kingdom, and Hong Kong.
End-User Customers
As of December 27, 2014, we had over 1,600 end-user customers, including 67 of the Fortune 100. Our Fabric can be used in a broad range of applications and has been adopted across many vertical markets including finance, high-speed trading, insurance, healthcare, higher education, government, e-commerce, technology, telecom and service providers.
Sales and Marketing
We sell our products through our direct sales force and a network of channel partners. We do not grant a general right of return or any refund terms to our channel partners, except to two of our North American distributors that have a general right of return. For these distributors, we defer revenue recognition from product sales until sell-through to end-user customers has occurred.
We market and sell our products through a hybrid sales model, which combines a high-touch sales organization and an overlay channel sales team that actively assists our extensive network of channel partners throughout the sales process. We also provide our channel partners with marketing assistance, technical training and support. Our direct sales teams are typically comprised of a combination of one or more field sales representatives and a systems engineer. These teams also have access to a pool of shared inside sales and telemarketing representatives. Each sales team is responsible for a geographical territory, has responsibility for a number of major direct end-user customer accounts or has assigned accounts in a specific vertical market.
Our demand generation activities are focused primarily on Fortune 1000 organizations, federal agencies, large service providers and large and mid-sized enterprises where we continue to see increased demand for our Unified Visibility Fabric. We also focus on ongoing account management for existing end-user customers and the development of follow-on sales as our existing end-user customers continue to expand and enhance their network infrastructure, increasing their demand for our Fabric. The majority of our North American sales are fulfilled by two of our existing channel partners, Global Convergence, Inc. (“GCI”), formerly Interlink Communications Systems, Inc. and Arrow Enterprise Computing Solutions, Inc., or Arrow, which we engaged as a distributor in February 2013.
For fiscal 2014, 2013 and 2012, GCI accounted for 47%, 52%, and 63% of our revenue, respectively. Sales to GCI are subject to an agreement between the parties which provides for an initial term of one year, one year renewal terms and permits termination by either party with 60 days written notice prior to the renewal date. For fiscal 2014 Arrow accounted for 16% of our revenues. No other channel partner represented more than 10% of our revenue in 2013.
To access potential end-user customers worldwide, our direct sales force is distributed across our offices in California, New York, Virginia, Canada, China, France, Germany, Hong Kong, Japan, Russia, Singapore, the United Kingdom, the United Arab Emirates, and through a localized presence in many countries.
Our marketing strategy is focused on increasing the awareness of, and driving end-user customer demand for, our Unified Visibility Fabric. We execute on this strategy by leveraging a combination of internal marketing professionals, external marketing agencies and a network of ecosystem and channel partners to effectively communicate the value proposition, differentiation and advantages of our Unified Visibility Fabric, thereby generating qualified leads for our sales force and channel partners. We focus our resources on a variety of marketing vehicles, including trade shows, online advertising, content syndication, public relations, industry research, our website and collaborative relationships with technology vendors.
For additional information about revenue and assets by geographic region, refer to Note 12 to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

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Backlog
Product backlog includes orders for products scheduled to be shipped within 90 days to customers with approved credit status, and is net of service revenue allocations and any rebates and discounts. Because of the generally short cycle between order and shipment and occasional customer changes in delivery schedules or cancellation of orders (which are made without significant penalty), we do not believe that our product backlog, as of any particular date, is necessarily indicative of actual product revenue for any future period. A significant portion of our product revenue comes from orders that are received and shipped in the same quarter. Our product backlog at December 27, 2014, the last day of fiscal 2014, was $12.2 million. Our product backlog as of December 28, 2013 was not material.
Technology Partners
We have ongoing non-exclusive relationships with a number of leading vendors of network management, analysis, compliance and security tools, including arrangements with CA Technologies, Inc., Dynatrace Corporation, Empirix Inc., Forescout, FireEye, Inc., Imperva, Inc., LiveAction, LogRhythm, ManageEngine, NIKSUN, Palo Alto Networks, Inc., Plixer, Riverbed Technology, Inc., SevOne, SolarWinds, SourceFire, Inc. (acquired by Cisco Systems, Inc.), VMware, and WildPackets, some of which include the joint development of use-case and reference architectures that enhance the performance and efficiency of the end-user customer’s network. We expect to continue adding more technology partners and to publish joint case studies with these partners following end-user deployment and approval. In addition to joint development of reference designs and case studies, we have undertaken various joint-marketing activities and events to drive interest and awareness of the combined solution as well as the Visibility Fabric itself. As our Fabric helps optimize the efficiency of our tool partners’ management, analysis, compliance and security tools, we believe these vendors improve awareness at end-user customers of our Fabric and create new deployment opportunities.
Research and Development
We believe continued investment in research and development is critical to our business. Our research and development efforts focus on improving and enhancing our existing products and services, as well as developing new products, features and functionality. We believe that our custom software is critical to expanding our leadership position within the traffic visibility market. As a result, we devote the majority of our research and development resources to software development. Our engineering team has deep expertise in key areas related to our research and development efforts, including network analysis and management technologies, network protocol and Ethernet system design. We work closely with our end-user customers to understand their current and future needs and have designed a product development process that captures and integrates feedback from our end-user customers.
We believe the timely development of new products is essential to maintaining our competitive position. As of December 27, 2014, we had 123 employees in our research and development organization, substantially all of whom were located at our headquarters in California. We also test our products to certify and ensure interoperability with third-party hardware and software products. We plan to prioritize and dedicate significant resources to these continued research and development efforts. Our research and development expenses were $42.8 million, or 27% of our revenue, in fiscal 2014, $42.1 million, or 30% of our revenue, in fiscal 2013, and $17.7 million, or 18% of our revenue, in fiscal 2012. Stock-based compensation of $8.1 million, $11.5 million, and $0.5 million was included in our research and development expenses in fiscal 2014, 2013, and 2012, respectively. In fiscal 2013, our research and development expenses also included a $5.2 million expense related to our performance units which we recorded upon the completion of our Initial Public Offering ("IPO") in June 2013.
Manufacturing and Suppliers
We outsource the manufacturing, systems assembly, testing and order fulfillment of our hardware products to third party contract manufacturers and original design manufacturers Jabil Circuit, Inc., or Jabil and Delta Networks International Ltd., or DNI. We are in the process of transitioning Jabil’s manufacturing operations from Jabil’s facilities in Santa Clara, California to Jabil’s facilities in Guadalajara, Mexico. In addition for all of our products, we utilize components from many suppliers. Whenever possible, we strive to have multiple sources for these components to ensure continuous supply. However, we have limited sources of supply for certain components that are technically unique or in high demand, and we have not entered into supply agreements with many of these suppliers. In such cases, we seek to maintain a close direct relationship with the suppliers to ensure supply is adequate and that the components meet our quality requirements. In certain instances, we have entered into license agreements with sole-source suppliers, allowing us to incorporate certain of their components into our hardware products.

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We entered into our manufacturing services agreement with Jabil in April 2013, pursuant to which Jabil manufactures, tests, configures, assembles, packages and ships our products. The initial term was one year, with the term automatically renewing for additional one-year terms, unless terminated by either party by giving at least six months written notice before the end of the then-current term. In addition, either party may terminate the agreement (i) for convenience upon nine months written notice by Jabil or six months written notice by us, (ii) for cause upon written notice of a material breach and if the other party does not cure such breach within 30 days of such notice, (iii) immediately upon the bankruptcy or insolvency of the other party, or (iv) upon a change of control of either party, subject to applicable notice periods.
Finally, we have entered into a license and services agreement with Tall Maple Systems, Inc., or Tall Maple, pursuant to which we have been granted a perpetual, non-exclusive, worldwide license to certain software code of Tall Maple which we integrate into the software component of our H Series products and which can be integrated into our other products and applications. In return, we paid Tall Maple a license fee. The agreement can only be terminated for cause upon written notice of a material breach and if the other party does not cure such breach within 30 days of such notice.
Competition
The markets in which we compete are highly competitive. We expect competition to intensify in the future as existing competitors bundle new and more competitive offerings with their existing products and services, and as new market entrants introduce new products into our markets.
We compete either directly or indirectly with certain Ethernet switch vendors, such as Cisco Systems, Inc., Brocade Communications Systems, Inc. and Arista Networks, Inc., and network management, analysis, compliance and security tool vendors that offer point solutions that address a portion of the issues that we solve. In the future, we expect to compete with new market entrants, which may include our joint-development partners or other current technology partners.
The principal competitive factors applicable to our products include: 
functionality and performance;
price and total cost of ownership;
ease of use;
flexibility and scalability of deployment;
brand awareness;
product reliability and quality;
interoperability with other products;
the extent and speed of user adoption; and
quality of service, support and fulfillment.
Although we believe that we compete favorably with respect to the above factors, we believe that other competitors will emerge that may have greater name recognition, longer operating histories, well-established relationships with end-user customers or channel partners in our markets, broader product portfolios and the ability to bundle competitive offerings with other products and services, larger intellectual property portfolios and substantially greater financial, technical, personnel and other resources than we have. We expect competition and competitive pressure, from both new and existing competitors, to increase in the future.
Intellectual Property
To protect our intellectual property, we rely primarily on patent, trademark, copyright and trade secret laws. As of December 27, 2014, we had 21 issued patents that expire between 2025 and 2033, 22 pending patent applications in the United States and two corresponding Patent Cooperation Treaty patent applications. The claims for which we have sought patent protection relate primarily to system architecture, traffic visibility technology, traffic control and management, and filtering technology we have developed. We also license software from third parties for integration into our products, including open source software and other commercially available software.
As part of our strategy to protect our proprietary technologies and our intellectual property rights from unauthorized parties that may attempt to copy aspects of our products or obtain and use our trade secrets or other confidential information, we generally enter into confidentiality agreements with our employees, consultants,

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channel partners and end-user customers, and generally limit access to and distribution of our proprietary information and proprietary technology.
Employees
As of December 27, 2014, we had 371 employees, including 123 in research and development, 184 in sales and marketing, 31 in manufacturing and support and 33 in general and administrative functions. None of our employees is represented by a labor union or is a party to any collective bargaining arrangement in connection with his or her employment with us. We have never experienced any work stoppages, and we consider our relations with our employees to be good.
Corporate Background and Information
Our business was founded in 2004 and originally operated by a California limited liability company, Gigamon Systems LLC. In January 2009, Gigamon Systems LLC contributed substantially all of its assets and certain of its liabilities to us in exchange for all of our common stock. In January 2010, entities affiliated with Highland Capital Partners invested in our company through the purchase of our preferred stock. On May 31, 2013, we converted from a Delaware limited liability company into a Delaware corporation and changed our name from Gigamon LLC to Gigamon Inc., pursuant to the LLC Conversion described in Note 8 of our notes to consolidated financial statements.
Our principal executive offices are located at 3300 Olcott Street, Santa Clara, California 95054, and our telephone number is (408) 831-4000. Our website address is www.gigamon.com. We make available our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, on the Investor section of our website as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission, or the SEC. All such filings are available free of charge. Information contained on, or that can be accessed through, our website, does not constitute part of this Annual Report on Form 10-K and the inclusion of our website address in this report is an inactive textual reference only.

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Item 1A. Risk Factors
Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information in this Annual Report on Form 10-K, before making a decision to invest in our common stock. The risks and uncertainties described below may not be the only ones we face. If any of the risks actually occur, our business, financial condition, operating results and prospects could be materially and adversely affected. In that event, the trading price of our common stock could decline, and you could lose part or all of your investment.
Risks Related to Our Business
The network traffic visibility market is rapidly evolving and difficult to predict. If the network traffic visibility market does not evolve as we anticipate or if our target end-user customers do not adopt our Unified Visibility Fabric, our sales will not grow as quickly as anticipated and our stock price could decline.
We are in a new, rapidly evolving category within the network infrastructure industry that focuses on providing organizations with enhanced visibility and control over their networks through the efficient collection and analysis of network traffic. As such, it is difficult to predict important market trends, including how large the network traffic visibility market will be, or when and what products end-user customers will adopt. For example, organizations that currently use traditional approaches may believe that these approaches already provide them with sufficient network traffic visibility. Therefore, they may continue spending their network infrastructure budgets on these products and may not adopt our Unified Visibility Fabric in addition to or in lieu of such products.
If the market for network traffic visibility does not evolve in the way we anticipate, if organizations do not recognize the benefit our Unified Visibility Fabric offers in addition to or in place of existing network traffic visibility products, or if we are unable to sell our family of products to end-user customers, or if we are not able to effectively expand into new or adjacent markets, then our revenue may not grow as expected or may decline, and our stock price could decline.
New or existing technologies that are perceived to address network traffic visibility or address the need for network traffic visibility in different ways could gain wide adoption and supplant our products, thereby weakening our sales and our financial results.
The introduction of products and services embodying new technologies could render our existing products obsolete or less attractive to end-user customers. Other network traffic visibility technologies exist and could be developed in the future, and our business could be materially negatively affected if such technologies are widely adopted. We may not be able to successfully anticipate or adapt to changing technology or customer requirements on a timely basis, or at all. If we fail to keep up with technological changes or to convince our end-user customers and potential end-user customers of the value of our solutions even in light of new technologies, our business, operating results and financial condition could be materially and adversely affected.
If we are unable to introduce new products successfully and to make enhancements to existing products, our growth rates would likely decline and our business, operating results and competitive position could suffer.
Our continued success depends on our ability to identify and develop new products and to enhance and improve our existing products, and the acceptance of those products by our existing and target end-user customers. Our growth would likely be adversely affected if: 
we fail to introduce these new products or product enhancements;
our new products or product enhancements are not timely introduced or do not function as expected;
we fail to successfully manage the transition to new products from the products they are replacing;
we do not invest our development efforts in appropriate products or enhancements for markets in which we now compete and expect to compete;
we fail to predict the demand for new products following their introduction to market; or
these new products or enhancements do not attain market acceptance.
We invest substantial amounts of time and resources in researching and developing new products and enhancing existing products by incorporating additional features, improving functionality and adding other improvements to meet end-user customers’ rapidly evolving demands in our highly competitive industry. Our

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research and development expenses were $42.8 million, or 27% of our total revenue in fiscal 2014, $42.1 million, or 30% of our total revenue, in fiscal 2013, and $17.7 million, or 18% of our total revenue, in fiscal 2012.
Our future plans contemplate significant investments in research and development and related product opportunities. We believe that we must continue to dedicate a significant amount of resources to our research and development efforts to maintain our competitive position. However, we often make these investments without being certain that they will result in products or enhancements that the markets will accept or that they will expand our share of those markets.
The introduction of new products or product enhancements may shorten the life cycle of our existing products, or replace sales of some of our current products, thereby offsetting the benefit of even a successful product introduction, and may cause end-user customers to defer purchasing our existing products in anticipation of the new products. For example, we recently introduced a software only version of GigaVUE-OS, which we intend to certify on third-party “white-box’ hardware appliances with similar functionality to our Gigamon branded TA family of appliances designed to work at the edge of a customer’s data center. We expect the software only version of GigaVUE-OS to be available in the spring of 2015. Once generally available, we would expect the software only version of GigaVUE-OS would generate less revenue but higher margins per unit compared to an equivalent Gigamon branded appliance. If we do not timely and effectively manage the introduction and growth of the software only version of GigaVUE-OS, then we may not capture opportunities to grow our market. Alternatively, if we do not effectively manage the mix of Gigamon branded appliances and software only GigaVUE-OS licenses, then our revenue from our TA family of products may be adversely impacted in the short to medium term.
Failure to successfully introduce this product or other new products in our portfolio could harm our operating results by decreasing sales, increasing our inventory levels of older products and exposing us to greater risk of product obsolescence. We have also experienced, and may in the future experience, delays in developing and releasing new products and product enhancements. This has led to, and may in the future lead to, delayed sales, deferred revenue, increased expenses and lower than anticipated quarterly revenue. In addition, complexity and difficulties in managing product transitions at the end-of-life stage of a product can create excess inventory of components associated with the outgoing products that can lead to increased expenses. Any or all of the above problems could materially harm our business and operating results.
Our quarterly and annual operating results may vary significantly and be difficult to predict, which may cause our stock price to fluctuate.
Our quarterly and annual operating results have varied historically from period to period, and we expect that they will continue to fluctuate due to a variety of factors, many of which are outside of our control, including: 
fluctuations in demand for our products and services, the timing of orders from our channel partners and end-user customers, and our ability to accurately forecast end-user customer demand;
the timing of shipments of products, which may depend on many factors such as inventory and logistics and our ability to ship new products on schedule and accurately forecast inventory requirements;
the budgeting cycles and internal purchasing priorities of our end-user customers;
seasonal buying patterns of our end-user customers;
changes in end-user customer or channel partner requirements or market needs;
the mix of products sold and the mix of revenue between products and services;
changes in the growth rate of the network traffic visibility market and related markets, such as the network infrastructure market, and the market for network management, analysis, compliance and security tools;
our ability to control costs, including operating expenses, the costs of hardware and software components, and other manufacturing costs;
our ability to timely develop, introduce and gain market acceptance for new products, technologies and services;
price competition;
any significant changes in the competitive environment, including the entry of new competitors, and any related discounting of products or services;

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the timing and execution of product transitions or new product introductions, and related inventory costs;
deferral of orders from end-user customers in anticipation of new products or product enhancements announced by us or our competitors;
decisions by potential end-user customers to purchase alternative network traffic visibility solutions from their existing network infrastructure vendors or other third parties;
our ability to establish and manage our distribution channels, and the effectiveness of any changes we make to our distribution model;
the ability of our suppliers and contract manufacturers to provide component parts and finished products in a timely manner;
changes in end-user customer renewal rates for our services and our ability to up-sell additional products;
general economic conditions, both domestically and in our foreign markets;
the timing of revenue recognition for our sales, which may be affected by the mix of sales by our channel partners; and
future accounting pronouncements or changes in our accounting policies.
Any one of the factors above or the cumulative effect of some of the factors referred to above may result in significant fluctuations in our quarterly and annual operating results, including fluctuations in our key performance indicators. This variability and unpredictability could result in our failure to meet our internal operating plan or the expectations of securities analysts or investors for any period. In addition, a significant percentage of our operating expenses are fixed in nature in the short term and based on forecasted revenue trends. Accordingly, in the event of revenue shortfalls, we are generally unable to mitigate the negative impact on margins in the short term. If we fail to meet or exceed such expectations for these or any other reasons, the market price of our shares could fall substantially and we could face costly lawsuits, including securities class action suits.
We compete in highly competitive markets, and competitive pressures from existing and new companies may adversely impact our business and operating results.
The markets in which we compete are highly competitive. We expect competition to intensify in the future as existing competitors bundle new and more competitive offerings with their existing products and services, and as new market entrants introduce new products into our markets. This competition could result in increased pricing pressure, reduced profit margins, increased sales and marketing expenses and our failure to increase, or the loss of, market share, any of which would likely seriously harm our business, operating results and financial condition. We also expect that competition will continue to increase as a result of advancements in networking technology and architecture. For example, recently there has been increased focus on software-defined networking, or SDN, which could significantly alter the way in which networks are architected and implemented, and certain of our competitors have publicized an approach to using SDN technology to provide network visibility. If we do not keep pace with product and technology advances and otherwise keep our product offerings competitive, there could be a material and adverse effect on our competitive position, revenue and prospects for growth.
We compete either directly or indirectly with certain large Ethernet switch vendors, such as Cisco Systems Inc., Brocade Systems Communications, Inc. and Arista Networks, Inc., and network management, analysis, compliance and security tool vendors, such as Netscout and Ixxia that offer point solutions that address a portion of the issues that we solve. The principal competitive factors in our markets include functionality and performance, price and total cost of ownership, ease of use, flexibility and scalability of deployment, brand awareness, breadth of portfolio, product reliability and quality, interoperability with other products, the extent and speed of user adoption and quality of service, support and fulfillment.
Many of our current and potential competitors are substantially larger and have greater financial, technical, research and development, sales and marketing, manufacturing, distribution and other resources and greater name recognition. We could also face competition from new market entrants, including our other current technology partners. In addition, many of our existing and potential competitors enjoy substantial competitive advantages, such as: 
longer operating histories;

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the capacity to leverage their sales efforts and marketing expenditures across a broader portfolio of products;
broader distribution and established relationships with channel partners;
access to larger customer bases;
greater resources to make acquisitions;
larger intellectual property portfolios;
the ability to bundle competitive offerings with other products and services; and
greater customer support.
As a result, increased competition could result in fewer customer orders, price reductions, reduced operating margins and loss of market share. Our competitors also may be able to provide end-user customers with capabilities or benefits different from or greater than those we can provide in areas such as technical qualifications or geographic presence, or to provide end-user customers a broader range of products, services and prices. In addition, some of our larger potential competitors have substantially broader product offerings and could leverage their relationships based on other products or incorporate functionality into existing products to gain business in a manner that discourages users from purchasing our products, including through selling at zero or negative margins, product bundling or closed technology platforms. These larger potential competitors may also have more extensive relationships within existing and potential end-user customers that provide them with an advantage in competing for business with those end-user customers. In addition, to the extent that one of our competitors establishes or strengthens a cooperative relationship with, or acquires one or more of the network management, analysis, compliance and security tool vendors that we have relationships with, it could adversely affect our ability to compete. Our ability to compete will depend upon our ability to provide a better solution than our competitors at a competitive price. To remain competitive, we may be required to make substantial additional investments in research, development, marketing and sales in order to respond to competition, and there is no assurance that these investments will achieve any returns for us or that we will be able to compete successfully in the future.
We also expect increased competition if our market continues to expand. Conditions in our market could change rapidly and significantly as a result of technological advancements or other factors. In addition, current or potential competitors may be acquired by third parties that have greater resources available. As a result of these acquisitions, our current or potential competitors might take advantage of the greater resources of the larger organization to compete more aggressively against us.
We depend on growth in markets relating to network security, management and analysis, and lack of growth or contraction in one or more of these markets could have a material adverse effect on our sales and financial condition.
Demand for our products is linked to, among other things, growth in the size and complexity of network infrastructures and the demand for networking technologies addressing the security, management and analysis of such infrastructures. If this demand declines, our sales, profitability and financial condition would be materially adversely affected. Segments of the network infrastructure industry have in the past experienced significant economic downturns. The occurrence of any of these factors in the markets relating to network security, management and analysis could materially adversely affect our sales, profitability and financial condition. Furthermore, these markets are dynamic and evolving. Our future financial performance will depend in large part on continued growth in the number of organizations investing in their network infrastructure and the amount they commit to such investments. The market for network infrastructure may not continue to grow at historic rates, or at all. If this market fails to grow, or grows more slowly than we currently anticipate, our sales and profitability could be adversely affected.
Our sales cycles can be long and unpredictable, and our sales efforts require considerable time and expense.
We have recently experienced difficulty managing lengthening and increasingly unpredictable sales cycles. Our sales efforts involve educating our end-user customers about the use and benefits of our solutions, including their technical capabilities. End-user customers often undertake an evaluation and testing process that can result in a lengthy sales cycle. Also, as our distribution strategy has evolved into more of a channel model, utilizing distributors, the level of variability in the length of sales cycle across transactions has increased and made it more difficult to predict the timing of many of our sales transactions. We spend substantial time and resources on our sales efforts without any assurance that our efforts will produce any sales or a material amount of revenue from such sales. In addition, product purchases are frequently subject to budget constraints, multiple approvals and

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unplanned administrative, processing and other delays. These factors, among others, have in the past led to, and could continue to result in, long and unpredictable sales cycles.
We sell our Unified Visibility Fabric solution primarily to enterprise IT departments and service providers. The length of our sales cycles typically ranges from three to six months and is generally longer the larger the size of the transaction. Often times, our larger transactions are part of larger data center projects or upgrades by our customers and we have little ability to influence the timing of these transactions. As a result, our sales cycles can often be more than six months, with sales cycles involving service providers taking significantly longer to complete. To the extent that the mix of our future sales shifts in the direction of service providers, the average length of our sales cycles will likely increase. Furthermore, our sales to federal, state, and local governmental agency end-user customers have increased in recent periods, and we may in the future increase sales to governmental entities. Selling to governmental entities can be highly competitive, expensive and time consuming, often requiring significant upfront time and expense without any assurance that some of these efforts will generate a sale. As a result of these lengthy and uncertain sales cycles and the increasing size of our transactions, it is difficult for us to predict when end-user customers may purchase solutions and accept products from us. If we are unable to effectively manage the sales cycle or if we fail to close a large transaction or multiple smaller transactions that we expect to close in a given period, our operating results may vary significantly from period to period and may be materially adversely affected.
Our limited operating history makes it difficult for you to evaluate our current business and future prospects, and may increase the risk of your investment.
We were founded in 2004 and sold our first products commercially in 2005. We have experienced rapid growth since our inception, and we have been increasing the breadth and scope of our product offerings. The majority of our revenue growth, however, has occurred over the past five years. This limited operating history, as well as the early stage of our relationships with many of our channel partners, makes financial forecasting and evaluation of our business difficult. Furthermore, because we depend in part on the market’s acceptance of our products, it is difficult to evaluate trends that may affect our business. We have encountered and will continue to encounter risks and difficulties frequently experienced by growing companies in rapidly changing industries, such as the risks described in this Annual Report on Form 10-K. If we do not address these risks successfully, our business and operating results would be adversely affected, and our stock price could decline.
Some of the components and technologies used in our products are purchased and licensed from a single source or a limited number of sources. The loss of any of these suppliers might cause us to incur additional transition costs, result in delays in the manufacturing and delivery of our products, or cause us to carry excess or obsolete inventory and could require us to redesign our products.
Although supplies of our components are generally available from a variety of sources, we currently depend on a single source or a limited number of sources for most components included in our products. For example, the processors and connectors that we use in the products manufactured by Broadcom Corp., Freescale Semiconductor, Ltd., Cavium, Inc., Tilera Corporation and Molex Inc. are currently available only from a limited number of sources, and neither we nor, to our knowledge, these manufacturers have entered into supply agreements with such sources. As there are no other sources for identical components and technologies, if we lost any of these suppliers or were unable to acquire these components or license these technologies, we may not be able to sell our products for a significant period of time, and we could incur significant costs to redesign our hardware and software to incorporate components or technologies from alternative sources or to qualify alternative suppliers. Our reliance on a single source or a limited number of suppliers involves a number of additional risks, including risks related to: 
supplier capacity constraints;
price increases;
timely delivery;
component quality;
failure of a key supplier to remain in business and adjust to market conditions;
delays in, or the inability to execute on, a supplier roadmap for components and technologies; and
natural disasters.
In addition, for certain components for which there are multiple sources, we are subject to potential price increases and limited availability as a result of market demand for these components. In the past, unexpected

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demand for computer and network products has caused worldwide shortages of certain electronic parts. If similar shortages occur in the future, our business would be adversely affected. Although, we carry some finished goods inventory of our products we and our manufacturer rely on our suppliers to deliver necessary components in a timely manner. We and our manufacturer rely on purchase orders rather than long-term contracts with these suppliers, and as a result we or our manufacturer might not be able to secure sufficient components, even if they were available, at reasonable prices or of acceptable quality to build products in a timely manner and, therefore, might not be able to meet end-user customer demands for our products, which would have a material and adverse effect on our business, operating results and financial condition.
We rely on third-party channel partners for a substantial portion of our revenue. If our partners fail to perform, our ability to sell our products and services would be limited, and if we fail to optimize our channel partner model going forward, our operating results would be harmed.
A substantial portion of our revenue is generated through sales by our channel partners, which include distributors and resellers. We depend upon our channel partners to assist with the sales process through introduction to accounts and to manage the fulfillment of orders and the distribution of our products. In North America we rely on two distributors, GCI and Arrow, which we engaged as a distributor in February 2013. GCI accounted for 47%, 52%, and 63%, of our revenue in fiscal 2014, 2013, and 2012, respectively. Arrow accounted for 16% of our revenue for fiscal 2014 and less than 10% of our revenue in fiscal 2013. To the extent our channel partners are unable to generate an increasing amount of our sales opportunities, are unsuccessful in selling our products, or we are unable to enter into arrangements with, and retain, a sufficient number of high quality channel partners in each of the regions in which we sell products, and keep them motivated to sell our products, our ability to sell our products and operating results would be harmed. The termination of our relationship with any significant channel partner may adversely impact our sales, operating results and revenue growth.
We provide sales channel partners with specific programs to assist them in selling our products, but there can be no assurance that these programs will be effective. Our channel partners may be unsuccessful in marketing, selling and supporting our products and services. Our agreements with our channel partners are generally non-exclusive and generally do not contain minimum purchase requirements. Therefore, in most cases our channel partners may also market, sell and support products and services that are competitive with ours, and may devote more resources to the marketing, sale and support of such products. They may have incentives to promote our competitors’ products to the detriment of our own. As is typical in our industry, our channel partners have the ability to terminate their respective relationships with us with limited notice and with limited or no penalty and may cease selling our products altogether. We cannot assure you that we will retain these channel partners or that we will be able to secure additional or replacement channel partners. The loss of one or more of our significant channel partners could harm our operating results.
As we add additional channel partners, particularly in North America where we currently rely primarily on a limited number of distributors, we may not be able enter into arrangements on as favorable terms, including with respect to pricing, which could have an adverse effect on our margins. In addition, most new channel partners could require comprehensive training and may take several months or more to achieve productivity. Furthermore, our channel partner sales structure could subject us to lawsuits, potential liability and reputational harm if, for example, any of our channel partners misrepresents the functionality of our products or services to end-user customers or our channel partners violate laws or our corporate policies. If we fail to optimize our channel partner model or fail to manage existing sales channels, our business and operating results could be materially and adversely affected.

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Managing inventory of our products and product components is complex. Insufficient inventory may result in lost sales opportunities or delayed revenue, while excess inventory may harm our gross margins.
Managing inventory of our products and product components is complex with many critical components requiring long lead times from the component manufacturer. These long lead times place added importance on our ability to effectively forecast customer demand so that we have the right amount of product or product components available. Managing inventory is further complicated as our channel partners may increase orders during periods of product shortages, cancel orders if their inventory is too high, return product or take advantage of price protection (if any) or delay orders in anticipation of new products. They also may adjust their orders in response to the supply of our products and the products of our competitors that are available to them and in response to seasonal fluctuations in customer demand. Furthermore, if the time required to manufacture certain products or ship products increases for any reason, this could result in inventory shortfalls. In addition, for those channel partners that have rights of return, inventory held by such channel partners affects our operating results. Managing our inventory depends significantly on our ability to accurately forecast end-user customer demand for our products. Our inventory management and demand planning systems and related supply chain visibility tools may be inadequate to enable us to effectively manage inventory. Inventory management remains an area of focus as we balance the need to maintain inventory levels that are sufficient to ensure competitive lead times against the risk of inventory obsolescence because of rapidly changing technology and customer requirements. If we ultimately determine that we have excess inventory, we may have to reduce our prices or write-down inventory, which in turn could result in lower gross margins. For example, in fiscal 2014, we recorded an inventory write-down of $3.8 million which reduced our gross margin by 3% in such period and in fiscal 2013 we recorded an inventory write-down of $0.9 million which reduced our gross margin by 1%. Alternatively, insufficient inventory levels may lead to shortages that result in delayed revenue or loss of sales opportunities altogether as potential end-user customers turn to competitors’ products that are readily available. If we are unable to effectively manage our inventory and that of our distribution partners, our operating results could be adversely affected.
We currently rely on a single contract manufacturer to manufacture a substantial majority of our products, and our failure to manage our relationship with our contract manufacturer successfully could negatively impact our business.
We rely on Jabil to manufacture a substantial majority all of our products. We transitioned our manufacturing to Jabil in an effort to expand and upgrade our manufacturing, systems assembly, testing and order fulfillment capabilities. We entered into a manufacturing services agreement with Jabil in April 2013 with an initial term of one year, and the agreement automatically renews for additional one-year terms, unless it is terminated by either party by giving at least six months written notice before the end of the then-current term. In addition, either party may terminate the agreement (i) for convenience upon nine months written notice by Jabil or upon six months written notice by us, (ii) for cause upon written notice of a material breach and if the other party does not cure such breach within 30 days of such notice, (iii) immediately upon the bankruptcy or insolvency of the other party, or (iv) upon a change of control of either party, subject to applicable notice periods.
Our reliance on Jabil reduces our control over the assembly process, exposing us to risks, including reduced control over quality assurance, production costs and product supply. For example, we experienced certain product quality issues and delays in delivery of our products to our end-user customers in the second and third quarters of fiscal 2013, and such delays may continue to occur in the future. We are currently working with Jabil to transfer the majority of our manufacturing operations from Jabil's U.S. facilities to its facilities in Mexico. If we fail to effectively manage our relationship with Jabil, in particular the transition to manufacturing operations in Mexico, or if Jabil experiences delays, disruptions, capacity constraints or quality control problems in their operations, our ability to ship products to our end-user customers could be impaired and our competitive position and reputation could be harmed. Furthermore, our manufacturing operations in Mexico will be subject to the heightened exposure to changes in the economic, security and political conditions in Mexico which might interrupt manufacturing operations. In addition, any adverse change in Jabil’s financial or business condition could disrupt our ability to supply quality products to our end-user customers. If we are required to change our contract manufacturer or cannot find a suitable alternative in a timely manner, we may lose revenue, incur increased costs and damage our relationships with our channel partners and end-user customers. In addition, qualifying a new contract manufacturer and commencing production can be an expensive and lengthy process. If we experience increased demand that Jabil is unable to fulfill, or if Jabil is unable to provide us with an adequate supply of high-quality products for any reason, we could experience a delay in our order fulfillment, and our business, operating results and financial condition would be adversely affected.

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Defects in our products could harm our reputation and business.
Our products are complex and have contained and may contain undetected defects or errors, especially when first introduced or when new versions are released. Defects in our products may impede or block network traffic or cause our products to fail to provide network traffic visibility as intended. Further, defects in our products may impair the functionality or performance of the appliances and applications that rely on the data provided by our products. Defects in our products may lead to product returns and require us to implement design changes or software updates.
Any defects or errors in our products, or the perception of such defects or errors, could result in:
expenditure of significant financial and product development resources in efforts to analyze, correct, eliminate or work around errors or defects;
loss of existing or potential end-user customers or channel partners;
delayed or lost revenue;
delay or failure to attain market acceptance;
delay in the development or release of new products or services;
negative publicity, which will harm our reputation;
warranty claims against us, which could result in an increase in our provision for doubtful accounts;
an increase in collection cycles for accounts receivable or the expense and risk of litigation; and
harm to our operating results.
Although we have limitation of liability provisions in our standard terms and conditions of sale, they may not fully or effectively protect us from claims as a result of federal, state or local laws or ordinances or unfavorable judicial decisions in the United States or other countries. The sale and support of our products also entail the risk of product liability claims. We maintain insurance to protect against certain claims associated with the use of our products, but our insurance coverage may not adequately cover any claim asserted against us. In addition, even claims that ultimately are unsuccessful could result in our expenditure of funds in litigation and divert management’s time and other resources.
We rely on the availability of licenses to third-party software and other intellectual property.
Many of our products and services include software or other intellectual property licensed from third parties, and we otherwise use software and other intellectual property licensed from third parties in our business. This exposes us to risks over which we may have little or no control. For example, a licensor may have difficulties keeping up with technological changes or may stop supporting the software or other intellectual property that it licenses to us. Also, it will be necessary in the future to renew certain licenses, expand the scope of certain existing licenses or seek new licenses, relating to various aspects of these products and services, or otherwise relating to our business, which may result in increased license fees. There can be no assurance that the necessary licenses will be available on acceptable terms, if at all. In addition, a third party may assert that we or our end-user customers, are in breach of the terms of a license, which could, among other things, give such third party the right to terminate a license, seek damages from us, or both. The inability to obtain or maintain certain licenses or other rights or to obtain or maintain such licenses or rights on favorable terms, or the need to engage in litigation regarding these matters, could result in delays in releases of products and services, and could otherwise disrupt our business, until equivalent technology can be identified, licensed or developed, if at all, and integrated into our products and services or otherwise in the conduct of our business. Any of these events could have a material adverse effect on our business, operating results and financial condition. Moreover, the inclusion in our products and services of software or other intellectual property licensed from third parties on a nonexclusive basis may limit our ability to differentiate our products from those of our competitors.
Furthermore, we have entered into a license and services agreement with Tall Maple Systems, Inc., or Tall Maple, pursuant to which we have been granted a perpetual, non-exclusive, worldwide license to certain software code of Tall Maple, which we integrate into the software component of our H Series products and which can be integrated into our other products and applications. In return, we paid Tall Maple a license fee. The agreement can only be terminated for cause upon written notice of a material breach and if the other party does not cure such breach within 30 days of such notice. We have been notified that the assets of tall Maple have been acquired by a third party. If our agreement with Tall Maple is terminated as a result of a material breach by us that we do not timely cure, we may need to identify, license or develop equivalent software, and integrate such replacement

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software into the software component of our H Series products, which could impede our ability to sell our H Series products until equivalent software is identified, licensed or developed, and integrated. These delays, if they occur, could adversely affect our business, operating results and financial condition.
Failure to protect our proprietary technology and intellectual property rights could substantially harm our business and operating results.
The success of our business depends on our ability to protect and enforce our trade secrets, trademarks, copyrights, patents and other intellectual property rights. We attempt to protect our intellectual property under patent, trademark, copyright and trade secret laws, and through a combination of confidentiality procedures, contractual provisions and other methods, all of which offer only limited protection.
As of December 27, 2014, we had 21 issued patents in the United States, but this number is relatively small in comparison to some of our competitors and potential competitors. Additionally, as of December 27, 2014, we had 22 pending U.S. patent applications and two corresponding Patent Cooperation Treaty patent applications, and may file additional patent applications in the future. The process of obtaining patent protection is expensive and time-consuming, and we may not be able to prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. We may choose not to seek patent protection for certain innovations and may choose not to pursue patent protection in certain jurisdictions. Furthermore, it is possible that our patent applications may not issue as granted patents, that the scope of our issued patents will be insufficient or not have the coverage originally sought, that our issued patents will not provide us with any competitive advantages, and that our patents and other intellectual property rights may be challenged by others or invalidated through administrative process or litigation. In addition, issuance of a patent does not guarantee that we have an absolute right to practice the patented invention, or that we have the right to exclude others from practicing the claimed invention. As a result, we may not be able to obtain adequate patent protection or to enforce our issued patents effectively.
In addition to patented technology, we rely on our unpatented proprietary technology and trade secrets. Despite our efforts to protect our proprietary technology and trade secrets, unauthorized parties may attempt to misappropriate, reverse engineer or otherwise obtain and use them. The contractual provisions that we enter into with employees, consultants, partners, vendors and customers may not prevent unauthorized use or disclosure of our proprietary technology or intellectual property rights and may not provide an adequate remedy in the event of unauthorized use or disclosure of our proprietary technology or intellectual property rights. Moreover, policing unauthorized use of our technologies, products and intellectual property is difficult, expensive and time-consuming, particularly in foreign countries where the laws may not be as protective of intellectual property rights as those in the United States and where mechanisms for enforcement of intellectual property rights may be weak. For example, the laws of India, where we are establishing a research and development facility, do not protect our proprietary rights to the same extent as the laws of the U.S. We may be unable to determine the extent of any unauthorized use or infringement of our products, technologies or intellectual property rights.
From time to time, we may need to take legal action to enforce our patents and other intellectual property rights, to protect our trade secrets, to determine the validity and scope of the intellectual property rights of others or to defend against claims of infringement or invalidity. Such litigation could result in substantial costs and diversion of resources and could negatively affect our business, operating results, financial condition and cash flows. If we are unable to adequately protect our intellectual property rights, we may find ourselves at a competitive disadvantage to others who need not incur the additional expense, time and effort required to create the innovative products that have enabled us to be successful to date.
Assertions by third parties of infringement or other violations by us of their intellectual property rights, or other lawsuits asserted against us, could result in significant costs and substantially harm our business and operating results.
Patent and other intellectual property disputes are common in the network infrastructure industry. Some companies in the network infrastructure industry, including some of our competitors, own large numbers of patents, copyrights, trademarks and trade secrets, which they may use to assert claims against us. Third parties may in the future assert claims of infringement, misappropriation or other violations of intellectual property rights against us. They may also assert such claims against our end-user customers or channel partners whom we typically indemnify against claims that our products infringe, misappropriate or otherwise violate the intellectual property rights of third parties. As the number of products and competitors in our market increase and overlaps occur, claims of infringement, misappropriation and other violations of intellectual property rights may increase. Any claim of infringement, misappropriation or other violation of intellectual property rights by a third party, even those without merit, could cause us to incur substantial costs defending against the claim and could distract our management from our business.

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The patent portfolios of our most significant competitors and potential competitors are larger than ours. This disparity between our patent portfolio and the patent portfolios of our most significant competitors may increase the risk that they may sue us for patent infringement and may limit our ability to counterclaim for patent infringement or settle through patent cross-licenses. In addition, future assertions of patent rights by third parties, and any resulting litigation, may involve patent holding companies or other adverse patent owners who have no relevant product revenue and against whom our own patents may therefore provide little or no deterrence or protection. We cannot assure you that we are not infringing or otherwise violating any third-party intellectual property rights.
An adverse outcome of a dispute may require us to pay substantial damages including treble damages if we are found to have willfully infringed a third party’s patents or copyrights; cease making, licensing or using solutions that are alleged to infringe or misappropriate the intellectual property of others; expend additional development resources to attempt to redesign our products or services or otherwise to develop non-infringing technology, which may not be successful; enter into potentially unfavorable royalty or license agreements in order to obtain the right to use necessary technologies or intellectual property rights; and indemnify our partners and other third parties. Any damages or royalty obligations we may become subject to, and any third-party indemnity we may need to provide, as a result of an adverse outcome could harm our operating results. Royalty or licensing agreements, if required or desirable, may be unavailable on terms acceptable to us, or at all, and may require significant royalty payments and other expenditures. In addition, some licenses may be non-exclusive, and therefore our competitors may have access to the same technology licensed to us. Any of these events could seriously harm our business, financial condition and operating results.
Under the indemnification provisions of our standard sales contracts, we agree to defend our customers against third-party claims asserting infringement of certain intellectual property rights, which may include patents, copyrights, trademarks or trade secrets, and to pay judgments entered on such claims. Our exposure under these indemnification provisions is generally limited to the total amount paid by our customer under the agreement. However, certain agreements include indemnification provisions that could potentially expose us to losses in excess of the amount received under the agreement. We have not incurred any material costs in the past as a result of such indemnification obligations, and have not accrued any liabilities related to such obligations in our consolidated financial statements.
In addition, we may, from time to time, be a party to other lawsuits in the normal course of our business. Litigation in general, and intellectual property and securities litigation in particular, can be expensive, lengthy and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. Responding to lawsuits is likely to be expensive and time consuming for us, and could divert our management’s attention from our business. An unfavorable resolution of any lawsuit could adversely affect our business, operating results or financial condition.
Our use of open source and third-party technology could impose limitations on our ability to commercialize our software.
We use open source software in our products, and although we monitor our use of open source software to avoid subjecting our products to conditions we do not intend, the terms of many open source licenses have not been interpreted by U.S. courts. As a result, there is a risk that these licenses could be construed in a way that could impose unanticipated conditions or restrictions on our ability to commercialize our products. In such an event, we could be required to seek licenses from third parties to continue offering our products, to make our proprietary code generally available in source code form, to re-engineer our products or to discontinue the sale of our products if re-engineering could not be accomplished on a timely basis, any of which could adversely affect our business, operating results and financial condition.
We are dependent on a single product family comprised of a limited number of products.
Our product offering is limited to a single product family comprised of our GigaVUE, GigaSECURE, GigaSMART and GigaTAP products. Historically, we have derived a substantial portion of our revenue from sales of our GigaVUE appliances and related services, and we expect to continue to derive a significant portion of our revenue from sales of our GigaVUE appliances and related services for the foreseeable future. A decline in the price of these products and related services, whether due to competition or otherwise, or our inability to increase sales of these products, would harm our business and operating results more seriously than it would if we derived significant revenue from a variety of product lines and services. GigaSECURE, GigaSMART, GigaTAP and related support services represent additional sources of revenue, however, collectively they accounted for a small portion of revenue in fiscal 2014. We expect that this concentration of revenue from a single product family comprised of a limited number of products will continue for the foreseeable future. As a result, our future growth and financial performance will depend heavily on our ability to develop and sell enhanced versions of our GigaVUE appliances. If

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we fail to deliver product enhancements, new releases or new products that end-user customers want, it will be more difficult for us to succeed.
Adverse economic conditions or reduced information technology and network infrastructure spending may adversely impact our business and operating results.
Our business depends on the overall demand for information technology, network infrastructure and the market for network analysis, compliance and security tools. In addition, the purchase of our products and services is often discretionary and may involve a significant commitment of capital and other resources. Weak global economic conditions, or a reduction in information technology and network infrastructure spending even if economic conditions improve, could adversely impact our business, financial condition and operating results in a number of ways, including longer sales cycles, lower prices for our products and services, higher default rates among our distributors, reduced unit sales and lower or no growth. As global or regional economic conditions continue to be volatile or economic uncertainty remains, trends in information technology and network infrastructure spending also remain unpredictable and subject to reductions due to credit constraints and uncertainties about the future. Unfavorable economic conditions may lead end-customers to delay or reduce purchases of our solutions. Demand for our solutions may not reach our sales targets, or may decline, when there is an economic downturn or economic uncertainty. Our sensitivity to economic cycles and any related fluctuation in demand may have a material adverse effect on our business, financial condition and operating results.
The market for cloud-based and cloud-focused solutions is at a relatively early stage of development, and if it does not develop or develops more slowly than we expect, our business could be harmed.
The market for cloud-based solutions is at an early stage relative to physical appliances and on-premise solutions, and these types of deployments may not achieve or sustain high levels of demand and market acceptance. In fiscal 2012, we introduced our first offering for virtualized and cloud-based applications, GigaVUE-VM, and expect to increase sales of GigaVUE-VM and expand the range of our cloud-focused offerings in the future. Many factors may affect the market acceptance of cloud-based and cloud-focused solutions, including: 
perceived security capabilities and reliability;
perceived concerns about the ability to scale operations for large enterprise customers;
concerns with entrusting a third party to store and manage critical data; and
the level of configurability or customizability of the solutions.
If organizations do not establish a presence in the cloud or do not perceive the benefits of our cloud-focused solutions, or if our competitors or new market entrants are able to develop cloud-focused solutions that are or are perceived to be more effective than ours, this portion of our business may not grow further or may develop more slowly than we expect, either of which would adversely affect our business and operating results.
The average selling price of our products has decreased from time to time, and may decrease in the future, which may negatively impact gross profits.
From time to time, the average selling price of our products has decreased. In the future, it is possible that the average selling prices of our products will decrease in response to competitive pricing pressures, increased sales discounts, new product introductions by us or our competitors or other factors. Such pricing pressures may also be dependent upon the mix of products sold, the mix of revenue between products and services and the degree to which products and services are bundled and sold together for a package price. Therefore, in order to maintain our profitability, we must develop and introduce new products and product enhancements on a timely basis and continually reduce our product costs. Our failure to do so would likely cause our revenue and gross profits to decline, which would harm our business and operating results. In addition, we may experience substantial period-to-period fluctuations in future operating results in the event we experience an erosion of our average selling prices.
We rely on revenue from support services which may decline, and because we recognize revenue from support services over the term of the relevant service period, downturns or upturns in sales of support services are not immediately reflected in full in our operating results.
Although our service revenue has historically accounted for a small percentage of our revenue, it may become a more meaningful part of revenue over time. Sales of new or renewal services contracts may decline and fluctuate as a result of a number of factors, including end-user customers’ level of satisfaction with our products and services, the prices of our products and services, the prices of products and services offered by our competitors or reductions in our end-user customers’ spending levels. If our sales of new or renewal services contracts decline, our revenue and revenue growth may decline and our business will suffer. In addition, we recognize service

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revenue over the term of the relevant service period, which is typically twelve months. As a result, some of the revenue we report each quarter is the recognition of deferred revenue from services contracts entered into during previous quarters. Consequently, a decline in new or renewed service contracts in any one quarter will not be fully reflected in revenue in that quarter but will negatively affect our revenue in future quarters. Accordingly, the effect of significant downturns in new or renewed sales of our services is not reflected in full in our operating results until future periods. Our service revenue also makes it difficult for us to rapidly increase our revenue through additional service sales in any period, as revenue from new and renewal service contracts must be recognized over the applicable service period. Furthermore, increases in the average term of services contracts would result in revenue for services contracts being recognized over longer periods of time.
Seasonality may cause fluctuations in our revenue and operating results.
We have experienced seasonality in our product revenue and operating results in the past, and we believe that we will continue to experience such seasonality in the future. The first quarter of each year is usually our lowest revenue quarter during the year and product revenue typically declines sequentially from the prior fourth quarter. We believe that this results in part from the procurement, budgeting and deployment cycles of many of our end-user customers. We generally expect an increase in sales in the second half of each year as budgets of our end-user customers for annual capital purchases are being fully utilized. We expect that seasonality will continue to affect our revenue and operating results in the future.
Our business and operations have experienced rapid growth, and if we do not appropriately manage any future growth, or are unable to improve our systems and processes, our operating results will be negatively affected.
We have experienced rapid growth over the last several years, which has placed a strain on our management, administrative, operational and financial infrastructure. In addition, some of the members of our current management team have only been working together for a short period of time. We also anticipate that additional investments in key channel partnerships and direct-sales personnel, as well as infrastructure and research and development spending, will be required to: 
scale our operations and increase productivity;
address the needs of our end-user customers;
further develop and enhance our products and services;
develop new technology; and
expand our markets and opportunity under management, including into new industry verticals and geographic areas.
Our success will depend in part upon our ability to manage our growth effectively. To do so, we must continue to increase the productivity of our existing employees and to hire, train and manage new employees as needed. To manage domestic and international growth of our operations and personnel, we will need to continue to improve our operational, financial and management controls and our reporting processes and procedures, and implement more extensive and integrated financial and business information systems. These additional investments will increase our operating costs, which will make it more difficult for us to offset any future revenue shortfalls by reducing expenses in the short term. Moreover, if we fail to scale our operations successfully, our business and operating results could be materially and adversely affected.
If we fail to remediate material weaknesses in our internal control over financial reporting or are unable to implement and maintain effective internal control over financial reporting in the future, the accuracy and timeliness of our financial reporting may be adversely affected.
We must maintain effective internal control over financial reporting in order to accurately and timely report our results of operations and financial condition. In addition, the Sarbanes-Oxley Act requires, among other things, that we assess the effectiveness of our internal control over financial reporting and the effectiveness of our disclosure controls and procedures quarterly. If we are not able to comply with the requirements of the Sarbanes-Oxley Act in a timely manner, the market price of our stock could decline and we could be subject to sanctions or investigations by the New York Stock Exchange, the SEC or other regulatory authorities, which would diminish investor confidence in our financial reporting and require additional financial and management resources, each of which may adversely affect our business and operating results.
In connection with the preparation of our consolidated financial statements for the fiscal year ended December 28, 2013, we identified a deficiency in our internal control over financial reporting with respect to our

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accounting for income taxes, specifically with respect to the treatment of 2013 Employee Stock Purchase Plan, or ESPP, related expenses for income tax purposes. Further, in connection with our preparation of our consolidated financial statements, we determined that it would be appropriate to revise our financial statements for the second and third quarters of fiscal 2013 to reflect certain corrections related to our treatment of ESPP-related expenses for income tax purposes and our inventory reserve releases. In accordance with applicable accounting guidance, we concluded that these corrections were not material to any of our previously issued financial statements. We put in place additional internal controls in 2014 related to the accuracy of accounting for income taxes related to ESPP-related expenses. However, we believe that additional testing is required before concluding that the material weakness has been remediated and therefore have concluded that a material weakness continued to exist in our internal control over financial reporting as of December 27, 2014 related to the accounting for income taxes regarding ESPP-related expenses.
Additionally, in connection with the preparation of our consolidated financial statements for the fiscal year ended December 27, 2014, we identified a deficiency in our internal control over financial reporting with respect to the accuracy of the complex spreadsheets that we utilize in the accounting for revenue allocation and inventory write-down. Specifically, our internal controls with respect to the review of these complex spreadsheets were not designed to operate at a sufficient level of precision. This control deficiency resulted in immaterial audit adjustments to revenue, deferred revenue, cost of revenue and inventory write-down during the year ended December 27, 2014. As such, we have concluded that a material weakness existed in our internal control over financial reporting as of December 27, 2014 related to our review of these complex spreadsheets in connection with their use in the preparation of period-end financial statements.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis. If we fail to effectively remediate the control deficiency discussed above, we may not be able to prevent a misstatement of the aforementioned account balances or disclosures that could result in a material misstatement to our annual or interim consolidated financial statements in future periods. Accordingly, we determined that each of these control deficiencies constituted a material weakness.
We have taken and are taking numerous steps to remediate these material weaknesses and improve our internal control over financial reporting, as discussed in Item 9A below. In connection with this annual report on Form 10-K, our management has performed an evaluation of our internal control over financial reporting as of December 27, 2014 pursuant to Section 404 of the Sarbanes-Oxley Act, and has concluded that our internal control over financial reporting and our disclosure controls and procedures were not effective as of December 27, 2014. If we fail to effectively remediate these material weaknesses in our internal control over financial reporting, we may be unable to timely and accurately report our financial results, which could subject us to adverse consequences including, but not limited to, regulatory or enforcement actions by the SEC or the New York Stock Exchange. Even if we are able to report our financial statements accurately and in a timely manner, or if we do not make all necessary improvements to address these material weaknesses, continued disclosure of these material weaknesses will be required in future filings with the SEC, which could cause our reputation to be harmed and our stock price to decline.
Further, there can be no assurance that control deficiencies or other significant deficiencies or material weaknesses in our financial reporting will not occur in the future. Any failure to maintain or implement required new or improved controls, or difficulties we encounter in their implementation, could result in significant deficiencies or material weaknesses, cause us to fail to meet our future reporting obligations or cause our financial statements to contain material misstatements. Internal control deficiencies could also result in a restatement of our financial statements in the future or cause investors to lose confidence in our reported financial information, which could cause a decline in the market price of our common stock.
We are dependent on the continued services and performance of our senior management and other key employees, the loss of any of whom could adversely affect our business, operating results and financial condition.
Our future performance depends on the continued services and contributions of our senior management and other key employees to execute on our business plan, and to identify and pursue new opportunities and product innovations. The loss of services of senior management or other key employees could significantly delay or prevent the achievement of our development and strategic objectives. In addition, most of the members of our current management team have only been working together for a short period of time. The loss of the services of our senior management or other key employees for any reason could adversely affect our business, financial condition and operating results.

26



If we are unable to hire, retain and motivate qualified personnel, our business would suffer.
Our future success depends, in part, on our ability to continue to attract and retain highly skilled personnel. The loss of the services of any of our key personnel, the inability to attract or retain qualified personnel or delays in hiring required personnel, particularly in engineering and sales, may seriously harm our business, financial condition and operating results. None of our key employees has an employment agreement for a specific term, and any of our employees may terminate their employment at any time. Our ability to continue to attract and retain highly skilled personnel will be critical to our future success. Competition for highly skilled personnel is frequently intense, especially in the San Francisco Bay Area, the location in which we have a substantial presence and need for highly-skilled personnel. We intend to continue to issue stock options and restricted stock units as a key component of our overall compensation and employee attraction and retention efforts. In addition, we are required under U.S generally accepted accounting principles, or GAAP to recognize compensation expense in our operating results for employee stock-based compensation under our equity grant programs, which may negatively impact our operating results and may increase the pressure to limit stock-based compensation. We may not be successful in attracting, assimilating or retaining qualified personnel to fulfill our current or future needs. Also, to the extent we hire personnel from competitors, we may be subject to allegations that they have been improperly solicited or divulged proprietary or other confidential information.
Our long-term success depends, in part, on our ability to expand the sales of our products to end-user customers located outside of the United States, and therefore our business will be susceptible to risks associated with international operations.
While we currently maintain limited operations outside of the United States, we intend to expand these operations in the future. For example, we are opening a research and development facility in India and are transitioning our primary manufacturing operations, through Jabil, to Mexico. We have limited experience operating in foreign jurisdictions. Our inexperience in operating our business outside of the United States increases the risk that any international expansion efforts we may undertake will not be successful. In addition, conducting and expanding international operations subjects us to new risks that we have not generally faced in the United States. These include: 
exposure to foreign currency exchange rate risk;
difficulties in managing and staffing international operations;
the increased travel, infrastructure and legal compliance costs associated with multiple international locations;
potentially adverse tax consequences;
the burdens of complying with a wide variety of foreign laws, including trade barriers, and different legal standards;
increased financial accounting and reporting burdens and complexities;
political, social and economic instability abroad, terrorist attacks and security concerns in general; and
reduced or varied protection for intellectual property rights in some countries.
The occurrence of any one of these risks could negatively affect our international business and, consequently, our business, operating results and financial condition.
Our use of and reliance on research and development resources in India may expose us to unanticipated costs or events.
We our currently opening a research and development center in India and, in the future expect to increase our headcount and development activity at this facility. There is no assurance that our reliance upon research and development resources in India will enable us to achieve our research and development goals, meaningful cost reductions or greater resource efficiency. Further, our research and development efforts in India involve significant risks, including:
difficulty hiring and retaining appropriate engineering personnel due to intense competition for such resources and resulting wage inflation;
the knowledge transfer related to our technology and resulting exposure to misappropriation of intellectual property or information that is proprietary to us, our customers and other third parties;

27



heightened exposure to change in the economic, security and political conditions in India;
fluctuations in currency exchange rates and regulatory compliance in India; and
interruptions to our operations in India as a result of floods and other natural catastrophic events as well as manmade problems such as power disruptions or terrorism.
Difficulties resulting from the factors above and other risks related to our research and development activities in India could increase our research and development expenses, delay the introduction of new products, or impact our product quality, the occurrence of which could adversely affect our business and operating results.
We are dependent on various IT systems, and failures of or interruptions to those systems could harm our business.
Many of our business processes depend upon our IT systems, the systems and processes of third parties and on interfaces with the systems of third parties. For example, we rely on Microsoft AX Dynamics for our ERP system and Salesforce.com, Inc. for our customer relationship management system. If those systems fail or are interrupted, or if our ability to connect to or interact with one or more networks is interrupted, our processes may function at a diminished level or not at all. This would harm our ability to ship products, and our financial results would likely be harmed.
In addition, reconfiguring our IT systems or other business processes in response to changing business needs may be time consuming and costly. To the extent this impacts our ability to react timely to specific market or business opportunities, our financial results would likely be harmed.
Failure to comply with laws and regulations could harm our business.
Our business is subject to regulation by various federal, state, local and foreign governmental agencies, including agencies responsible for monitoring and enforcing employment and labor laws, workplace safety, product safety, environmental laws, consumer protection laws, anti-bribery laws, import/export controls, federal securities laws and tax laws and regulations. For example, our products are subject to various U.S. and foreign governmental regulations limiting the electromagnetic interference that our products can safely emit. If our products do not meet these regulatory standards, we may be required to stop shipping or recall non-compliant products until we are able to meet the applicable standards. Noncompliance with applicable regulations or requirements could subject us to investigations, sanctions, mandatory product recalls, enforcement actions, disgorgement of profits, fines, damages, civil and criminal penalties or injunctions. If any governmental sanctions are imposed, or if we do not prevail in any possible civil or criminal litigation, our business, operating results and financial condition could be materially adversely affected. In addition, responding to any action will likely result in a significant diversion of management’s attention and resources and an increase in professional fees. Enforcement actions and sanctions could harm our business, operating results and financial condition.
Governmental regulations affecting the import or export of products could negatively affect our revenue.
The U.S. and various foreign governments have imposed controls, export license requirements and restrictions on the import or export of some technologies, especially encryption technology. In addition, from time to time, governmental agencies have proposed additional regulation of encryption technology, such as requiring the escrow and governmental recovery of private encryption keys. Governmental regulation of encryption technology and regulation of imports or exports, or our failure to obtain required import or export approval for our products, could harm our international and domestic sales and adversely affect our revenue. In addition, failure to comply with such regulations could result in penalties, costs and restrictions on export privileges, which would harm our operating results.
Due to the global nature of our business, we could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act, or similar anti-bribery laws in other jurisdictions in which we operate, and various international trade and export laws.
The global nature of our business creates various domestic and local regulatory challenges. The U.S. Foreign Corrupt Practices Act (the "FCPA"), the U.K. Bribery Act 2010 (the "U.K. Bribery Act"), and similar anti-bribery laws in other jurisdictions generally prohibit U.S.-based companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. In addition, U.S. based companies are required to maintain records that accurately and fairly represent their transactions and have an adequate system of internal accounting controls. We operate in areas of the world that experience corruption by government officials to some degree and, in certain circumstances, compliance with anti-bribery laws may conflict with local customs and practices. Our global operations require us to import and export to and from several countries, which

28



geographically stretches our compliance obligations. In addition, changes in such laws could result in increased regulatory requirements and compliance costs which could adversely affect our business, financial condition and results of operations. We cannot assure that our employees or other agents will not engage in prohibited conduct and render us responsible under the FCPA or the U.K. Bribery Act. If we are found to be in violation of the FCPA, the U.K. Bribery Act or other anti-bribery laws (either due to acts or inadvertence of our employees, or due to the acts or inadvertence of others), we could suffer criminal or civil penalties or other sanctions, which could have a material adverse effect on our business.
We may expand through acquisitions of, or investments in, other companies, each of which may divert our management’s attention, resulting in additional dilution to our stockholders and consumption of resources that are necessary to sustain and grow our business.
Our business strategy may, from time to time, include acquiring complementary products, technologies or businesses. We also may enter into relationships with other businesses in order to expand our product offerings, which could involve preferred or exclusive licenses, additional channels of distribution or discount pricing or investments in other companies. Negotiating these transactions can be time consuming, difficult and expensive, and our ability to close these transactions may be subject to third-party approvals, such as government regulation, which are beyond our control. Consequently, we can make no assurance that these transactions, once undertaken and announced, will close.
An acquisition or investment may result in unforeseen operating difficulties and expenditures. In particular, we may encounter difficulties assimilating or integrating the businesses, technologies, products, personnel or operations of the acquired companies, particularly if the key personnel of the acquired business choose not to work for us, and we may have difficulty retaining the customers of any acquired business. Acquisitions may also disrupt our ongoing business, divert our resources and require significant management attention that would otherwise be available for development of our business. Any acquisition or investment could expose us to unknown liabilities. Moreover, we cannot assure you that the anticipated benefits of any acquisition or investment would be realized or that we would not be exposed to unknown liabilities. An acquisition could also result in dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities, amortization expenses or the write-off of goodwill. These challenges related to acquisitions or investments could adversely affect our business, operating results and financial condition.
If our estimates or judgments relating to our critical accounting policies are based on assumptions that change or prove to be incorrect, our operating results could fall below expectations of securities analysts and investors, resulting in a decline in our stock price.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as provided in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the results of which form the basis for making judgments about the carrying values of assets, liabilities and equity, and the amount of revenue and expenses that are not readily apparent from other sources. Our operating results may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our operating results to fall below the expectations of securities analysts and investors, resulting in a decline in our stock price. Significant assumptions and estimates used in preparing our consolidated financial statements include, or may in the future include, those related to revenue recognition, stock-based compensation expense, long-lived assets, excess and obsolete inventory write-downs, warranty reserves and accounting for income taxes including deferred tax assets and liabilities.
If we fail to comply with environmental requirements, our business, financial condition, operating results and reputation could be adversely affected.
We are subject to various environmental laws and regulations including laws governing the hazardous material content of our products and laws relating to the collection of and recycling of electrical and electronic equipment. Examples of these laws and regulations include the European Union (the "EU"), Restrictions of Hazardous Substances Directive (the "RoHS Directive"), and the EU Waste Electrical and Electronic Equipment Directive (the "WEEE Directive") as well as the implementing legislation of the EU member states. Similar laws and regulations have been passed or are pending in China, South Korea, Norway and Japan and may be enacted in other regions, including in the United States, and we are, or may in the future be, subject to these laws and regulations.
The RoHS Directive and the similar laws of other jurisdictions ban the use of certain hazardous materials such as lead, mercury and cadmium in the manufacture of electrical equipment, including our products. We rely on our

29



contract manufactures to ensure that the manufacturer of our physical appliances and major component part suppliers comply with the RoHS Directive requirements. In addition, if there are changes to this or other laws (or their interpretation) or if new similar laws are passed in other jurisdictions, we may be required to reengineer our products to use components compatible with these regulations. This reengineering and component substitution could result in additional costs to us or disrupt our operations or logistics.
The WEEE Directive requires electronic goods producers to be responsible for the collection, recycling and treatment of such products. Changes in interpretation of the directive may cause us to incur costs or have additional regulatory requirements to meet in the future in order to comply with this directive, or with any similar laws adopted in other jurisdictions.
Our failure to comply with past, present and future similar laws could result in reduced sales of our products, substantial product inventory write-offs, reputational damage, penalties and other sanctions, which could harm our business and financial condition. We also expect that our products will be affected by new environmental laws and regulations on an ongoing basis. To date, our expenditures for environmental compliance have not had a material impact on our results of operations or cash flows and, although we cannot predict the future impact of such laws or regulations, they will likely result in additional costs and may increase penalties associated with violations or require us to change the content of our products or how they are manufactured, which could have a material adverse effect on our business, operating results and financial condition.
Changes in our valuation allowance of deferred tax assets may affect our future financial results
We record a valuation allowance to reduce our net deferred tax assets to the amount that we believe is more-likely-than-not to be realized. In assessing the need for a valuation allowance, we consider historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and practical tax planning strategies. On a periodic basis we evaluate our deferred tax asset balance for realizability. To the extent we believe it is more-likely-than-not that some portion of our deferred tax assets will not be realized, we will increase the valuation allowance against the deferred tax assets. Realization of our deferred tax assets is primarily upon future taxable income in related tax jurisdictions. If our assumptions and consequently our estimates change in the future, the valuation allowances may be increased or decreased, resulting in a respective increase or decrease in income tax expense.
As of December 27, 2014 we assessed that it is more-likely-than-not that we will not realize our federal and state deferred tax assets based on the absence of sufficient positive objective evidence that we would generate sufficient taxable income in our U.S. tax jurisdiction to realize the deferred tax assets. Accordingly, we recorded a valuation allowance on our federal and state deferred tax assets (see Note 10 of the Notes to Consolidated Financial Statements).
New regulations related to conflict minerals may cause us to incur additional expenses and could limit the supply and increase the costs of certain metals used in the manufacturing of our products.
As a public company, we are subject to new requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act") which will require us to diligence, disclose, and report whether or not our products contain conflict minerals. As a recently public company, we must file our initial report with respect to conflict minerals on or prior to May 31, 2016 for the 2015 calendar year. The implementation of these new requirements could adversely affect the sourcing, availability and pricing of the materials used in the manufacture of components used in our products. In addition, we will incur additional costs to comply with the disclosure requirements, including costs related to conducting diligence procedures to determine the sources of conflict minerals that may be used or necessary to the production of our products and, if applicable, potential changes to products, processes or sources of supply as a consequence of such verification activities. It is also possible that we may face reputational harm if we determine that certain of our products contain minerals not determined to be conflict free or if we are unable to alter our products, processes or sources of supply to avoid such materials.
The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain executive management and qualified board members.
As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Act, the listing requirements of the New York Stock Exchange and other applicable securities rules and regulations. Compliance with these rules and regulations has increased and may continue to increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources, particularly after we are no longer an “emerging growth company,” as defined in the Jumpstart our Business Startups Act (the "JOBS Act"). The Exchange Act requires, among other

30



things, that we file annual, quarterly and current reports with respect to our business and operating results. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. In order to maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight may be required. As a result, management’s attention may be diverted from other business concerns, which could adversely affect our business and operating results. Although we have already hired additional employees to comply with these requirements, we may need to hire more employees in the future or engage outside consultants, which will increase our costs and expenses.
In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and our business may be adversely affected.
However, for as long as we remain an “emerging growth company,” we may take advantage of certain exemptions from various reporting requirements that are applicable to public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We may take advantage of these reporting exemptions until we are no longer an “emerging growth company.”
We will cease to be an “emerging growth company” upon the earliest of: (i) the end of our fiscal year 2018, (ii) the beginning of our first fiscal year after our annual gross revenues are $1.0 billion or more, (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt securities or (iv) as of the end of any fiscal year in which the market value of our common stock held by non-affiliates exceeded $700 million as of the end of the second quarter of that fiscal year.
Our business is subject to the risks of earthquakes, fire, power outages, floods and other catastrophic events, and to interruption by manmade problems such as terrorism.
A significant natural disaster, such as an earthquake, fire or a flood, or a significant power outage could have a material adverse impact on our business, operating results and financial condition. Our corporate headquarters are located in the San Francisco Bay Area, a region known for seismic activity. In addition, natural disasters could affect our manufacturing vendors or logistics providers’ ability to perform services such as manufacturing products on a timely basis and assisting with shipments on a timely basis. In the event our service providers’ information technology systems or manufacturing or logistics abilities are hindered by any of the events discussed above, shipments could be delayed, resulting in missing financial targets, such as revenue and shipment targets, for a particular quarter. Further, if a natural disaster occurs in a region from which we derive a significant portion of our revenue, end-user customers in that region may delay or forego purchases of our products, which may materially and adversely impact our operating results for a particular period. In addition, acts of terrorism could cause disruptions in our business or the business of our manufacturer, logistics providers, partners, end-user customers or the economy as a whole. Given our typical concentration of sales at each quarter end, any disruption in the business of our manufacturer, logistics providers, partners or customers that impacts sales at the end of our quarter could have a significant adverse impact on our quarterly results. All of the aforementioned risks may be augmented if the disaster recovery plans for us and our suppliers prove to be inadequate. To the extent that any of the above results in delays or cancellations of customer orders, or delays in the manufacture, deployment or shipment of our products, our business, financial condition and operating results would be adversely affected.
Risks Relating to Owning Our Common Stock
Our actual operating results may differ significantly from our guidance.

31



From time to time, we have released, and may continue to release guidance in our quarterly earnings conference call, quarterly earnings releases, or otherwise, regarding our future performance that represents our management’s estimates as of the date of release. This guidance, which includes forward-looking statements, has been and will be based on projections prepared by our management. These projections are not prepared with a view toward compliance with published guidelines of the American Institute of Certified Public Accountants, and neither our registered public accountants nor any other independent expert or outside party compiles or examines the projections. Accordingly, no such person expresses any opinion or any other form of assurance with respect to the projections.
Projections are based upon a number of assumptions and estimates that, while presented with numerical specificity, are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and are based upon specific assumptions with respect to future business decisions, some of which will change. We intend to state possible outcomes as high and low ranges which are intended to provide a sensitivity analysis as variables are changed but are not intended to imply that actual results could not fall outside of the suggested ranges. The principal reason that we release guidance is to provide a basis for our management to discuss our business outlook with analysts and investors. We do not accept any responsibility for any projections or reports published by any such third parties.
Guidance is necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the guidance furnished by us will not materialize or will vary significantly from actual results. Accordingly, our guidance is only an estimate of what management believes is realizable as of the date of release. Actual results may vary from our guidance and the variations may be material. For example, in the first and second quarters of 2014, we announced results that fell below our guidance and below analyst expectations, both of which events resulted in sharp declines in our stock price. If we fail to meet such expectations in the future, the market price of our common stock could again fall substantially and we could face costly lawsuits, including securities class action litigation. We undertake no obligation to make revisions or publicly update our guidance in advance of actual results unless required by law. In light of the foregoing, investors are urged to consider all of the information we make publicly available in making an investment decision regarding our common stock and not rely solely upon our guidance.
Any failure to successfully implement our operating strategy or the occurrence of any of the events or circumstances set forth in this “Risk Factors” section could result in the actual operating results being different from our guidance, and the differences may be adverse and material.
Our share price has been and may continue to be volatile, and you could lose all or part of your investment.
Technology stocks have historically experienced high levels of volatility. The trading price of our common stock has been and is likely to continue to be highly volatile and subject to wide fluctuations in response to various factors, some of which are beyond our control and may not be related to our operating performance. Since shares of our common stock were sold in our IPO in June 2013 at a price of $19.00 per share, the reported high and low sales prices of our common stock have ranged from $9.95 to $41.81 through December 27, 2014. These fluctuations could cause you to lose all or part of your investment in our common stock. Factors that may cause the market price of our common stock to fluctuate include: 
price and volume fluctuations in the overall stock market from time to time;
significant volatility in the market price and trading volume of technology companies in general, and of companies in our industry;
actual or anticipated changes in our results of operations or fluctuations in our operating results;
whether our operating results meet the expectations of securities analysts or investors;
actual or anticipated changes in the expectations of investors or securities analysts;
actual or anticipated developments in our competitors’ businesses or the competitive landscape generally;
litigation involving us, our industry or both;
regulatory developments in the United States, foreign countries or both;
general economic conditions and trends;
major catastrophic events;

32



sales of large blocks of our stock; or
departures of key personnel.
In addition, if the market for technology stocks, or the stock market in general, experiences a loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, operating results or financial condition. The trading price of our common stock might also decline in reaction to events that affect other companies in our industry even if these events do not directly affect us.
In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company. If our stock price is volatile, we may become the target of securities litigation. Securities litigation could result in substantial costs and divert our management’s attention and resources from our business, and this could have a material adverse effect on our business, operating results and financial condition.
Sales of outstanding shares of our common stock into the market in the future could cause the market price of our common stock to drop significantly.
If our existing stockholders sell, or indicate an intention to sell, substantial amounts of our common stock in the public market after legal restrictions on resale lapse, the trading price of our common stock could decline. There were 32,641,500 shares of common stock outstanding as of December 27, 2014, all of which are freely tradable, unless such shares are held by “affiliates,” as that term is defined in Rule 144 of the Securities Act of 1933, as amended (the "Securities Act").
In addition, we have filed a registration statement to register all shares subject to options or restricted stock units that are currently outstanding or that are reserved for future issuance under our equity compensation plans. If these additional shares are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline.
If securities analysts do not publish research or reports about our business, or if they downgrade our stock, the price of our stock could decline.
The trading market for our common stock could be influenced by any research and reports that securities or industry analysts publish about us or our business. Securities and industry analysts have only recently commenced research coverage of us. In the event securities or industry analysts who cover our company downgrade our stock or publish inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price and trading volume to decline.
We do not intend to pay dividends in the foreseeable future.
We intend to retain any earnings to finance the operation and expansion of our business, and we do not anticipate paying any cash dividends on our common stock for the foreseeable future. As a result, you may only receive a return on your investment in our common stock if the market price of our common stock increases.
Provisions in our certificate of incorporation and bylaws and under Delaware law might discourage, delay or prevent a change of control of our company or changes in our management and, therefore, depress the trading price of our common stock.
Our certificate of incorporation and bylaws contain provisions that could depress the trading price of our common stock by acting to discourage, delay or prevent a change of control of our company or changes in our management that the stockholders of our company may deem advantageous. These provisions: 
establish a classified board of directors so that not all members of our board of directors are elected at one time;
authorize the issuance of “blank check” preferred stock that our board of directors could issue to increase the number of outstanding shares to discourage a takeover attempt;
prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;
prohibit stockholders from calling a special meeting of our stockholders;
provide that the board of directors is expressly authorized to make, alter or repeal our bylaws; and
establish advance notice requirements for nominations for elections to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.

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Additionally, we are subject to Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “interested” stockholder for a period of three years following the date on which the stockholder became an “interested” stockholder and which may discourage, delay or prevent a change of control of our company.
Any provision of our certificate of incorporation or bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
In February 2014, we relocated our worldwide headquarters from Milpitas, California, to a facility in Santa Clara, California. Our new worldwide headquarters occupy approximately 105,600 square feet of office space under a sublease arrangement that expires in March 2018 for an aggregate net base rent of $10.7 million. In addition to the base rent, we are responsible for payment of certain operating expenses, including utilities and real estate taxes.
We have additional office locations in New York, New York and Vienna, Virginia in the United States. We lease space in various international locations for operations and sales personnel and are currently opening a research and development facility in Chennai, India. Our current facilities are adequate to meet our existing needs. However, to the extent we meet our current growth expectations, we will need to expand our facilities. We believe that we will be able to obtain additional or substitute facilities on commercially reasonable terms. However, we expect to incur additional expenses in connection with any such new or expanded facilities.
Item 3. Legal Proceedings
We may, from time to time, be subject to legal proceedings and claims arising from the normal course of business activities, and an unfavorable resolution of any of these matters could materially affect our future business, results of operations, financial condition or cash flows.
Item 4. Mine Safety Disclosures
Not applicable.

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PART II 
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock, $0.0001 par value per share, has been listed on the New York Stock Exchange under the symbol “GIMO” since June 12, 2013. Prior to that date, there was no public trading market for our common stock.
Holders of Record
As of February 27, 2015, there were 121 holders of record of our common stock. Because many of our shares of common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.
Price Range of Our Common Stock
The following table sets forth for the periods indicated the high and low sales prices per share of our common stock as reported on the New York Stock Exchange: 
 
High
Low
Fiscal 2013:
 
 
Second Quarter (from June 12, 2013)
$
28.75

$
23.02

Third Quarter
$
41.81

$
26.40

Fourth Quarter
$
39.85

$
25.18

Fiscal 2014:
 
 
First Quarter
$
36.75

$
27.13

Second Quarter
$
31.78

$
14.75

Third Quarter
$
19.76

$
10.11

Fourth Quarter
$
17.88

$
9.95

On December 27, 2014, the last reported sale price of our common stock on the New York Stock Exchange was $17.47 per share.
Dividend Policy
We intend to retain any future earnings and do not currently anticipate paying any cash dividends on our common stock. Any future determination to declare cash dividends will be made at the discretion of our board of directors, subject to applicable laws, and will depend on our financial condition, results of operations, capital requirements, general business conditions and other factors that our board of directors may deem relevant.
Stock Price Performance Graph
This performance graph shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or incorporated by reference into any filing of Gigamon Inc. under the Securities Act of 1933, as amended, or the Securities Act, except as shall be expressly set forth by specific reference in such filing. The stock price performance on this performance graph is not necessarily indicative of future stock price performance.
This performance graph compares the cumulative total return on our common stock with that of the NYSE Composite Index and the NASDAQ Telecommunications Index. The initial public offering price of our common stock was $19.00 per share and the closing price was $28.47 per share on June 12, 2013. This performance graph assumes $100 was invested in the common stock of Gigamon Inc. at the closing price of $28.47 per share on June 12, 2013 as required by SEC rules and $100 was invested in each of the NYSE Composite Index and the NASDAQ Telecommunications Index on May 31, 2013.

35



COMPARISON OF 18 MONTH CUMULATIVE TOTAL RETURN*
Among Gigamon Inc., the NYSE Composite Index,
and the NASDAQ Telecommunications Index
* $100 invested on 6/12/13 in stock or 5/31/13 in index, including reinvestment of dividends. Fiscal year ending December 27.
Recent Sales of Unregistered Securities
None
Issuer Purchases of Equity Securities
None.
Item 6. Selected Consolidated Financial Data
Effective January 1, 2013, we changed our reporting period from a calendar year ending on December 31 of each year to a 52- or 53-week fiscal year that ends on the last Saturday in December. Fiscal 2014 was a 52-week fiscal year ended on December 27, 2014, and each quarter was a 13-week quarter. Fiscal 2013 was a 52-week fiscal year ended on December 28, 2013, and each quarter was a 13-week quarter.
The following tables summarize our historical consolidated financial data. We have derived the summary consolidated statement of operations data for fiscal 2014, 2013 and 2012, and the selected consolidated balance sheet data as of December 27, 2014 and December 28, 2013, from our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The consolidated statement of operations data for fiscal 2011 and 2010, and the selected consolidated balance sheet data as of December 31, 2012, 2011 and 2010, are derived from our audited consolidated financial statements not included in this Annual Report on Form 10-K. Our historical results are not necessarily indicative of the results that may be expected in the future. The following summary consolidated financial and other data should be read in conjunction with the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.

36



 
Fiscal Year Ended
 
December 27, 2014
December 28, 2013
December 31, 2012
December 31, 2011
December 31, 2010
 
(in thousands, except per share amounts)
Consolidated Statement of Operations Data:
 
 
 
 
 
Revenue:
 
 
 
 
 
Product
$
105,594

$
101,717

$
69,516

$
51,308

$
35,577

Service
51,536

38,578

27,199

16,797

10,909

Total revenue
157,130

140,295

96,715

68,105

46,486

Cost of revenue:





Product
31,001

26,103

18,039

12,528

6,122

Service
6,447

4,727

2,246

1,900

2,239

Total cost of revenue(1)
37,448

30,830

20,285

14,428

8,361

Gross profit
119,682

109,465

76,430

53,677

38,125

Operating expenses:





Research and development(1)
42,806

42,067

17,730

12,530

12,283

Sales and marketing(1)
76,063

72,024

39,359

19,358

12,522

General and administrative(1)
20,683

25,575

11,665

4,766

6,610

Total operating expenses
139,552

139,666

68,754

36,654

31,415

(Loss) income from operations
(19,870
)
(30,201
)
7,676

17,023

6,710

Interest income
308

95

64

4

9

Other expense, net
(94
)
(94
)
(70
)
(16
)
(7
)
(Loss) income before income tax(provision) benefit
(19,656
)
(30,200
)
7,670

17,011

6,712

Income tax (provision) benefit
(21,134
)
20,663

(139
)
(80
)
(75
)
Net (loss) income
(40,790
)
(9,537
)
7,531

16,931

6,637

Accretion of preferred units to redemption value and issuance costs

(1,088
)
(2,236
)
(2,078
)
(1,834
)
Loss (earnings) distributable to preferred stock holders

1,107

(1,690
)
(4,741
)
(1,350
)
Net (loss) income attributable to common stockholders
$
(40,790
)
$
(9,518
)
$
3,605

$
10,112

$
3,453

Net (loss) income per share attributable to common stockholders:





Basic and Diluted(2)
$
(1.27
)
$
(0.39
)
$
0.21

$
0.58

$
0.19

Weighted average shares used in computing net (loss) income per share attributable to common stockholders:





Basic(2)
32,200

24,722

17,300

17,300

17,862

Diluted(2)
32,200

24,722

17,303

17,300

17,862

 
(1)The following tables present stock-based compensation expense and expenses related to our performance units included in each expense category:
 
Fiscal Year Ended
 
December 27, 2014
December 28, 2013
December 31, 2012
December 31, 2011
December 31, 2010
 
(in thousands)
Stock-based compensation and related payroll tax expenses:
 
 
 
 
 
Cost of revenue
$
1,743

$
3,496

$
153

$

$
1,086

Research and development
8,523

11,467

542

8

4,692

Sales and marketing
8,433

11,034

893

2

2,377

General and administrative
6,780

6,546

2,011

2

2,212

Total stock-based compensation and related payroll tax expenses
$
25,479

$
32,543

$
3,599

$
12

$
10,367

 

37



 
Fiscal Year Ended
 
December 27, 2014
December 28, 2013
December 31, 2012
December 31, 2011
December 31, 2010
 
(in thousands)
Performance units and related payroll tax expenses:
 
 
 
 
 
Cost of revenue
$

$
353

$

$

$

Research and development

5,188




Sales and marketing

7,991




General and administrative

6,839




Total performance unit and related payroll tax expenses
$

$
20,371

$

$

$

 
(2)See Note 2 to our consolidated financial statements for an explanation of the calculations of our basic and diluted net (loss) income per share attributable to common stockholders.
 
As of
 
December 27, 2014
December 28,
2013
December 31,
2012
December 31,
2011
December 31,
2010
 
(in thousands)
Consolidated Balance Sheet Data:
 
 
 
 
 
Cash and cash equivalents
$
38,941

$
79,908

$
18,675

$
13,102

$
5,804

Short-term investments
110,465

58,242




Working capital (deficit)
122,697

111,468

647

183

(555
)
Total assets
197,986

195,517

51,497

43,995

20,876

Redeemable convertible preferred units


28,344

26,108

24,030

Total stockholders’ equity (members’ deficit)
115,435

123,438

(30,045
)
(27,809
)
(25,731
)

38



Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. In addition to historical financial information, this discussion contains forward-looking statements that reflect our plans, estimates and beliefs. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” and similar expressions are intended to identify forward-looking statements. Our actual results could differ materially from those contained in or implied by any forward-looking statements. Factors that could cause or contribute to those differences include, but are not limited to, those identified below and those discussed above in the section titled “Risk Factors” and elsewhere in this Annual Report on Form 10-K.
Overview
We have developed an innovative solution that delivers pervasive and dynamic intelligent visibility and control of traffic across networks. Our solution, which we refer to as our Unified Visibility Fabric, consists of distributed Visibility Fabric nodes that enable an advanced level of visibility, modification and control of network traffic. Our Unified Visibility Fabric enables IT organizations to forward traffic from network and server infrastructure to management, analysis, compliance and security tools.
In 2005, we introduced our patented Flow Mapping technology in combination with the launch of our first product, the GigaVUE-MP. In 2010, we introduced our GigaSMART platform to support advanced packet modification applications, and have since introduced 12 licensable applications including De-Duplication, Tunneling, Advanced Packet Filtering, FlowVUE, GTP Correlation and NetFlow Generation. We have also continued to expand our Fabric Node portfolio including adding the GigaVUE H Series chassis, the first Terabit scale Visibility Fabric for high-throughput environments, which we launched in 2011. In 2012, we introduced GigaVUE-VM, a software-only version of our platform for virtualized and cloud-based applications, and GigaVUE-FM, our software-only management offering. In 2013, we introduced the GigaVUE-HB1 platform, which incorporates GigaSMART as standard, to extend the reach of the Visibility Fabric to smaller environments and mid-size enterprises, and several new software applications, including Adaptive Packet Filtering (content-based filtering), FlowVUE and GTP Correlation (mobile subscriber-based sampling). In 2014, we introduced the GigaVUE-HC2 platform enabling customers to deploy a Visibility Fabric inline and introduced an integrated SSL decryption capability as part of our GigaSMART portfolio. In January 2015, we announced our intent to make our feature-rich visibility software, GigaVUE-OS, available on select, third party “white box" hardware to enable customers to choose new deployment models for a Visibility Fabric.
We generate product revenue primarily from sales of perpetual software licenses installed on physical appliances for our Unified Visibility Fabric solutions to channel partners, including distributors and resellers, as well as directly to end-user customers. We sell our products directly through our own sales force and indirectly through our channel partners. We provide our channel partners with marketing assistance, technical training and support.
We generate service revenue primarily from the sale of maintenance and support services for our products. A one-year contract for our maintenance and support services is generally bundled with the initial contract to purchase our products. Following expiration of this one-year contract, our end-user customers typically purchase maintenance and support contracts that generally have one-year terms.
We have experienced significant growth since our inception in 2004. Our revenue increased from $68.1 million in fiscal 2011 to $157.1 million in fiscal 2014, representing a compounded annual growth rate, or CAGR, of 32%. In fiscal 2014, we added 329 new customers as compared to 310 new customers added in fiscal 2013. Our net loss was $40.8 million, and $9.5 million in fiscal 2014 and 2013, respectively and our net income was $7.5 million in fiscal 2012. Our net loss in fiscal 2013 included a one-time cash charge of $20.4 million relating to performance unit payments as a result of our IPO in June 2013. We generated cash from operations of $11.1 million, $23.3 million, and $27.7 million in fiscal 2014, 2013, and 2012, respectively. We operate as a single reportable segment.

39



Key Performance Indicators of Our Business
We monitor a variety of key performance indicators to help us evaluate growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts and assess operational efficiencies. These key performance indicators include the following (dollars in thousands):
 
Fiscal Year Ended
 
December 27, 2014
December 28, 2013
December 31, 2012
Key Performance Indicators:
 
 
 
Revenue
$
157,130

$
140,295

$
96,715

Gross margin
76
%
78
%
79
%
(Loss) income from operations
$
(19,870
)
$
(30,201
)
$
7,676

Deferred revenue
55,505

47,476

30,820

Revenue.    We monitor our revenue to assess the acceptance of our products by our end-user customers and growth in the markets we serve.
Gross margin.    We monitor our gross margin to assess the impact on our current and forecasted financial results from any changes to the pricing and mix of products we are selling to our customers.
(Loss) income from operations.    We monitor our (loss) income from operations to assess how effectively we are conducting our operations as well as controlling our operating expenses, which are primarily driven by headcount.
Deferred revenue. Our deferred revenue consists of amounts that have been invoiced but that have not yet been recognized as revenue. The majority of our deferred revenue balance consists of the unamortized portion of service revenue from maintenance and support contracts. We also defer revenue, and the related costs of product revenue, on sales of products to distributors who stock inventory until the distributors report to us that they have sold the products to end-user customers. We monitor our deferred revenue balance because it represents a significant portion of the revenue that we will recognize in future periods. We assess the change in our deferred revenue balance which, taken together with revenue, is an indication of sales activity in a given period.
Initial Public Offering and Follow-On Public Offering
On June 17, 2013, we completed our IPO, in which 7,762,500 shares of common stock were sold at a public offering of $19.00 per share. We issued and sold 5,512,500 shares of common stock, inclusive of the 1,012,500 shares of common stock sold in connection with the full exercise of the overallotment option of shares granted to the underwriters, at a public offering price of $19.00 per share. We received proceeds of $93.4 million, net of underwriting discounts and commissions and offering expenses. In addition, our selling stockholders sold 2,250,000 shares of common stock at a public offering price of $19.00 per share. We did not receive any proceeds from the sale of shares by the selling stockholders.
On October 28, 2013, we completed a follow-on public offering, in which 5,100,000 shares of our common stock were sold at a public offering price of $38.50 per share. We issued and sold 300,000 shares of common stock, for which we received proceeds of $10.2 million, net of underwriting discounts and commissions and offering expenses. In addition, our selling stockholders sold 4,800,000 shares of common stock, which included 293,718 shares of common stock issued upon the exercise of options by certain selling stockholders with an aggregate exercise price of $1.3 million, at a public offering price of $38.50 per share. We did not receive any proceeds from the sale of shares by the selling stockholders.
Financial Overview
Revenue
We generate revenue from the sale of products and related services, including maintenance and support. We present revenue net of discounts, rebates and sales taxes. Our revenue is comprised of the following:
Product revenue. We generate product revenue primarily from sales of perpetual software licenses installed on physical appliances for our Unified Visibility Fabric solutions. We generally recognize product revenue at the time of product delivery, provided that all other revenue recognition criteria have been met. As a percentage of revenue, we expect our product revenue to vary from quarter-to-quarter based on, among other things, the timing of

40



orders, the delivery of products, and seasonal and cyclical factors discussed under the section titled “Results of Operations”.
We have experienced seasonality in the sale of our products. The first quarter of each year is usually our lowest revenue quarter during the year and product revenue typically declines sequentially from the prior fourth quarter. We generally expect an increase in sales in the second half of the year, primarily due to the buying habits of many of our end-user customers as budgets for annual capital purchases are being fully utilized.
We expect our product revenue to increase as we continue to add new end-user customers, expand the volume of shipments to our current end-user customers and introduce new products.
Service revenue.    We generate service revenue from sales of maintenance and support contracts, which are bundled with sales of products, and from subsequent renewals of those contracts. We offer tiered maintenance and support services under our renewable, fee-based maintenance and support contracts, which include technical support, hardware repair and replacement parts, bug fixes, patches and unspecified upgrades on a when-and-if-available basis. We recognize service revenue ratably over the duration of the contract, which is typically one year and can be up to five years. As a result, the impact on service revenue will lag any shift in product revenue because product revenue is recognized when a product is sold and revenue criteria are satisfied, whereas service revenue is recognized ratably over the contract term. We expect our service revenue to increase as we expand our installed base by selling more products and adding more end-user customers.
Cost of revenue
Our cost of revenue consists of the following:
Cost of product revenue. Cost of product revenue is comprised primarily of the costs associated with manufacturing our products, including third-party hardware manufacturing costs; personnel costs for salary, benefits, bonuses and stock-based compensation expense; shipping costs; allocated costs of facilities and information technology; any inventory write-downs; and warranty costs and other related expenses. We expect cost of product revenue to increase in connection with the anticipated increase in product revenue.
Cost of service revenue.    Cost of service revenue is comprised primarily of personnel costs for salary, benefits, bonuses and stock-based compensation expense related to our customer support organization, as well as allocated costs of facilities and information technology. We expect cost of service revenue to increase in connection with the anticipated increase in service revenue.
Gross profit and gross margin
Gross profit has been and will continue to be affected by a variety of factors including shipment volumes, changes in the mix of products and services sold, changes in our product costs including any inventory write-downs, new product introductions and upgrades to existing products, changes in customer mix, changes in pricing and the extent of customer rebates and incentive programs. We expect our gross margin to fluctuate over time depending on a variety of factors, including those described above.
Operating expenses
Operating expenses consist of research and development, sales and marketing and general and administrative expenses. Personnel costs comprise a significant component of our operating expenses, and consist of salaries, benefits, bonuses and stock-based compensation expense; and with respect to our sales organization, personnel costs also include sales commissions. The number of employees attributable to our operating expenses increased to 340 as of December 27, 2014, compared to 326 as of December 28, 2013 and 224 as of December 31, 2012. We expect to continue to hire new employees to support our anticipated growth, particularly with respect to an anticipated increase in sales and marketing and research and development employees in fiscal 2015. We expect operating expenses to increase as we continue to grow. However, we expect these increases to be at a lower rate than our increase in revenue.
Research and development.    Our research and development efforts are focused on new product development and on developing additional functionality for our existing products. Research and development expenses consist primarily of personnel costs, and to a lesser extent, prototype materials, allocated costs of facilities and information technology and product certification. We expense research and development costs as incurred. We expect our research and development expenses to increase as we continue to develop new products and enhance our existing products. However, we expect these increases to be at a lower rate than our increase in revenue.

41



Sales and marketing.    Sales and marketing expenses are the largest component of our operating expenses and consist primarily of personnel costs, as well as travel expenses, trade shows, marketing and promotional activities, and allocated costs of facilities and information technology. We sell our products through our global sales organization, which is divided into three geographic regions: Americas, Europe, Middle East, and Africa (EMEA), and Asia Pacific. We expect our sales and marketing expenses to increase as we expand our sales and marketing efforts internationally and domestically to help drive increased revenue. However, we expect these increases to be at a lower rate than our increase in revenue.
General and administrative.    General and administrative expenses consist of personnel costs and allocated costs of facilities and information technology related to our executive, finance, human resources and legal functions, as well as professional services costs. Professional services costs consist primarily of outside legal and accounting services. We have incurred and expect to continue to incur expenses as a result of operating as a public company, including costs to comply with the rules and regulations applicable to companies listed on a national securities exchange and costs related to compliance and reporting obligations. However, we expect any increases to be at a lower rate than our increase in revenue.
Interest income and other expense, net
Interest income consists primarily of income earned on our invested cash, cash equivalents and short-term investments. Historically, interest income has not been material, but it has increased with the level of invested cash.
Other expense, net consists primarily of foreign currency exchange losses related to transactions denominated in currencies other than the U.S. dollar, which have not been material to date.
Provision (benefit) for income taxes
Prior to May 31, 2013, we conducted our operations through Gigamon LLC, a pass through entity that filed its income tax return as a partnership for federal and state income tax purposes. As a result, prior to May 31, 2013, we were not subject to U.S. federal or state income taxes as our taxable income was reported by our individual members.
On May 31, 2013, we converted from a Delaware limited liability company (a pass through entity not subject to U.S. federal and state income taxes) to a Delaware corporation. Accordingly, following such conversion, we elected to be treated as a corporation under Subchapter C of Chapter 1 of the United States Internal Revenue Code, as amended, or the Code, and, therefore, are subject to both federal and state income taxes. As a result of this tax election, we recorded a one-time non-cash income tax benefit of $14.8 million in fiscal 2013, for the deferred tax asset amount recorded upon our change in entity status from a Delaware limited liability company to a Delaware corporation. The provision for income taxes in fiscal 2014, was primarily related to the establishment of a valuation allowance against the deferred tax assets in the United States during the second quarter of fiscal 2014 and for taxes assessed by foreign jurisdictions. As of June 28, 2014 it was assessed that it is more-likely-than-not that we will not realize our federal and state deferred tax assets based on the absence of sufficient positive objective evidence that we would generate sufficient taxable income in our United States tax jurisdiction to realize the deferred tax assets. Accordingly, a valuation allowance on our federal and state deferred tax assets for an amount of $24.6 million was charged to the income tax provision.
The recording of this valuation allowance was primarily due to ongoing losses and the uncertainty regarding future results adjusted for permanent differences which have resulted in a more likely than not determination that our deferred tax assets would not be realized. In making this determination, we considered all available evidence, both positive and negative. Such evidence included, among other factors, our history of profitability and losses, jurisdictional income recognition trends, pretax losses adjusted for certain other items, and future forecasted income by jurisdiction. The benefit from income taxes for the six months ended June 29, 2013 was $25.0 million. This was the initial recognition of deferred tax assets, upon the conversion of the limited liability company to a corporation, partially offset by current foreign taxes. We are also subject to state taxes in certain states that may assess capital taxes or taxes based on gross receipts. We also have a subsidiary in a foreign jurisdiction, which is subject to income taxes in the jurisdictions in which it operates.
Stock-based compensation expense and other compensation charges
Prior to the formation of our company in 2009, Gigamon Systems LLC, our majority stockholder prior to the LLC Conversion, issued options to purchase its common units to some of its employees. As these employees became our employees upon the contribution of all of the assets and liabilities of Gigamon Systems LLC to us in January 2009, we assumed all of the necessary tax obligations and recorded a relatively small stock-based compensation expense related to these options in our consolidated statement of operations. Between January 1, 2009 and December 31, 2011, instead of granting stock options to our employees, we granted performance units to

42



our employees under our 2009 Performance Unit Plan. The vested performance units were satisfied by us with a cash payment to the holders of performance units in connection with the completion of our IPO. Accordingly, the grant of performance units did not result in stock-based compensation expense or compensation charges in any period prior to the completion of our IPO, but, upon the completion of our IPO, we recorded cash-based compensation expense and related payroll taxes of $20.4 million for our performance units based on our IPO price of $19.00 per share, which is reflected in cost of revenue and operating expenses in the second quarter of fiscal 2013.
We began granting stock options in April 2012 and began granting restricted stock units, or RSUs, in August 2012. Prior to the second quarter of fiscal 2013, we did not record any stock-based compensation expense associated with stock options and RSUs that did not begin to vest until the completion of our IPO, or the IPO Awards. Upon the completion of our IPO in fiscal 2013, we recorded stock-based compensation expense of $5.5 million, net of estimated forfeitures, related to these IPO Awards and began offering eligible employees the opportunity to purchase shares under our 2013 Employee Stock Purchase Plan. Total stock-based compensation expense, net of estimated forfeitures, was $24.7 million, $32.5 million, and $3.6 million in fiscal 2014, 2013, and 2012, respectively. As of December 27, 2014, unrecognized stock-based compensation expense, net of estimated forfeitures, was $24.8 million. To the extent actual forfeiture rates are different from what we have anticipated, stock-based compensation expense related to these awards will be different from our expectations.
Change in Reporting Calendar
Effective January 1, 2013, we changed our reporting period from a calendar year ending on December 31 of each year to a 52- or 53-week fiscal year that ends on the last Saturday in December. Fiscal 2014 was a 52-week fiscal year ended on December 27, 2014, and each quarter was a 13-week quarter. Fiscal 2013 was a 52-week fiscal year ended on December 28, 2013, and each quarter was a 13-week quarter.
Results of Operations
The following tables set forth our results of operations for the fiscal years presented in dollars and as a percentage of our revenue (in thousands, except percentages):

43



 
Fiscal Year Ended
 
December 27, 2014
December 28, 2013
December 31, 2012
Consolidated Statement of Operations Data:
 
 
 
Revenue:
 
 
 
Product
$
105,594

$
101,717

$
69,516

Service
51,536

38,578

27,199

Total revenue
157,130

140,295

96,715

Cost of revenue:



Product
31,001

26,103

18,039

Service
6,447

4,727

2,246

Total cost of revenue
37,448

30,830

20,285

Gross profit
119,682

109,465

76,430

Operating expenses:



Research and development
42,806

42,067

17,730

Sales and marketing
76,063

72,024

39,359

General and administrative
20,683

25,575

11,665

Total operating expenses
139,552

139,666

68,754

(Loss) income from operations
(19,870
)
(30,201
)
7,676

Interest income
308

95

64

Other expense, net
(94
)
(94
)
(70
)
(Loss) income before income tax (provision) benefit
(19,656
)
(30,200
)
7,670

Income tax (provision) benefit
(21,134
)
20,663

(139
)
Net (loss) income
$
(40,790
)
$
(9,537
)
$
7,531

Net (loss) income includes stock-based compensation expense and performance units expense allocated as follows:
 
 
 
Stock-based compensation and related payroll tax expenses:
 
 
 
Cost of revenue
$
1,743

$
3,496

$
153

Research and development
8,523

11,467

542

Sales and marketing
8,433

11,034

893

General and administrative
6,780

6,546

2,011

Total stock-based compensation and related payroll tax expenses
$
25,479

$
32,543

$
3,599

Performance unit and related payroll tax expenses:
 
 
 
Cost of revenue
$

$
353

$

Research and development

5,188


Sales and marketing

7,991


General and administrative

6,839


Total performance unit and related payroll tax expenses
$

$
20,371

$


44



 
Fiscal Year Ended
 
December 27, 2014
December 28, 2013
December 31, 2012
Percentage of Revenue:
 
 
 
Revenue:
 
 
 
Product
67
 %
73
 %
72
 %
Service
33
 %
27
 %
28
 %
Total revenue
100
 %
100
 %
100
 %
Cost of revenue
24
 %
22
 %
21
 %
Gross margin
76
 %
78
 %
79
 %
Operating expenses:



Research and development
27
 %
30
 %
18
 %
Sales and marketing
49
 %
51
 %
41
 %
General and administrative
13
 %
19
 %
12
 %
Total operating expenses
89
 %
100
 %
71
 %
(Loss) income from operations
(13
)%
(22
)%
8
 %
Interest income
 %
 %
 %
Other expense, net
 %
 %
 %
(Loss) income before income tax (provision) benefit
(13
)%
(22
)%
8
 %
Income tax (provision) benefit
(13
)%
15
 %
 %
Net (loss) income
(26
)%
(7
)%
8
 %
Comparison of Fiscal 2014 and Fiscal 2013
Revenue
 
Fiscal Year Ended
 
 
 
December 27, 2014
December 28, 2013
Increase
% Increase
 
 
(dollars in thousands)
 
 
Revenue:
 
 
 
 
Product
$
105,594

$
101,717

$
3,877

4
%
Service
51,536

38,578

12,958

34
%
Total revenue
$
157,130

$
140,295

$
16,835

12
%
Product revenue increased $3.9 million in fiscal 2014 as compared to fiscal 2013, primarily due to a $22.4 million increase in sales of our high density, H-Series products offset in part by a decrease in the volume of sales of our G-Series products of $18.5 million.
Service revenue increased $13.0 million in fiscal 2014, compared to fiscal 2013, primarily due to the growth in our installed base at our end-user customers under maintenance and support contracts.

45



Cost of revenue and gross margin
 
Fiscal Year Ended
 
 
 
December 27, 2014
December 28, 2013
Increase/(decrease)
% Increase/(decrease)
 
(dollars in thousands)
 
Cost of revenue:
 
 
 
 
Product
$
31,001

$
26,103

$
4,898

19
 %
Service
6,447

4,727

1,720

36
 %
Total cost of revenue
$
37,448

$
30,830

$
6,618

21
 %
Gross margin:
 
 
 
 
Product
71
%
74
%
 
 
Service
87
%
88
%
 
 
Total gross margin
76
%
78
%
 
 
Stock-based compensation expense included in cost of revenue
$
1,743

$
3,496

(1,753
)
(50
)%
Performance units expense included in cost of revenue
$

$
353

(353
)
(100
)%
Total gross margin decreased to 76% in fiscal 2014 from 78% in fiscal 2013 primarily due to a net increase in inventory write-down of $3.8 million, offset in part by a decrease of $2.1 million in stock-based compensation expense and Performance Unit Plan or "PUP" expenses.
Product gross margin decreased to 71% in fiscal 2014 from 74% in fiscal 2013, primarily attributable to a net increase of $3.8 million of inventory write-down, offset in part by a $1.3 million decrease in stock-based compensation and PUP expenses.
Service gross margin decreased to 87% in fiscal 2014 from 88% in fiscal 2013, primarily due to $2.2 million increase in personnel costs and allocated expenses to support the higher number of maintenance and support contracts, offset by $0.8 million decrease in stock-based compensation and PUP expenses.
Operating expenses
 
Fiscal Year Ended
 
 
 
December 27, 2014
December 28, 2013
Increase/(decrease)
% Increase/(decrease)
 
(dollars in thousands)
 
Operating expenses:
 
 
 
 
Research and development
$
42,806

$
42,067

$
739

2
 %
Sales and marketing
76,063

72,024

4,039

6
 %
General and administrative
20,683

25,575

(4,892
)
(19
)%
Total operating expenses
$
139,552

$
139,666

$
(114
)
*

Stock-based compensation and related payroll tax expense included in:
 
 
 
 
Research and development
$
8,523

$
11,467

$
(2,944
)
(26
)%
Sales and marketing
8,433

11,034

$
(2,601
)
(24
)%
General and administrative
6,780

6,546

$
234

4
 %
Total stock-based compensation expense
$
23,736

$
29,047

$
(5,311
)
(18
)%
Performance units and related payroll tax expense included in:
 
 
 
 
Research and development

5,188

$
(5,188
)
(100
)%
Sales and marketing

7,991

$
(7,991
)
(100
)%
General and administrative

6,839

$
(6,839
)
(100
)%
Total performance units expense
$

$
20,018

$
(20,018
)
(100
)%
 
* Not meaningful


46



Research and development expenses increased $0.7 million in fiscal 2014 compared to fiscal 2013. This increase in research and development expenses was primarily due to increased facilities rent and depreciation costs of $2.7 million and were partially offset by a $2.1 million decrease in personnel related costs largely associated with decreased stock-based compensation and PUP related costs. Net of stock-based compensation expense and expenses related to our performance units, research and development expenses increased $8.9 million, primarily attributable to increased facilities rent and depreciation costs of $2.7 million combined with a $6.0 million increase in personnel related and benefit related costs.
Sales and marketing expenses increased $4.0 million in fiscal 2014 compared to fiscal 2013.The increase in sales and marketing expenses was primarily due to an increased number of employees and personnel related costs of $12.0 million, combined with increased facilities costs of $1.9 million and increased marketing related spending of $0.9 million. These increases were offset by a $10.6 million decrease in stock based compensation and PUP related costs. Net of stock-based compensation expense and expenses related to our performance units, sales and marketing expenses increased $14.6 million, primarily attributable to increased employees and personnel related costs of $10.0 million, combined with increased facilities costs of $1.9 million and increased marketing related spending of $0.9 million.
General and administrative expenses decreased $4.9 million in fiscal 2014 compared to fiscal 2013. This decrease in general and administrative expenses was primarily due to a $6.6 million decrease in stock based compensation expenses and PUP related costs. Net of expenses related to our performance units and stock-based compensation expense, general and administrative expenses increased $1.7 million. This increase was primarily due to increases in facilities rent, general office related expenses including business insurance, and depreciation expenses of $1.2 million. Additionally, we had an increase in personnel related expenses of $0.4 million.
Income Tax (Provision) Benefit
 
Fiscal Year Ended
 
% Change
 
December 27, 2014
December 28, 2013
Change
 
(dollars in thousands)
 
Income tax (provision) benefit
$
(21,134
)
$
20,663

$
(41,797
)
(202
)%
We account for income taxes under the asset and liability approach. This process involves estimating our actual current tax exposure and including assessing the risks associated with tax audits, and assessing temporary differences resulting from different treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. We then assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not likely, we establish a valuation allowance. Significant judgment is required in determining whether the valuation allowance should be recorded against deferred tax assets. In assessing the need for a valuation allowance, we consider all available evidence including past operating results and estimates of future forecasted taxable income or losses.
The provision for income taxes for fiscal 2014 was primarily related to the establishment of a valuation allowance against the deferred tax assets in the United States and the taxes assessed by foreign jurisdictions. As of June 28, 2014 we have assessed that it is more-likely-than-not that we will not realize our federal and state deferred tax assets based on the absence of sufficient positive objective evidence that we would generate sufficient taxable income in our United States tax jurisdiction to realize the deferred tax assets. Accordingly, we recorded a valuation allowance on our federal and state deferred tax assets for an amount of $24.6 million which was charged to the income tax provision. The recording of the valuation allowance was mainly due to ongoing losses and uncertainty regarding future results adjusted for permanent differences which has resulted in a more likely than not determination that the deferred tax assets would not be realized. In making this determination, we considered all available evidence, both positive and negative. Such evidence included, among other factors, our history of profitability and losses, jurisdictional income recognition trends, pretax losses adjusted for certain other items, and forecasted income by jurisdiction. The benefit from income taxes for the six months ended June 29, 2013 was $25.0 million. This was the initial recognition of deferred tax assets, upon the conversion of the limited liability company to a corporation, partially offset by current foreign taxes.

47



Comparison of Fiscal 2013 and Fiscal 2012
Revenue 
 
Fiscal Year Ended
 
 
 
December 28, 2013
December 31, 2012
Increase
% Increase
 
(dollars in thousands)
 
 
Revenue:
 
 
 
 
Product
$
101,717

$
69,516

$
32,201

46
%
Service
38,578

27,199

11,379

42
%
Total revenue
$
140,295

$
96,715

$
43,580

45
%

Product revenue increased $32.2 million in fiscal 2013, compared to fiscal 2012, primarily due to an increase in the volume of sales of our H Series products, including our HB-1 products introduced in 2013, partially offset by lower volume of sales of our G Series products. Revenue from our H Series products, including HB-1 products, increased to $64.2 million in fiscal 2013 from $27.1 million in fiscal 2012, partially offset by a decrease in revenue from our G Series products to $37.5 million in fiscal 2013 from $42.4 million in fiscal 2012, primarily due to a decrease in the volume of units sold.
Service revenue increased $11.4 million in fiscal 2013, compared to fiscal 2012, primarily due to the growth in our installed base at our existing end-user customers and also due to an increase in the total number of end-user customers under maintenance and support contracts with us, which was primarily driven by higher sales of our products.
Cost of revenue and gross margin 
 
Fiscal Year Ended
 
 
 
December 28, 2013
December 31, 2012
Increase
% Increase
 
(dollars in thousands)
 
Cost of revenue:
 
 
 
 
Product
$
26,103

$
18,039

$
8,064

45
%
Service
4,727

2,246

2,481

110
%
Total cost of revenue
$
30,830

$
20,285

$
10,545

52
%
Gross margin:
 
 
 
 
Product
74
%
74
%
 
 
Service
88
%
92
%
 
 
Total gross margin
78
%
79
%
 
 
Stock-based compensation expense included in cost of revenue
$
3,496

$
153

$
3,343

*

Performance units expense included in cost of revenue
$
353

$

$
353

*

* Not meaningful
Total gross margin decreased to 78% in fiscal 2013 from 79% in fiscal 2012 as costs increased as a percentage of revenue, primarily due to a $3.3 million increase in stock-based compensation expense and a $0.4 million expense related to our performance units, partially offset by the sale of previously written-down inventory, net of an excess and obsolete inventory write-down, in fiscal 2013.
Product gross margin remained consistent at 74% in fiscal 2013 and fiscal 2012, primarily due to an increase in cost of product revenue resulting from an increase in stock-based compensation expense of $2.0 million and expenses related to our performance units of $0.3 million, offset by the sale of previously written-down inventory of $0.8 million, net of an excess and obsolete inventory write-down, in fiscal 2013, compared to inventory write-downs of $1.5 million in fiscal 2012.

48



Service gross margin decreased to 88% in fiscal 2013 from 92% in fiscal 2012, primarily due to an increase in stock-based compensation expense of $1.4 million in fiscal 2013.
Operating expenses
 
Fiscal Year Ended
 
 
 
December 28, 2013
December 31, 2012
Increase
% Increase
 
(dollars in thousands)
 
Operating expenses:
 
 
 
 
Research and development
$
42,067

$
17,730

$
24,337

137
%
Sales and marketing
72,024

39,359

32,665

83
%
General and administrative
25,575

11,665

13,910

119
%
Total operating expenses
$
139,666

$
68,754

$
70,912

103
%
Stock-based compensation expense included in:
 
 
 
 
Research and development
$
11,467

$
542

$
10,925

*

Sales and marketing
11,034

893

10,141

*

General and administrative
6,546

2,011

4,535

226
%
Total stock-based compensation expense
$
29,047

$
3,446

$
25,601

*

Performance units expense included in:
 
 
 
 
Research and development
$
5,188

$

$
5,188

*

Sales and marketing
7,991


7,991

*

General and administrative
6,839


6,839

*

Total performance units expense
$
20,018

$

$
20,018

*

 
* Not meaningful
Research and development expenses increased $24.3 million in fiscal 2013 compared to fiscal 2012, primarily due to a $10.9 million increase in stock-based compensation expense and a $5.2 million expense related to our performance units in fiscal 2013. Net of stock-based compensation expense and expenses related to our performance units, research and development expenses increased $8.2 million, primarily attributable to a $5.7 million increase in personnel costs primarily driven by increased headcount, a $1.0 million increase in development expense, a $0.8 million increase in allocated costs of facilities and information technology and a $0.8 million increase in depreciation expense.
Sales and marketing expenses increased $32.7 million in fiscal 2013 compared to fiscal 2012, primarily due to a $10.1 million increase in stock-based compensation expense and an $8.0 million expense related to our performance units in fiscal 2013. Net of stock-based compensation expense and expenses related to our performance units, sales and marketing expenses increased $14.5 million, primarily attributable to a $10.4 million increase in personnel costs, primarily driven by increased headcount and additional commissions related to higher sales of our products and services, a $2.3 million increase in allocated costs of facilities and information technology and a $1.1 million increase in employee-related programs, travel and professional services.
General and administrative expenses increased $13.9 million in fiscal 2013 compared to fiscal 2012 primarily due to a $6.8 million expense related to our performance units and a $4.5 million increase in stock-based compensation expense in fiscal 2013. Net of expenses related to our performance units and stock-based compensation expense, general and administrative expenses increased $2.5 million, primarily attributable to a $1.2 million increase in personnel and other allocated costs of facilities and information technology and a $0.9 million increase in office expense.

49



Income Tax Benefit (Provision)
 
Fiscal Year Ended
 
% Increase
 
December 28, 2013
December 31, 2012
Increase
 
(dollars in thousands)
 
Income tax benefit (provision)
$
20,663

$
(139
)
$
20,802

*
* Not meaningful.
We recognized an income tax benefit of $20.7 million in fiscal 2013 compared to an income tax provision of $0.1 million in fiscal 2012, primarily due to a one-time tax benefit of $14.8 million for the deferred tax asset recorded upon our change in status from a Delaware limited liability company to a Delaware corporation and also due to operating losses we incurred as a Delaware corporation following the LLC Conversion, partially offset by foreign income taxes. Prior to May 31, 2013, we conducted our U.S. operations through Gigamon LLC, a pass through entity that filed income tax return as a partnership for federal and state income tax purposes, and therefore, we were not subject to U.S. federal or state income taxes as our taxable income was reported by our individual members.
We had no valuation allowance recorded against our deferred tax assets as of December 28, 2013.
Non-GAAP Financial Measures
We report all financial information required in accordance with GAAP but we believe that evaluating our ongoing operating results may be difficult to understand if limited to reviewing only GAAP financial measures. Many of our investors have requested that we disclose non-GAAP information because it is useful in understanding our performance as it excludes amounts that many investors feel may obscure our true operating results. Likewise, management uses non-GAAP measures to manage and assess the profitability of our business going forward and does not consider stock-based compensation expense or expenses related to our performance units and related taxes in managing our operations. Specifically, management does not consider these expenses or benefits when developing and monitoring our budgets and spending. As a result, we use calculations of non-GAAP net income and non-GAAP net income per share, which exclude these expenses when evaluating our ongoing operations and allocating resources within the organization.
Reconciliations of our GAAP and non-GAAP financial measures were as follows (in thousands, except per share amounts): 
 
Fiscal Year Ended
 
December 27, 2014
December 28, 2013
December 31, 2012
GAAP net (loss) income attributable to common stockholders
$
(40,790
)
$
(9,518
)
$
3,605

Stock-based compensation
24,658

32,543

3,599

Stock-based compensation related payroll taxes
821



Performance unit expense

20,371


Accretion of preferred stock to redemption value and issuance costs

1,088

2,236

(Loss) earnings distributable to preferred stockholders

(1,107
)
1,690

Tax benefit upon conversion of LLC to a C corporation

(14,811
)

Income tax effect of non-GAAP adjustments
19,271

(12,673
)

Non-GAAP net income
$
3,960

$
15,893

11,130

Basic and diluted GAAP net (loss) income per share attributable to common stockholders
$
(1.27
)
$
(0.39
)
$
0.21

Basic Non-GAAP net income per share
$
0.12

$
0.64

$
0.64

Diluted Non-GAAP net income per share
$
0.12

$
0.53

$
0.62

GAAP and Non-GAAP weighted average number of shares - Basic
32,200

24,722

17,300

GAAP weighted average number of shares - Diluted
32,200

24,722

17,303

Stock-based compensation impact on weighted average number of shares
1,394

5,323

570

Non-GAAP weighted average number of shares - Diluted
33,594

30,045

17,873

** Non-GAAP tax provision excludes the tax benefits upon conversion of LLC to a C corporation, the recording of valuation allowance on the deferred tax assets, and the tax benefit relating to stock-based compensation expense.

50



Liquidity and Capital Resources
As of December 27, 2014, our principal sources of liquidity, which consisted of cash, cash equivalents and investments of $149.4 million, were held primarily in the United States. Our liquidity requirements are primarily to fund our working capital and operating expenses. As of December 27, 2014, we had no material commitments for capital expenditures.
On June 17, 2013, we completed our IPO, in which 7,762,500 shares of our common stock were sold at a public offering price of $19.00 per share. We issued and sold 5,512,500 shares of common stock, inclusive of the 1,012,500 shares of common stock sold in connection with the full exercise of the overallotment option of shares granted to the underwriters, at a public offering price of $19.00 per share. We received proceeds of $93.4 million, net of underwriting discounts, commissions and offering expenses. In addition, our selling stockholders sold 2,250,000 shares of common stock at a public offering price of $19.00 per share. We did not receive any proceeds from the sales of shares by the selling stockholders. We used a portion of the proceeds that we received from our IPO to satisfy our obligations to holders of vested performance units and related payroll taxes of $20.4 million. The compensation expense related to these performance units was recorded and paid in fiscal 2013.
On October 28, 2013, we completed our follow-on public offering, in which 5,100,000 shares of our common stock were sold at a public offering price of $38.50 per share. We sold 300,000 shares of common stock, for which we received proceeds of $10.2 million, net of underwriting discounts, commissions and offering expenses. In addition, our selling stockholders sold 4,800,000 shares of common stock, which included 293,718 shares of common stock issued upon the exercise of options by certain selling stockholders with an aggregate exercise price of $1.3 million, at a public offering price of $38.50 per share. We did not receive any proceeds from the sale of shares by the selling stockholders. We intend to retain any future earnings to finance the operations and expansion of our business, and we do not currently anticipate paying any cash dividends on our common stock.
Our future capital requirements will depend on many factors, including our results of operations and the expansion of our research and development, sales and marketing and general and administrative functions. Based on our current operating plan, we believe our existing cash, cash equivalents and investments, combined with cash generated from operations, will be sufficient to fund our working capital and operating expenses for at least the next 12 months. If we require additional capital resources to grow our business internally or to acquire complementary technologies and businesses at any time in the future, we may seek to sell additional equity, or raise funds through debt financing or other sources. The sale of additional equity could result in additional dilution to our stockholders. If we raise additional funds by obtaining loans from third parties, the terms of those financing arrangements may include negative covenants or other restrictions on our business that could impair our operating flexibility, and would also require us to incur interest expense. We can provide no assurance that additional financing will be available at all or, if available, that we would be able to obtain financing on terms favorable to us.
Cash flows
The following table summarizes our cash flows for the periods indicated (in thousands):
 
Fiscal Year Ended
 
December 27, 2014
December 28, 2013
December 31, 2012
Cash provided by operating activities
$
11,095

$
23,308

$
27,680

Cash used in investing activities
(59,695
)
(61,767
)
(2,006
)
Cash provided by (used in) financing activities
7,633

99,692

(20,101
)
Our cash provided by operating activities is generated from sales of our products and, to a lesser extent, by upfront payments from customers under maintenance and support contracts. Our primary uses of cash from operating activities have been for personnel related expenses, manufacturing costs, expenses related to marketing and promotional activities and costs related to our facilities. Our cash flows from operating activities will continue to be affected principally by our working capital requirements and increased spending on personnel, facilities and sales and marketing activities to meet our anticipated business growth.
In fiscal 2014, our operating activities provided cash of $11.1 million. The $40.8 million net loss and $2.6 million used for changes in our operating assets and liabilities was more than offset by $54.5 million of non-cash charges. These non-cash charges included changes in the deferred tax assets of $20.8 million, $24.7 million stock-based compensation expenses, depreciation and amortization expenses of $5.3 million and $3.8 million of inventory write-downs. The $2.6 million of cash used for changes in operating assets and liabilities were largely used for an $8.2 million inventory increase, a $4.2 million accounts receivable increase, and a $1.0 million increase in prepaid

51



expenses. This was partially offset by increases in deferred revenue of $8.0 million and increased accounts payable and other accrued liabilities of $2.7 million.
In fiscal 2013, our operating activities provided cash of $23.3 million. We incurred a net loss of $9.5 million, which included net non-cash expenses of $15.4 million. Non-cash expenses primarily consisted of stock-based compensation expenses of $32.5 million and depreciation and amortization expenses of $2.9 million, offset in part by a deferred income tax benefit of $20.9 million. Our operating activities provided cash of $23.3 million primarily due to an increase in deferred revenue of $16.7 million driven by an increase in billings for products and services as a result of our larger installed base; a $8.3 million increase in accrued and other liabilities primarily attributable to a $3.9 million increase in employee related accruals and $3.6 million withheld for our ESPP purchases; and a $3.1 million decrease in inventory due to higher inventory turnover in fiscal 2013. These changes were partially offset by a $3.9 million increase in accounts receivable primarily attributable to an increase in the amount of billings and a $3.3 million increase in prepaid expenses, other current assets and other assets. Our days sales outstanding, or DSO, decreased to 52 days as of December 28, 2013 from 60 days as of December 31, 2012.
In fiscal 2012, our operating activities provided cash of $27.7 million primarily as a result of our net income of $7.5 million, which included net non-cash charges of $6.5 million due to stock-based compensation expense of $3.6 million, inventory write-down of $1.5 million, and depreciation and amortization of $1.4 million; a $3.0 million inventory decline driven by higher inventory turnover in fiscal 2012; a $8.9 million increase in deferred revenue due to higher billings for service as we increased the size of our installed base; a $4.0 million increase in accrued and other liabilities primarily due to an increase in employee-related accruals and a $1.7 million decrease in prepaid expenses and other current assets; partially offset by higher accounts receivable of $4.3 million due to an increase in revenue offset by a decrease in our DSO to 60 days as of December 31, 2012 from 69 days as of December 31, 2011.
Cash flows from investing activities
In fiscal 2014, cash used in investing activities of $59.7 million primarily consisted of net purchases and sales of short-term investments of $52.1 million and purchases of property and equipment of $7.6 million to support the growth of our business.
In fiscal 2013, cash used in investing activities of $61.8 million consisted of short-term investment purchases of $59.7 million and property and equipment purchases of $4.0 million, offset by $2.0 million in proceeds from the sale of short-term investments.
In fiscal 2012, cash used in investing activities of $2.0 million and consisted of capital expenditures for property and equipment to support the growth of our business.
Cash flows from financing activities
In fiscal 2014, cash provided by financing activities was $7.6 million and was primarily due to cash proceeds of $5.9 million from the issuance of common stock pursuant to our ESPP and $5.4 million from stock option exercises, partially offset by $3.1 million in shares repurchased due to tax withholdings upon vesting of RSUs. We also made the final payout of $0.5 million to Gigamon LLC members pursuant to the Restated Limited Liability Company Agreement by and among Gigamon LLC and certain of its members, dated January 20, 2010, as amended, in effect prior to the LLC Conversion, or the LLC Agreement.
In fiscal 2013, cash provided by financing activities was $99.7 million primarily due to net cash proceeds of $95.3 million and $10.2 million from our sale and issuance of common stock in our IPO and follow-on public offering, respectively. We also generated $1.7 million from stock option exercises in fiscal 2013. In addition, we distributed $7.0 million in fiscal 2013 to Gigamon LLC members pursuant to the LLC Agreement.
In fiscal 2012, cash used in financing activities was $20.1 million as a result of cash distributions of $18.2 million to our Gigamon LLC members and $1.9 million in costs paid in connection with our IPO.
Contractual Obligations
The following summarizes our contractual obligations as of December 27, 2014: 

52



 
Payments Due by Period
 
Less
than 1
year
1 to 3
years
4 to 5
years
More
than 5
years
Total
 
(in thousands)
Operating lease obligations (1)
$
3,343

$
6,595

$
1,039

$

$
10,977

Purchase commitments (2)
3,585




3,585

Total
$
6,928

$
6,595

$
1,039

$

$
14,562

 
(1)Operating lease obligations represent our obligations to make payments under the lease agreements for our facilities and office equipment leases.
(2)Purchase commitments primarily represent our obligations to purchase inventory and related components. We record a liability for firm, non-cancelable and unconditional purchase commitments for quantities in excess of our future demand forecasts consistent with the valuation of our excess and obsolete inventory.
As of December 27, 2014, we had no tax liabilities recorded related to uncertainty in income tax positions.
Off-Balance Sheet Arrangements
We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Indemnification Obligations
Under the indemnification provisions of our standard sales related contracts, we agree to defend our customers against third-party claims asserting infringement of certain intellectual property rights, which may include patents, copyrights, trademarks, or trade secrets, and to pay judgments entered on such claims. Our exposure under these indemnification provisions is generally limited to the total amount paid by our customer under the agreement. However, certain agreements include indemnification provisions that could potentially expose us to losses in excess of the amount received under the agreement. We have not incurred any costs as a result of such indemnifications and have not accrued any liabilities related to such obligations in our consolidated financial statements. In addition, we indemnify our officers, directors, and certain key employees while they are serving in good faith in the company capacities. To date, there have been no claims under any indemnification provisions.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, operating expenses and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. We base our estimates and assumptions on historical experience and on various other factors that we believe to be reasonable under the circumstances. Accordingly, actual results could differ significantly from the estimates made by our management. To the extent that there are material differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows would be affected.
We believe that of our significant accounting policies, which are described in the notes to our consolidated financial statements, the accounting policies discussed below involve the greatest degree of judgment and complexity and have the most significant impact on our consolidated financial statements. Accordingly, these are the policies we believe are most critical to aid in understanding and evaluating our financial condition and results of operations.
Revenue Recognition
We recognize revenue when (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) sales price is fixed or determinable and (4) collectability is reasonably assured.
When sales arrangements contain multiple elements and software and non-software components that function together to deliver the products’ essential functionality, we allocate revenue to each element based on a selling price hierarchy: vendor-specific objective evidence (“VSOE”) if available, third-party evidence (“TPE”) of the selling price if VSOE is not available, or best estimated selling prices (“BESP”) if neither VSOE nor TPE is available.

53



When we enter into arrangements to provide more than one product or service (“multiple deliverables”), these arrangements are evaluated to determine if the multiple elements consist of more than one unit of accounting and can be separated accordingly. Based on separation criteria under the guidance, deliverables in multiple element arrangements can be segregated into separate units of accounting if they have value to the customer on a standalone basis. If deliverables can be separated into individual units of accounting, then the arrangement consideration is allocated among deliverables based on their relative selling price. Revenue from each deliverable is recognized when all requirements are met for that specific deliverable. If deliverables cannot be separated into separate units of accounting, then the arrangement will be accounted for as a single unit of accounting and revenue will be recognized when all requirements are met for all deliverables within the arrangement. We have established VSOE for maintenance and support contracts since the majority of selling prices fall within a narrow range when sold separately. TPE is not used since this information is not widely available in the market and we do not consider our products to be similar to or interchangeable with our competitors’ products in standalone sales to similarly situated customers. For deliverables with no established VSOE, such as standard product offerings, we determine the standalone selling price for such deliverables by establishing BESP, which incorporates historical selling prices, the effect of market conditions, gross margin objectives and pricing practices, as well as entity specific factors. We monitor and evaluate BESP on a regular basis to ensure that changes in circumstances are accounted for in a timely manner.
Service revenue is recognized ratably over the contractual support period, which is typically one year and can be up to five years.
In accordance with contractual provisions, we may offer cooperative marketing funds based on a fixed dollar percentage of product sales to certain channel partners or to fund specific marketing activities for these partners. We record such amounts as a reduction to revenue or, if we have evidence of fair value of the separable and identifiable benefit received, as marketing expense.
Inventories
Inventory is valued at the lower of cost computed on a first-in, first-out basis, or market value. We write down inventory in excess of forecasted demand over a certain period, as a component of cost of revenue. In these cases, inventory is reduced to estimated realizable value based on historical usage and expected demand. At the point of inventory write-down, a new lower-cost basis for that inventory is established and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis. Inherent in our estimates of market value in determining inventory valuation are estimates related to economic trends, future demand for our products, and technical obsolescence of products. We use contract manufacturers to provide manufacturing services for our products. During the normal course of business, in order to manage manufacturing lead times and help ensure adequate component supply, we enter into agreements with the contract manufacturers that either allow them to procure inventory based upon criteria as defined by us, or establish the parameters defining our requirements. A portion of our reported purchase commitments arising from these agreements consists of non-cancelable commitments. We record a liability for firm, non-cancelable and unconditional purchase commitments for quantities in excess of its future demand forecasts consistent with the valuation of our excess and obsolete inventory.
Warranty
We provide our end-user customers with five-year warranties on our products against defects in manufacturing. We accrue for potential liability claims as a component of cost of product revenue based on historical trends of product failure rates and the expected material and labor costs to provide warranty services. The accrued warranty balance is reviewed periodically for adequacy and is included in accrued liabilities and in other non-current liabilities on the consolidated balance sheets.
Stock-based compensation expense
Stock-based compensation expense related to stock-based transactions, including employee and director awards, as well as employee stock purchase plan purchase rights (“ESPP purchase rights”), is measured and recognized in the consolidated financial statements based on fair value of the award on the grant date. Stock-based compensation expense related to equity awards that can be settled in cash is measured based on the fair value on each balance sheet date until the settlement dates. The fair value of option awards and ESPP purchase rights is estimated using the Black-Scholes option-pricing model. This model requires assumptions including the market value of our common stock, expected volatility, expected term of the award, expected dividend yield and risk-free interest rate. Expected term for stock option awards is determined based on the mid-point of the vest period and the contractual period of each option award due to our limited historical stock option exercise data. Expected volatility is established based on the historical volatility of the common stock of a peer group of publicly traded companies. The

54



stock-based compensation expense, net of estimated forfeitures, is recognized on a graded-vesting basis over the requisite service periods of the awards, unless a performance-based condition exists. Expense for performance-based awards are recognized when the issuance of the underlying awards is probable. Expense for consultant awards is measured based on the fair value on the vest date. Expenses related to the option grants to consultants that have not been vested as of the reporting date are marked to market until the earlier of the commitment or the completion of the underlying performance. We estimate a forfeiture rate to calculate the stock-based compensation for our awards based on an analysis of our historical experience, analysis of employee turnover and other related factors.
Income Taxes
We are subject to U.S. federal income taxes as well as state taxes. In addition, we are subject to taxes in the foreign jurisdictions where we operate.
Prior to the LLC Conversion in May 2013, we were a Delaware limited liability company that passed through income and losses to our members. As a result, we were not subject to any U.S. federal or state income taxes as the related tax consequences were reported by the individual members.
Effective upon the completion of the LLC Conversion, we account for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in its financial statements or tax returns. In addition, deferred tax assets are recorded for the future benefit of utilizing net operating losses and research and development credit carry forwards. Valuation allowances are provided when necessary to reduce deferred tax assets to the amount expected to be realized. Accordingly, we assess the need for a valuation allowance based on the ASC 740 more-likely-than-not realization threshold criterion. Consideration was given to all positive and negative evidence related to the realization of the deferred tax assets. This assessment considered, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carryforward periods, experience with operating loss and tax credit carryforwards expiring, and tax planning alternatives. Significant judgment was required to determine whether a valuation allowance was necessary and the amount of such valuation allowance, if appropriate. As discussed in Note 10 to the consolidated financial statements, we recorded a valuation allowance against our federal and state deferred tax assets as of December 27, 2014. In the event that we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made.
We apply the authoritative accounting guidance prescribing a threshold and measurement attribute for the financial recognition and measurement of a tax position taken or expected to be taken in a tax return. We recognize liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more-likely-than-not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step requires us to estimate and measure the tax liability as the largest amount that is more-likely-than-not to be realized upon ultimate settlement. We also account for any related interest and penalty charges as a component of income taxes.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in Accounting Standards Codification 605, Revenue Recognition. This ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The effective date of this ASU will be the first quarter of fiscal year 2017 using one of two retrospective application methods. We are currently evaluating the potential impact, if any, of this accounting standard update on our future consolidated financial statements.

55



In June 2014, the FASB issued ASU No. 2014-12, Compensation-Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. This ASU requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A company should apply existing guidance in Topic 718 as it relates to awards with performance conditions that affect vesting to account for such awards. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the periods for which the requisite service has already been rendered. The amendments in this update are effective for annual periods and interim periods within annual periods beginning after December 15, 2015 and early adoption is permitted. The adoption of this guidance is not currently expected to have a material impact on our consolidated financial statements.
In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, to provide guidance on management’s responsibility in evaluating whether there is a substantial doubt about a company’s ability to continue as a going concern and to provide related footnote disclosures. The effective date of this ASU will be for annual periods ending after December 15, 2016 with early adoption permitted. The adoption of this guidance is not currently expected to have a material impact on our consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risks in the ordinary course of our business. These risks primarily include risk related to interest rate and foreign currency exchange rate sensitivities.
Interest rate sensitivity
We had cash, cash equivalents and investments of $149.4 million and $138.2 million as of December 27, 2014 and December 28, 2013, respectively. We hold our cash, cash equivalents and investments for working capital purposes. Our cash and cash equivalents are primarily held in cash deposits and money market funds. We have invested a portion of our funds in short-term investments that are focused on preservation of capital and supporting our liquidity requirements. Our investments are held in U.S. Treasury securities, U.S. agency debt securities and corporate debt securities. Due to the short-term nature of these instruments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. Declines in interest rates, however, would reduce future interest income. The effect of a hypothetical 10% increase or decrease in overall interest rates would not have had a material impact on the fair value of our available-for-sale securities as of December 27, 2014 and December 28, 2013, or our interest income for fiscal 2014, 2013 and 2012.
Foreign currency exchange rate sensitivity
The U.S. dollar is the functional currency for our subsidiary and our sales to international customers are denominated in U.S. dollars. Because the U.S. dollar is our functional currency, monetary accounts denominated in non-U.S. currencies, such as cash or payables to vendors, are remeasured to U.S. dollars and all gains and losses resulting from remeasurement are recorded in other expense, net in our consolidated statements of operations. Non-monetary assets and liabilities are translated at historical rates. To date, our operating costs have been denominated primarily in U.S. dollars, although we incur a limited amount of operating expenses in non-U.S. currencies such as British pounds, Euros and Hong Kong dollars. As a result, we have limited exposure to foreign currency exchange rates, and therefore we do not currently enter into foreign currency hedging transactions. If our international operations increase, our exposure to foreign currency exchange rate fluctuations may increase. In fiscal 2014, 2013 and 2012, the effect of a hypothetical 10% change in foreign currency exchange rates applicable to our business would not have had a material impact on our consolidated financial statements.

56



Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS 


57



Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Gigamon Inc.:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, consolidated statements of comprehensive (loss) income, consolidated statements of redeemable convertible preferred units and stockholders’ equity (members’ deficit), and consolidated statements of cash flows present fairly, in all material respects, the financial position of Gigamon Inc. and its subsidiary at December 27, 2014 and December 28, 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 27, 2014 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.





/s/ PricewaterhouseCoopers LLP
San Jose, California
March 9, 2015


58



Gigamon Inc.
Consolidated Balance Sheets
(In thousands)
 
 
December 27, 2014
December 28, 2013
ASSETS
 
 
CURRENT ASSETS:
 
 
Cash and cash equivalents
$
38,941

$
79,908

Short-term investments
110,465

58,242

Accounts receivable
28,686

24,528

Inventories, net
6,551

1,484

Deferred tax assets
150

3,574

Prepaid expenses and other current assets
5,316

5,606

Total current assets
190,109

173,342

Property and equipment, net
7,387

4,389

Deferred tax assets, non-current
64

17,315

Other assets
426

471

TOTAL ASSETS
$
197,986

$
195,517

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
CURRENT LIABILITIES:
 
 
Accounts payable
$
2,391

$
1,405

Accrued liabilities
22,838

22,401

Deferred revenue
42,183

37,592

Gigamon LLC members’ distribution payable

476

Total current liabilities
67,412

61,874

Deferred revenue, non-current
13,322

9,884

Deferred tax liability, non-current
150


Other liabilities, non-current
1,667

321

TOTAL LIABILITIES
82,551

72,079

Commitments and Contingencies (Note 6)


STOCKHOLDERS’ EQUITY
 
 
Preferred stock—$0.0001 par value; 20,000 shares authorized, no shares issued or outstanding as of December 27, 2014 and December 28, 2013


Common stock—$0.0001 par value; 1,000,000 shares authorized, 32,642 and 31,152 shares issued and outstanding as of December 27, 2014 and December 28, 2013, respectively
3

3

Treasury stock—No par value; 8,110 shares authorized and outstanding as of December 27, 2014 and December 28, 2013
(12,469
)
(12,469
)
Additional paid-in capital
177,714

144,810

Accumulated other comprehensive (loss) income
(94
)
23

Accumulated deficit
(49,719
)
(8,929
)
TOTAL STOCKHOLDERS’ EQUITY
115,435

123,438

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
197,986

$
195,517

The accompanying notes are an integral part of these consolidated financial statements.


59



Gigamon Inc.
Consolidated Statements of Operations
(In thousands, except per share amounts)
 
Fiscal Year Ended
 
December 27, 2014
December 28, 2013
December 31, 2012
Revenue:
 
 
 
Product
$
105,594

$
101,717

$
69,516

Service
51,536

38,578

27,199

Total revenue
157,130

140,295

96,715

Cost of revenue:



Product
31,001

26,103

18,039

Service
6,447

4,727

2,246

Total cost of revenue
37,448

30,830

20,285

Gross profit
119,682

109,465

76,430

Operating expenses:



Research and development
42,806

42,067

17,730

Sales and marketing
76,063

72,024

39,359

General and administrative
20,683

25,575

11,665

Total operating expenses
139,552

139,666

68,754

(Loss) income from operations
(19,870
)
(30,201
)
7,676

Interest income
308

95

64

Other expense, net
(94
)
(94
)
(70
)
(Loss) income before income tax (provision) benefit
(19,656
)
(30,200
)
7,670

Income tax (provision) benefit
(21,134
)
20,663

(139
)
Net (loss) income
(40,790
)
(9,537
)
7,531

Accretion of preferred stock to redemption value and issuance costs

(1,088
)
(2,236
)
Earnings (loss) distributable to preferred stockholders

1,107

(1,690
)
Net (loss) income attributable to common stockholders
$
(40,790
)
$
(9,518
)
$
3,605

Net (loss) income per share attributable to common stockholders:



Basic
$
(1.27
)
$
(0.39
)
$
0.21

Diluted
$
(1.27
)
$
(0.39
)
$
0.21

Weighted average shares used in computing net (loss) income per share attributable to common stockholders:



Basic
32,200

24,722

17,300

Diluted
32,200

24,722

17,303

The accompanying notes are an integral part of these consolidated financial statements.


60



Gigamon Inc.
Consolidated Statements of Comprehensive (Loss) Income
(In thousands) 
 
Fiscal Year Ended
 
December 27, 2014
December 28, 2013
December 31, 2012
Net (loss) income
$
(40,790
)
$
(9,537
)
$
7,531

Other comprehensive (loss) income:



Change in unrealized (loss) gain on available-for-sale investments
(117
)
23


Comprehensive (loss) income
(40,907
)
(9,514
)
7,531

Accretion of preferred units to redemption value and issuance costs

(1,088
)
(2,236
)
Earnings (loss) distributable to preferred stockholders

1,107

(1,690
)
Comprehensive (loss) income attributable to common stockholders
$
(40,907
)
$
(9,495
)
$
3,605