S-1 1 d121338ds1.htm FORM S-1 Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on June 2, 2016

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM S-1

REGISTRATION STATEMENT

Under

The Securities Act of 1933

Blue Coat, Inc.

(Exact name of Registrant as specified in its charter)

 

Delaware   7372   47-3317933

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

384 Santa Trinita Ave.

Sunnyvale, CA 94085

(408) 220-2200

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

Gregory Clark, Chief Executive Officer

Nicholas Noviello, Chief Financial Officer

Blue Coat, Inc.

384 Santa Trinita Ave.

Sunnyvale, CA 94085

(408) 220-2200

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to

 

Thomas Holden

Ropes & Gray LLP

3 Embarcadero Center

San Francisco, CA 94111-4006

(415) 315-6300

 

Matthew MacKenzie

General Counsel

Blue Coat, Inc.

384 Santa Trinita Ave.

Sunnyvale, CA 94085

(408) 220-2200

 

Jeffrey D. Saper

Allison B. Spinner

Wilson Sonsini Goodrich & Rosati, P.C.

650 Page Mill Road

Palo Alto, CA 94304-1050

(650) 493-9300

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box:  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):  ¨

 

Large Accelerated Filer   ¨    Accelerated Filer   ¨
Non-accelerated filer   x (Do not check if a smaller reporting company)    Smaller reporting company   ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class

of Securities to

be Registered

 

Proposed Maximum

Aggregate

Offering Price(1)(2)

 

Amount of

Registration Fee

Common Stock, $0.001 par value per share

  $100,000,000   $10,070

 

 

 

(1) Includes the additional shares that the underwriters have the option to purchase.
(2) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o) under the Securities Act, as amended.

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

PROSPECTUS (Subject to Completion)

Issued June 2, 2016

             Shares

LOGO

COMMON STOCK

 

 

This is an initial public offering of shares of common stock of Blue Coat, Inc. Blue Coat, Inc. is offering              shares of its common stock. Prior to this offering, there has been no public market for our common stock. We currently estimate that the initial public offering price per share will be between $         and $          .

 

 

We intend to apply to list our common stock on the New York Stock Exchange under the symbol “BLCT.”

 

 

Investing in our common stock involves risks. See “Risk Factors” beginning on page 14.

We are an “emerging growth company” as that term is used in the Jumpstart Our Business Startups Act of 2012 and, as such, may elect to comply with certain reduced public company reporting requirements in future reports after the completion of this offering.

Following this offering, investment funds controlled by Bain Capital Investors, LLC will continue to control a majority of the voting power of our outstanding common stock. As a result, we will be a “controlled company” within the meaning of the corporate governance rules of the New York Stock Exchange. See “Management—Board Composition and Director Independence.”

 

 

PRICE $             A SHARE

 

 

 

      

Price to

Public

      

Underwriting

Discounts

and
Commissions(1)

      

Proceeds to

Blue Coat,

Inc.

 

Per Share

       $                    $                    $            

Total

       $                               $                               $                       

 

(1) See the section titled “Underwriters” for a description of the compensation payable to the underwriters.

We have granted the underwriters the right to purchase up to an additional              shares of common stock to cover over-allotments.

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares of common stock to purchasers on                     , 2016.

 

 

 

MORGAN STANLEY    J.P. MORGAN
CREDIT SUISSE    GOLDMAN, SACHS & CO.

 

JEFFERIES     UBS INVESTMENT BANK     RBC CAPITAL MARKETS     WELLS FARGO SECURITIES

 

COWEN AND COMPANY

 

PACIFIC CREST SECURITIES

          a division of KeyBanc Capital Markets

  PIPER JAFFRAY     WILLIAM BLAIR

                    , 2016


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LOGO

#1 Market Share Leader in Enterprise Web Security Market 15,000+ Customers 70%+ of Fortune Global 500 $11B+Total Addressable Market by 2019 Advanced Web and Cloud Security Responding Rapidly to Security Incidents Defending Against Advanced Threats Securing Web Applications Managing Encrypted Traffic Optimizing Network Performance


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TABLE OF CONTENTS

Prospectus

 

     Page  

Prospectus Summary

     1   

Risk Factors

     14   

Special Note Regarding Forward-Looking Statements

     46   

Market, Industry and Other Data

     47   

Trademarks

     47   

Use of Proceeds

     48   

Dividend Policy

     49   

Capitalization

     50   

Dilution

     51   

Selected Consolidated Financial Data

     53   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     60   

Business

     94   

Management

     114   

Executive Compensation

     120   
 

 

 

We are responsible for the information contained in this prospectus and in any free writing prospectus we prepare or authorize. Neither we nor the underwriters have authorized anyone to provide you with different information, and neither we nor the underwriters take responsibility for any other information others may give you. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date of this prospectus.

Through and including                  , 2016 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 

-i-


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PROSPECTUS SUMMARY

This summary highlights material information about our business and about this offering. This is a summary of material information contained elsewhere in this prospectus and is not complete and does not contain all of the information that may be important to you. For a more complete understanding of our business and this offering, you should read this entire prospectus, including the sections entitled “Risk Factors,” “Cautionary Note Regarding Forward-Looking Statements,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes thereto, which are included elsewhere in this prospectus.

In this prospectus, unless otherwise stated or unless the context otherwise requires, “we,” “us,” “our” and the “Company” refer to Blue Coat, Inc. and its consolidated subsidiaries. References to “fiscal 2012,” “fiscal 2013,” “fiscal 2014,” “fiscal 2015,” and “fiscal 2016” refer to Blue Coat, Inc.’s fiscal years ended April 30, 2012, 2013, 2014, 2015 and 2016, respectively. Our “customers” refers to the end-users of our products and services that are typically purchased through our two-tiered indirect channel of solution providers, systems integrators, value-added resellers and distributors, or our “channel partners.”

BLUE COAT, INC.

Mission

We are a leading provider of advanced web security solutions for global enterprises and governments. Our mission is to protect enterprises and their users from cyber threats – whether they are on the enterprise network, on the web, in the cloud or mobile.

The Blue Coat Opportunity

The modern enterprise network is being redefined

Enterprises are experiencing a fundamental shift in the way their employees and customers consume technology. The influx of personally owned devices, ubiquitous high-speed Internet connectivity and cloud-based applications is redefining the enterprise network well beyond the traditional responsibilities of the chief information officer (“CIO”). This transformation is happening in nearly every vertical and region. This is sometimes referred to as a dissolving network perimeter, but in reality, it is an expansion of the traditional enterprise network. The IT infrastructure that enterprises have built is shrinking but is not disappearing; it is being augmented by cloud and mobile users, as well as the Internet of Things (“IoT”). For example, a portion of the corporate network is delivered through cloud applications such as Salesforce and Microsoft Office365, some of it is provided by cloud-based infrastructure such as Amazon Web Services and some of it is provided by an employee’s mobile device or an IoT device. We refer to this new enterprise reality as the expanding enterprise network. These major forces are rapidly redefining IT, which has many implications with respect to cyber security. The Blue Coat Security Platform is specifically designed to secure the expanding enterprise network.

At the same time, attacks are increasing in volume and sophistication

The volume and severity of attacks that target the enterprise are rapidly growing. Sophisticated user-oriented attacks have led to significant data breaches in every major industry, causing substantial financial, operational and brand damage. The result is that security has become a critical area of focus in the boardroom and a budgetary priority for corporate enterprises.

 



 

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The expanding enterprise network is shifting security budgets to user-centric solutions

Total spending on IT security reached $35 billion in 2015, according to International Data Corporation (“IDC”). Board awareness of cyber threats is shifting dollars within corporate IT budgets to address new risks. The rise of both sanctioned and non-sanctioned cloud applications that can be accessed by users from any location or device is increasing the complexity of securing the enterprise network and creating opportunities and budget for the Blue Coat Security Platform, which is designed around the following six solution areas:

 

    Advanced Web and Cloud Security—delivered on-premise and through the cloud via secure web gateways and cloud application security brokers

 

    Advanced Threat Protection—powered by our content analysis, malware analysis and mail threat defense

 

    Encrypted Traffic Management—enabled by our policy-based encrypted traffic visibility technology and cloud data protection

 

    Incident Response, Analytics and Forensics—activated with our security analytics and remediation solutions

 

    Protecting Web Applications—a web application firewall and reverse proxy to secure corporate-deployed web applications

 

    Network Performance and Optimization—traffic flow, quality-of-service and caching solutions to optimize network performance

Proxies are designed to protect the user regardless of location

The growth in cloud applications, mobility and IoT is driving the need for sophisticated proxy technology designed to protect the user. In the expanding enterprise network, users have multiple options for the devices they use and how they choose to connect to corporate applications. This gives rise to a critical need for a web proxy, or gatekeeper, that resides between users and the web and protects organizations from threats coming from a growing array of cloud applications and websites. Given the dynamic threat landscape, IT departments require an extensible approach, with an open architecture capable of integrating multiple layers of IT assets to secure the user. This approach protects users and secures both the traditional IT model and the expanding enterprise network.

We are the market leader in proxy technology

We are the market leader in proxy technology, which is a foundational element of the security architecture for global enterprise networks. Our industry-leading Secure Web Gateway sits in-line, or in the flow, with network traffic where it acts as a proxy and inspects web traffic in real time for malicious activity and implements policy-based controls to prevent the usage of inappropriate websites and to control the distribution of sensitive content. We are deeply embedded in our customers’ security infrastructure. Our in-line Secure Web Gateway solution positions us in a critical place to see all web traffic in real time and prevent or stop threats. The growth in cloud applications, mobility and IoT has driven the growth in usage of our proxy technology. As the volume and bandwidth requirements of Internet traffic increases through cloud application adoption, our customers have purchased more of our on-premise Secure Web Gateway products to handle their increased capacity demands. The increase in cloud applications along with employee mobility has also driven demand for our Cloud-Delivered Secure Web Gateway. Our Cloud-Delivered Secure Web Gateway service is deployed from over 40 locations across six continents. This hybrid deployment model gives our customers flexibility and allows us to support users that extend across multiple networks, computing platforms and application stacks across the globe. According to IDC, we were the worldwide leader in the web security market in 2014. We held a 43% share of the web security appliance market in 2014, up from 40% in 2013, which was more than two times larger

 



 

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than our closest competitor, as reported by IDC. We have been recognized as a “leader” in Gartner’s Magic Quadrant for Secure Web Gateway every year since 2007.

We grow with the biggest forces in IT: Cloud, Mobility and IoT

As cloud, mobile and IoT devices expand the enterprise network, the IT infrastructure that sits between users and the Internet is growing. These forces are driving increased Internet traffic and bandwidth requirements, which has fueled demand for our products and positions us to deliver the Blue Coat Security Platform to be a foundational security platform of the future for enterprises. Sales of our appliances have grown significantly in recent periods. As the number of cloud applications rises, we expect demand for web proxy technology and cloud security brokers that secure and govern cloud applications to increase. As the use of mobile devices increases, we expect demand for the Blue Coat Security Platform with extensible services that can be delivered from our cloud data centers around the globe to grow. As IoT grows, we expect demand for our Cloud-Delivered Secure Web Gateway will also grow to defend users from attack. During the year ended April 30, 2016, we added over 700 new customers, which we believe is an indicator of positive business momentum.

The Blue Coat Security Platform provides cloud security broker technology to enable customers to discover, manage and secure the use of cloud applications

Modern enterprises are using an increasingly large number of cloud-based applications, which are not typically covered by traditional network security solutions. We have invested in our platform to maintain a leadership position throughout this technology shift. The growth in cloud application usage has led to growth in our web proxy solutions and has also created demand for security technology that discovers, analyzes and governs the use of cloud applications outside of the traditional responsibilities of enterprise IT. Through our Cloud Access Security Broker (“CASB”) products, we give IT control over cloud access to mitigate the risk of employee use of non-sanctioned applications, or “shadow IT”, while enabling the secure use of sanctioned cloud applications. Forrester Research, Inc. (“Forrester”) estimates that the Cloud Security market was $572 million in 2015 and is projected to grow at a compound annual growth rate, or CAGR, of 36% through 2019. We are uniquely positioned in this market because of our trusted, in-line position within the network and our recent acquisitions of two leading CASB providers, Perspecsys, which specializes in protecting data stored in cloud applications, and Elastica, a leader in cloud application discovery, analytics and governance.

Encryption technology is disrupting the modern enterprise network and creating significant challenges for IT departments

Enterprises are facing significant challenges in managing an ever increasing flow of encrypted traffic. There has been a rapid increase in encrypted traffic on the network, which is being driven by the demand for consumer privacy following highly publicized data breaches. We believe as web traffic continues to grow exponentially, the proportion of web traffic that currently flows through the Secure Sockets Layer (“SSL”) as encrypted traffic will increase rapidly, and currently exceeds 50% of all web traffic in certain industries. The increased demand for consumer privacy has frequently come at the expense of enterprise security, as malware is increasingly hidden in encrypted traffic. Gartner, Inc. (“Gartner”) estimates that by 2017, over 50% of network attacks targeting enterprises will use encrypted traffic to bypass controls.

The increased flow of encrypted traffic is a key security challenge for the modern enterprise network. In order to detect and stop threats, while complying with data privacy standards, security solutions must be able to identify and decrypt all encrypted traffic that does not contain protected personal data. Many traditional security solutions either do not have decryption capabilities or offer solutions that significantly degrade the performance of the network, which results in increased reliance on endpoint-deployed security solutions. Effective endpoint security requires integration and support from network security solutions. Our Encrypted Traffic Management

 



 

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technology is purposefully built to perform the operations needed to decrypt, analyze, orchestrate and re-encrypt traffic while complying with data privacy standards and without degrading network performance.

The Blue Coat Security Platform strengthens endpoint protection

It is difficult to deploy and manage security technology on the many endpoints used in a modern enterprise, including personal devices that do not have corporate-deployed endpoint protection and many IoT devices. Many of these endpoints are not owned, and often are not managed, by the enterprise Chief Information Officer (“CIO”). Our platform incorporates a unique approach to augmenting the endpoint security in the network. This is delivered via our content analysis system, which integrates real time blocking of advanced threats with a variety of anti-malware technologies to scan network traffic for potentially malicious content before reaching the endpoint. For a deeper level of inspection, our malware analysis system utilizes our proprietary virtual sandboxing and emulation technologies to detect and block advanced persistent threats.

The Blue Coat Security Platform can detect security breaches and perform forensics to help enterprises expedite recovery from an attack

Given the increased severity and sophistication of attacks, enterprises have increased spending on technologies that help analyze and remediate breaches. In order to effect this type of incident response, enterprises need technology that can record network traffic, reconstruct an intrusion, quickly and accurately assess the impact of an attack and confirm that the threat has been mitigated. Without an accurate recording of network traffic history, the incident response is largely ineffective and may result in substantial financial, operational and brand damage. Our Security Analytics solution leverages threat data collected from our customers, our Global Intelligence Network and Blue Coat Labs, and gives our customers insight into where a threat came from and the potential damage that may be done to organizations. In addition, we apply remediation measures to resolve the existing threats and protect against new threats.

The Blue Coat Security Platform is powered by a “living map” of the Internet that allows us to accurately categorize the web

An essential part of protecting the user from Internet threats is maintaining a “living map” of the Internet, which categorizes the web according to the threat profile of a website or Internet Protocol (“IP”) address. New websites and IP addresses are constantly being added, changed and removed from the Internet, which makes maintaining an accurate living map of the Internet challenging and creates opportunities for hackers and cyber crime groups to exploit and repurpose web destinations to attack enterprises and users. We have been a pioneer in identifying and tracking malicious websites and networks and have developed industry-leading technology and analytics to categorize the web. We support and enhance the functionality of our products through our Global Intelligence Network services that offer global threat intelligence sharing amongst our customers to provide a globally distributed, real-time threat identification and analysis network. Our Global Intelligence Network collects and analyzes over a billion previously unseen and uncategorized websites a day from our 15,000 enterprise customers and their millions of users accessing the Internet daily. The network effect of having over 70% of the Fortune Global 500 as customers provides us valuable data to feed our analytics engines.

Our Proven Success

Our business has experienced strong growth in recent periods, including:

 

    Adjusted net revenue of $755.4 million and $642.9 million for fiscal 2016 and 2015, respectively, representing year-over-year growth of approximately 17%.

 

    Adjusted EBITDA of $222.8 million and $196.5 million for the year ended April 30, 2016 and 2015, an increase of $26.4 million, or 13%.

 



 

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Adjusted net revenue and adjusted EBITDA are financial measures that are not prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). Refer to “Selected Consolidated Financial Data—Non-GAAP Financial Measures” and “—Reconciliation of Non-GAAP Financial Measures” for a description of adjusted net revenue and adjusted EBITDA, and a reconciliation of these measures to GAAP.

Our net revenue for fiscal 2016, 2015 and 2014 was $598.3 million, $631.3 million and $606.5 million, respectively. Our net loss for fiscal 2016, which includes the impact of purchase accounting implications of the 2015 Bain Acquisition, fiscal 2015 and fiscal 2014 was $289.1 million, $15.4 million and $51.3 million, respectively.

Our Competitive Strengths

We believe we have the following competitive strengths:

 

    Powerful technology with proven success in identifying and blocking sophisticated malware;

 

    Industry leader with strong reputation and brand;

 

    Global sales organization and market reach;

 

    Long-term relationships with our blue chip customers;

 

    Deeply integrated into our customers’ and security partners’ ecosystems;

 

    Consistent innovation and technology expansion; and

 

    An experienced management team of security experts and IT thought leaders.

Our Growth Strategy

We intend to further strengthen our position as a trusted provider of advanced web security solutions for global enterprises and governments and expand our technology leadership in web security for the cloud generation. Our growth strategy includes the following key elements:

 

    Continue to invest in research and development to drive product innovation and technology expansion;

 

    Increase sales to our existing customers;

 

    Leverage our scale, global reach and partners to reach new customers;

 

    Continue to invest in our direct sales force; and

 

    Continue to pursue strategic acquisitions to expand our capabilities.

Our Market Opportunity

There is an increasing demand for unified web and cloud security platforms as organizations seek to integrate currently fragmented security products. Given the changes in enterprise networks, with the proliferation of mobile and IoT devices and increase in encrypted traffic, the Blue Coat Security Platform, deployed in-line with visibility into all inbound and outbound web traffic, provides a key foundation for the incorporation of additional security solutions such as advanced malware detection and encrypted traffic management. Our Blue Coat Security Platform spans a number of large, established segments across the IT security market estimated at over $7 billion in 2015 and projected to reach over $11 billion by 2019, representing a 12% CAGR, based on research from industry analysts. Given our leadership in the secure web gateway market and our broad suite of solutions, we believe we are well positioned to capture additional share of the $35 billion IT security market, as estimated by IDC in 2015. See “Business—Market Opportunity.”

 



 

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Summary Risk Factors

Our business is subject to numerous risks and uncertainties, including those highlighted in the section titled “Risk Factors” immediately following this prospectus summary. These risks include, but are not limited to, the following:

 

    the information technology security market is rapidly evolving within the increasingly challenging cyber threat landscape and the industry might not develop as we anticipate;

 

    our business depends substantially on our ability to retain customers and to expand our offerings to them, and a decline in our customer retention or in our ability to expand sales to existing customers could harm our future operating results;

 

    if we are unable to successfully expand our sales force while maintaining sales productivity, sales of our products and services and our financial performance could be harmed;

 

    if we are unable to increase sales of our products and services to new customers, our future revenue and operating results could be harmed;

 

    our operating results may fluctuate significantly, be difficult to predict, and may not meet investor expectations;

 

    the markets in which we compete are intensely competitive and certain of our competitors have greater resources and experience;

 

    our sales cycles can be long and unpredictable, and our sales efforts require considerable time and expense;

 

    we have experienced net losses in recent periods and may not achieve or maintain profitability in the future;

 

    our gross margin is affected by a number of factors, and we may not be able to sustain it at present levels;

 

    our business and operations have experienced rapid growth, and if we do not appropriately manage future growth, our business and financial performance may be adversely affected; and

 

    our substantial indebtedness could adversely affect our financial condition.

The Bain Acquisition

We operated as Project Barbour Holdings Corporation, which we refer to as the “Predecessor,” until May 22, 2015. On May 22, 2015, Blue Coat, Inc. (formerly Batman Holdings, Inc.), which we refer to as the “Successor,” acquired Project Barbour Holdings Corporation, which then changed its name to Blue Coat Holdings, Inc., in connection with an investment by investment funds controlled by Bain Capital Investors, LLC (the “Sponsor”) and certain co-investors, which we refer to as the “Bain Acquisition.” The Successor was created for the sole purpose of acquiring the Predecessor and had no prior operations. In connection with the Bain Acquisition, the Sponsor obtained a controlling interest in us.

Our Sponsor

Bain Capital is a global private investment firm that, together with its affiliates, manages several pools of capital including private equity, venture capital, public equity and credit products with more than $74 billion in assets under management. Since its inception in 1984, Bain Capital has made private equity, growth, and venture capital investments in over 400 companies in a variety of industries around the world. Headquartered in Boston, Bain Capital has offices in Chicago, Dublin, Hong Kong, London, Luxembourg, Melbourne, Mumbai, Munich, New York, Palo Alto, and Tokyo.

 



 

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Following the completion of this offering, the Sponsor will own approximately    % of our common stock, or    % if the underwriters’ option to purchase additional shares of our common stock is fully exercised. As a result, we expect to be a “controlled company” within the meaning of the corporate governance standards of the New York Stock Exchange (the “NYSE”) on which we have been approved to list our shares. See “Risk Factors—Risks Relating to Our Common Stock and This Offering.”

Corporate Information

Blue Coat, Inc. is a Delaware corporation. Its principal corporate offices are located at 384 Santa Trinita Ave., Sunnyvale, CA 94085. Our main telephone number is (408) 220-2200. Our website is located at www.bluecoat.com. Our website and the information contained on, or accessed through, our website are not part of this prospectus.

 



 

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THE OFFERING

 

Common stock offered by us

  

             shares.

Common stock to be outstanding immediately after this offering

  

             shares.

Option to purchase additional shares of common stock from us

  

             shares.

Use of proceeds

   We intend to use a portion of the anticipated net proceeds from this offering to repay certain of our existing indebtedness. We intend to use the remainder of the net proceeds from this offering, if any, for working capital and other general corporate purposes. We may also, in our discretion, use a portion of the net proceeds for the acquisition of, or investment in, businesses, products, services, or technologies that complement our business, although we have no current commitments or agreements to enter into any acquisitions or investments. See “Use of Proceeds.”

Risk factors

   See “Risk Factors” and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in shares of our common stock.

Proposed NYSE symbol

  

“BLCT”.

The number of shares of our common stock that will be outstanding after this offering is based on              shares of our common stock outstanding as of                     , 2016, and excludes:

 

                 shares of our common stock issuable upon the exercise of options to purchase shares of our common stock outstanding as of                    , 2016, with a weighted-average exercise price of $             per share;

 

                 shares of our common stock reserved for future issuance under our stock-based compensation plans, consisting of (i)             shares of common stock reserved for future awards under our 2015 Amended and Restated Equity Incentive Plan as of                      , 2016, (which will terminate as of the completion of this offering and no awards will be granted under our 2015 Amended and Restated Equity Incentive Plan thereafter), and (ii)              shares of common stock reserved for issuance under our             , which will become effective on the date of this prospectus.

Except as otherwise indicated, all information in this prospectus assumes:

 

    the filing and effectiveness of our restated certificate of incorporation in Delaware and the adoption of our amended and restated bylaws, each of which will occur immediately prior to the completion of this offering;

 

    no exercise of outstanding options subsequent to                    , 2016; and

 

    no exercise by the underwriters of their option to purchase up to an additional             shares of our common stock from us.

 



 

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SUMMARY CONSOLIDATED FINANCIAL DATA

As a result of the Bain Acquisition, which occurred on May 22, 2015, we applied purchase accounting and a new basis of accounting beginning on the date of the acquisition. We refer to ourselves as Predecessor in the periods before the Bain Acquisition and Successor in the periods after.

The summary consolidated statements of operations and balance sheet data presented below as of April 30, 2015 and for the two years then ended and the period from May 1, 2015 to May 22, 2015 relate to the Predecessor and are derived from audited consolidated financial statements that are included in this prospectus. The summary consolidated statements of operations data for the period from May 23, 2015 to April 30, 2016, and the consolidated balance sheet data as of April 30, 2016 relate to the Successor and are derived from audited consolidated financial statements that are included in this prospectus.

Although the period from May 1, 2015 to May 22, 2015 relates to the Predecessor and the period from May 23, 2015 to April 30, 2016 relates to the Successor, in order to assist in the period to period comparison we have combined these periods as a sum of the amounts without any other adjustments and refer to the combined period as the combined year ended April 30, 2016.

The unaudited consolidated financial statements were prepared on a basis consistent with our audited financial statements and include all adjustments, consisting of normal and recurring adjustments that we consider necessary for a fair presentation of the financial position and results of operations as of and for such periods. Operating results for the periods presented are not necessarily indicative of the results that may be expected in future periods. The following summary consolidated financial data should be read with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 



 

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     Predecessor           Successor        
    

 

 

Year Ended April 30,

    Period
from
May 1 to
May 22,
2015
          Period from
May 23,
2015 to
April 30,
2016
    (Combined)
Year
Ended
April 30,
2016
 
(In thousands, except per share data)    2014     2015           
                                   (Unaudited)  

Net revenue:

               

Product

   $ 319,232      $ 274,373      $ 7,032           $ 306,787      $ 313,819   

Service and subscription

     287,240        356,910        22,446             262,072        284,518   
  

 

 

   

 

 

   

 

 

        

 

 

   

 

 

 

Total net revenue

     606,472        631,283        29,478             568,859        598,337   
  

 

 

   

 

 

   

 

 

        

 

 

   

 

 

 

Cost of net revenue:

               

Product(2)

     106,188        106,904        4,687             131,119        135,806   

Service and subscription(2)

     56,447        53,682        3,069             66,642        69,711   
  

 

 

   

 

 

   

 

 

        

 

 

   

 

 

 

Total cost of net revenue

     162,635        160,586        7,756             197,761        205,517   
  

 

 

   

 

 

   

 

 

        

 

 

   

 

 

 

Gross profit

     443,837        470,697        21,722             371,098        392,820   
  

 

 

   

 

 

   

 

 

        

 

 

   

 

 

 

Operating expenses:

               

Sales and marketing(2)

     193,661        190,288        12,024             229,094        241,118   

Research and development(2)

     110,886        110,591        7,050             124,317        131,367   

General and administrative(2)

     69,266        68,131        21,649             126,520        148,169   

Amortization of intangible assets

     37,814        33,111        1,738             121,019        122,757   

Change in fair value of acquisition-related earn-out liability

     9,698                           (970     (970

Restructuring and other charges

     3,020        1,130                    2,857        2,857   
  

 

 

   

 

 

   

 

 

        

 

 

   

 

 

 

Total operating expenses

     424,345        403,251        42,461             602,837        645,298   
  

 

 

   

 

 

   

 

 

        

 

 

   

 

 

 

Operating income (loss)

     19,492        67,446        (20,739          (231,739     (252,478

Interest income

     44        38        1             143        144   

Interest expense

     (63,015     (66,434     (3,986          (99,386     (103,372

Debt extinguishment and refinancing costs

     (11,100                        (3,406     (3,406

Other expense, net

     (1,973     (1,376     (349          (759     (1,108
  

 

 

   

 

 

   

 

 

        

 

 

   

 

 

 

Loss before income taxes

     (56,552     (326     (25,073          (335,147     (360,220

Income tax provision (benefit)

     (5,221     15,104        (7,596          (63,543     (71,139
  

 

 

   

 

 

   

 

 

        

 

 

   

 

 

 

Net loss

     (51,331     (15,430     (17,477          (271,604   $ (289,081
               

 

 

 

Cumulative dividends earned on Class A Common Stock

     (34,535     (32,838     (2,112              
  

 

 

   

 

 

   

 

 

        

 

 

   

Net loss attributable to common stockholders

   $ (85,866   $ (48,268   $ (19,589        $ (271,604  
  

 

 

   

 

 

   

 

 

        

 

 

   

Net loss per share attributable to common stockholders:(1)

               

Basic and diluted

   $ (0.90   $ (0.49   $ (0.20        $ (3.09  
  

 

 

   

 

 

   

 

 

        

 

 

   

Weighted-average shares used to compute net loss per share attributable to common stockholders:(1)

               

Basic and diluted

     95,082        97,927        98,376             87,823     
  

 

 

   

 

 

   

 

 

        

 

 

   

 

(1) Net loss per share information is not presented for the combined year ended April 30, 2016 due to changes in capital structure resulting from the Bain Acquisition on May 22, 2015.

 



 

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(2) Includes stock-based compensation expense as follows:

 

     Predecessor           Successor         
     Year Ended April 30,      Period from
May 1 to
May 22,
2015
          Period from
May 23,
2015 to
April 30,
2016
     (Combined)
Year
Ended
April 30,
2016
 
         2014              2015                 
(In thousands)                                     (Unaudited)  

Cost of product

   $ 1       $ 22       $ 15           $ 76       $ 91   

Cost of service and subscription

     21         90         44             484         528   

Sales and marketing

     386         514         621             5,395         6,016   

Research and development

     219         476         386             2,801         3,187   

General and administrative

     2,612         1,594         2,585             10,158         12,743   
  

 

 

    

 

 

    

 

 

        

 

 

    

 

 

 

Total stock-based compensation expense

   $ 3,239       $ 2,696       $ 3,651           $ 18,914       $ 22,565   
  

 

 

    

 

 

    

 

 

        

 

 

    

 

 

 

 

     Predecessor           Successor  
     April 30,
2015
          April 30,
2016
 
(In thousands)                   

Consolidated Balance Sheet Data:

         

Cash and cash equivalents

   $ 202,665           $ 136,563   

Working capital

     92,949             (20,337

Total assets

     1,558,581             3,001,607   

Current and long-term deferred revenue

     353,943             364,223   

Current and long-term debt, net of borrowing costs

     1,047,847             1,785,374   

Total liabilities

     1,515,503             2,374,588   

Total stockholders’ equity

     43,078             627,019   

Non-GAAP Financial Measures

In addition to our results determined in accordance with GAAP, we believe the following non-GAAP measures are useful in evaluating our operating performance because, in the case of adjusted product revenue, adjusted service and subscription revenue, adjusted net revenue and adjusted deferred revenue, they exclude the impact of purchase accounting, which we believe aids in the period to period comparability of our revenue and financial outlook of our business. In the case of adjusted EBITDA, we exclude certain material non-cash items and certain other adjustments we believe are not reflective of our ongoing operations. We believe adjusted EBITDA is a measure commonly used by investors to evaluate companies in our industry. Accordingly, we use these non-GAAP financial measures to measure our financial performance for business planning purposes and to compare our performance to that of our competitors.

 

     Predecessor            Successor         
    

 

 

Year Ended April 30,

     Period from
May 1 to
May 22,
2015
           Period from
May 23,
2015 to
April 30,
2016
     (Combined)
Year
Ended
April 30,
2016
 
     2014      2015              
(In thousands)    (Unaudited)      (Unaudited)            (Unaudited)      (Unaudited)  

Adjusted product revenue

   $ 319,528       $ 274,930       $ 7,081            $ 312,494       $ 319,575   

Adjusted service and subscription revenue

     312,240         367,954         22,778              413,021         435,799   

Adjusted net revenue

     631,768         642,884         29,859              725,515         755,374   

Adjusted EBITDA

     183,179         196,468         7,190              215,658         222,848   

Adjusted deferred revenue ending balance

     305,846         359,079         347,797              443,818         443,818   

 



 

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Adjusted product revenue, adjusted service and subscription revenue and adjusted net revenue. We define adjusted product revenue, adjusted service and subscription revenue and adjusted net revenue as product revenue, service and subscription revenue, and net revenue, respectively, excluding the impact of purchase accounting. We regularly monitor these measures to assess our operating performance. On February 15, 2012, in connection with our acquisition by funds affiliated with Thoma Bravo, LLC (the “Thoma Bravo Acquisition”), and on May 22, 2015, as part of the Bain Acquisition, we were required to write down our deferred revenue balances due to purchase accounting in accordance with GAAP. In addition, in connection with our other acquisitions, we were also required to make similar adjustments to write down our deferred revenue balances due to purchase accounting in accordance with GAAP. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Impact of Purchase Accounting Related to Mergers and Acquisitions.” The impact on revenue related to purchase accounting as a result of these transactions, particularly as a result of the Bain Acquisition, limits the comparability of our revenue between periods. While the deferred revenue written down in connection with our acquisitions will never be recognized as revenue under GAAP, we do not expect the Bain Acquisition to have an impact on future renewal rates of the contracts included within the deferred revenue write-down, nor do we expect revenue generated from new service and subscription contracts to be similarly impacted by purchase accounting adjustments. Accordingly, we believe presenting adjusted product revenue, adjusted service and subscription revenue and adjusted net revenue to exclude the impact of purchase accounting adjustments, including the deferred revenue write-down, aids in the comparability between periods and in assessing our overall operating performance. If these adjustments were not made, our future revenue growth rates could appear overstated. Adjusted product revenue, adjusted service and subscription revenue and adjusted net revenue have limitations as analytical tools, and you should not consider them in isolation or as substitutes for product revenue, service and subscription revenue or net revenue. Other companies in our industry may calculate these measures differently, which may limit their usefulness as a comparative measure.

Adjusted EBITDA. We regularly monitor adjusted EBITDA, as it is a measure we use to assess our operating performance. We define adjusted EBITDA as net income or loss, excluding the impact of purchase accounting on net revenue, amortization of intangible assets and purchased technology, litigation costs, depreciation expense, acquisition write-up of acquired inventory sold, stock-based compensation expense, restructuring and other charges, acquisition fair value adjustments to earn outs, acquisition transaction costs, acquisition integration, transition, retention and other costs, financial sponsor and debt fees, interest expense, net, debt extinguishment and refinancing costs, other expense, net, and income tax provision (benefit). Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

 

    although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;

 

    adjusted EBITDA excludes the impact of the write-down of deferred revenue due to purchase accounting in connection with our acquisition, and therefore includes revenue that will never be recognized under GAAP;

 

    adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

 

    adjusted EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;

 

    adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us; and

 

    other companies, including companies in our industry, may calculate adjusted EBITDA differently, which reduces its usefulness as a comparative measure.

Because of these limitations, you should consider adjusted EBITDA alongside other financial performance measures, including net income (loss) and our other GAAP results. In evaluating adjusted EBITDA, you should be

 



 

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aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of adjusted EBITDA should not be construed as an inference that our future results will be unaffected by the types of items excluded from the calculation of adjusted EBITDA. Adjusted EBITDA is not a presentation made in accordance with GAAP and the use of the term varies from others in our industry.

Adjusted deferred revenue. We regularly monitor adjusted deferred revenue, as it provides visibility into our anticipated future revenue, primarily for our support and subscription contracts which we generally invoice in full up front and recognize revenue over the contract term, and is a key component in other measures we track to measure our financial performance. We define adjusted deferred revenue as deferred revenue, excluding the write-down of deferred revenue in connection with our acquisitions. While the deferred revenue written down in connection with our acquisitions will never be recognized as revenue under GAAP, we do not expect the Bain Acquisition to have an impact on future renewal rates of the contracts included within the deferred revenue write-down, nor do we expect revenue generated from new service and subscription contracts to be similarly impacted by purchase accounting adjustments. Accordingly, we believe presenting adjusted deferred revenue to exclude the impact of purchase accounting adjustments, including the deferred revenue write-down, aids in the comparability between periods. If these adjustments were not made, our future revenue growth rates could appear overstated. Adjusted deferred revenue has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for deferred revenue. Other companies in our industry may calculate this measure differently, which may limit its usefulness as a comparative measure.

The foregoing financial measures are not intended to represent and should not be considered as alternatives to revenue, net income, operating income or any other performance measures derived in accordance with GAAP as measures of financial performance or operating cash flows or as measures of liquidity. See “Selected Consolidated Financial Data—Reconciliation of Non-GAAP Financial Measures” for a reconciliation of these measures to GAAP.

 



 

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RISK FACTORS

This offering and investing in our common stock involves a high degree of risk. You should carefully consider the following risks, together with all of the other information contained in this prospectus, including our financial statements and related notes and the section titled “Special Note Regarding Forward-Looking Statements,” before making a decision to invest in our common stock. Any of the following risks could have a material adverse effect on our business, operating results and financial condition, and could cause the trading price of our common stock to decline, which would cause you to lose all or part of your investment. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or deemed to be material by us may impair our operations and performance.

Risks Related to Our Business

The IT security market is rapidly evolving within the increasingly challenging cyber threat landscape. If the industry does not continue to develop as we anticipate, our sales will not grow as quickly as expected.

The IT security needs of our customers continue to evolve rapidly. Many of our customers operate in markets characterized by rapidly changing technologies and business plans, which require them to adapt to increasingly complex enterprise networks, expand network access points and continuously update a variety of hardware, software applications, operating systems and networking protocols. The technology in our products and underlying our services offerings is especially complex because it must effectively identify and respond to new and increasingly sophisticated methods of attack, while minimizing the impact on network performance. Although the market expects rapid introduction of new products or product enhancements to respond to new threats, the development of these products requires significant investment, and the timing for commercial release and availability of new products and product enhancements is uncertain. We may experience unanticipated delays in the availability of new products and services and fail to meet customer expectations for such availability. If we fail to anticipate the evolving and rigorous needs of our customers, or do not respond quickly to shifting customer expectations or demands by developing and releasing on a timely basis new products and services or enhancements that can respond effectively and efficiently to new security threats, our competitive position and business prospects will be harmed. For example, we recently made investments in cloud security with our acquisitions of Perspecsys and Elastica, but we cannot be certain that the cloud security market will develop at the rate or in the manner we expect or that we will be able to compete successfully with more established competitors in the cloud security market.

The introduction of new products by others, market acceptance of products based on new or alternative technologies, or the emergence of new industry standards, could render our existing products obsolete or make it easier for other products to compete with our products. In addition, advanced cyber attackers are skilled at adapting to new technologies and developing new methods of gaining access to organizations’ sensitive business data. Changes in the nature of advanced cyber threats could result in a shift in IT budgets away from solutions such as ours. In addition, any changes in compliance standards or audit requirements that deemphasize the types of controls, monitoring and analysis that our solutions provide would adversely impact demand for our offerings. If solutions such as ours are not viewed by organizations as necessary, or if customers do not recognize the benefit of our solutions as a critical layer of an effective security strategy, then our revenues may not grow as quickly as expected, or may decline, and our business could suffer.

Our future success will depend in part upon our ability to:

 

    develop, acquire and maintain competitive products;

 

    enhance our products by adding innovative features that differentiate our products from those of our competitors;

 

    bring products to market on a timely basis at competitive prices;

 

    identify and respond to emerging technological trends in the market; and

 

    respond effectively to new technological changes or new product announcements by others.

 

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We cannot be sure that we will accurately predict the direction the markets in which we compete or intend to compete will evolve. Failure on our part to anticipate the direction of our markets and to develop products, enhancements and service offerings that meet the demands of those markets will significantly impair our business, financial condition and results of operations.

Our business depends substantially on our ability to retain customers and to expand our offerings to them. A decline in our customer retention or in our ability to expand sales to existing customers could harm our future operating results.

Given the consequences of the loss of critical data, many organizations seek security solutions that are among the best available in the industry. In order for us to maintain or improve our operating results in an industry that is rapidly evolving and places a premium on market leading solutions, it is important that we retain existing customers and that our customers expand their use of our products and services. Our customers have no obligation to renew their service contracts with us upon their expiration, and even if they do, they may not renew with a similar contract period or with the same or a greater amount of committed revenue to us. Retention rates may decline or fluctuate as a result of a number of factors, including the level of our customers’ satisfaction with our solutions, services and support, our prices and the prices of competing solutions or products, mergers and acquisitions affecting our customer base, the effects of global economic conditions, new technologies, changes in our customers’ spending levels and changes in how our customers perceive the security threats to their organizations and the importance of our offerings to the security of their organizations.

Furthermore, because we collect critical data from our customers regarding attempted breaches, new vulnerabilities and emerging security threats, the loss of a small number of key customers or groups of customers may cause other existing customers to perceive the security intelligence underlying some of our solutions to have diminished value and to seek alternative security solutions from our competitors. If our customers do not renew their service contracts with us, or renew them on less favorable terms or for fewer of our products or services, our revenue may decline.

Our future success depends substantially on our ability to expand our sales to our existing customers with solutions we develop or acquire. If we are unable to expand our presence within our customer base by expanding the scope of their usage or adopting additional solutions, our business and revenue will be adversely affected.

If we are unable to successfully expand our sales force while maintaining sales productivity, sales of our products and services and the growth of our business and financial performance could be harmed.

We continue to be substantially dependent on our direct-touch sales force to obtain new customers and increase sales to existing customers, and we plan to continue to grow our sales force. There is significant competition for sales personnel with the skills and technical knowledge that we require. Our ability to achieve significant revenue growth profitably will depend, in large part, on our success in recruiting, training and retaining sufficient numbers of sales personnel to support our growth, particularly in international markets. In addition, certain of our current sales personnel are new to our company. New hires require significant training and may require a lengthy onboarding process before they achieve full productivity. Our recent hires and planned hires may not become productive as quickly as we expect, and we may be unable to hire or retain sufficient numbers of qualified individuals in the markets where we do business or plan to do business. If we are unable to recruit, train and retain a sufficient number of productive sales personnel, sales of our products and services and the growth of our business could be harmed. Additionally, if our efforts to expand our sales force do not result in increased revenues, our operating results could be negatively impacted due to increased operating expenses associated with an expanded sales force.

If we are unable to increase sales of our products and services to new customers, our future revenue and operating results may be harmed.

An important part of our growth strategy involves continued investment in our sales force, channel partner relationships and infrastructure to add new customers. The number and rate at which new customers may

 

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purchase products and services depends on a number of factors, including those outside of our control, such as customers’ perceived need for our solutions, competition and general economic conditions. If our efforts to sell our products and services to new customers are not successful, our business and operating results may suffer.

Our operating results may fluctuate significantly, be difficult to predict and may not meet investor expectations.

Our operating results have in the past varied, and may in the future vary, significantly from period to period due to a number of factors, many of which are outside of our control, including the macroeconomic environment. These factors limit our ability to accurately predict our operating results and include factors discussed throughout this “Risk Factors” section, including the following:

 

    macroeconomic conditions in our markets, both domestic and international, as well as the level of discretionary IT spending;

 

    the timing, size and mix of orders from, and shipments to, customers, including the timing of large orders, and timing of shipments;

 

    fluctuation in demand for our products and services;

 

    evolving conditions in the markets in which we compete;

 

    variability and unpredictability in the rate of growth in the markets in which we compete;

 

    our ability to continue to acquire new customers and increase our market share;

 

    our sales cycles, which may lengthen as the complexity of products and competition in our markets increases and in response to macroeconomic conditions;

 

    the level of competition in our markets, including the effect of new entrants, consolidation and technological innovation;

 

    market acceptance of our products and services;

 

    product announcements, introductions, transitions and enhancements by us or our competitors, which could result in deferrals of customer orders;

 

    technological changes in our markets;

 

    the quality and level of our execution of our business strategy and operating plan, and the effectiveness of our sales and marketing programs;

 

    the impact of future acquisitions or divestitures;

 

    changes in accounting rules and policies; and

 

    the need to recognize certain revenue ratably over a defined period or to defer recognition of revenue to a later period.

Our business has historically experienced a major product refresh cycle approximately once every five years, as hardware appliances reach end of life. Customers typically refresh their install base of our hardware appliance products with our latest equipment, replacing older versions of the hardware that reach the end of their useful life and are no longer supported under service contracts. Historically, these refresh cycles triggered buying cycles for new versions of our hardware appliance products, which typically offer greater capacity and additional features, as well as new service contracts. In 2012, we launched a refresh program for our SWG 8100, our high-end ProxySG product, which we no longer supported as of March 2013 regardless of when a customer purchased this product. Following our SWG 8100 product refresh cycle in 2013, we changed the end-of-life policy for all of our hardware appliance products such that our hardware appliances now generally have an end-of-life date that is five years from the date of purchase, which we expect will extend refresh cycles over a multi-year period and reduce the impact of a product refresh cycle in any one period. We cannot be certain what impact our change in policy will have, if any, or whether we will continue to experience significant fluctuations in revenue as a result

 

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of these refresh cycles. If customers choose not to replace older versions of our products with newer products supported under our service contracts, our business and results of operations will be adversely affected.

A refresh cycle also creates an opportunity for our competitors to try to displace our existing product deployments at our customers, who may be more inclined to consider other product solutions when they otherwise have to replace our existing products that have reached the end of their useful life. The extent to which customers decide to refresh by purchasing products from our current or future competitors, as opposed to purchasing our new products, may significantly impact our current period product revenues, as well as future service revenue.

Furthermore, a high percentage of our expenses, including those related to overhead, service and maintenance, research and development, sales and marketing, and general and administrative functions are generally fixed in nature in the short term. As a result, if our net revenue is less than forecasted, we may not be able to effectively reduce such expenses to compensate for the revenue shortfall and our operating results will be adversely affected.

The markets in which we compete are intensely competitive and certain of our competitors have greater resources and experience.

Our products and services currently focus on the markets for Advanced Web and Cloud Security, Advanced Threat Protection, Encrypted Traffic Management, Incident Response, Analytics and Forensics, Web Application Protection, and Network Performance and Optimization. Each of these markets is intensely competitive, and the intensity of this competition is expected to increase, particularly given current economic pressures and industry consolidation. Service provider markets are especially volatile and typically have longer sales cycles. Competition in these markets may result in price reductions, reduced margins, loss of market share and inability to gain market share, any one of which could seriously impact our business, financial condition and results of operations. We may not be able to compete successfully against current or future competitors, including those resulting from consolidation in our historical and new markets, and we cannot be certain that the competitive pressures we face will not seriously impact our business.

Our participation in these markets requires careful resource allocation. If we are required to decrease our investment in any of these markets, we could become vulnerable to our competitors in those markets. Some of our current and potential competitors have longer operating histories; significantly greater financial, technical, sales and marketing resources; significantly greater name recognition; and a larger installed base of customers than we do. Such competitors also may have well-established relationships with our current and potential customers and extensive knowledge of our industry and the markets in which we compete and intend to compete. As a result, our competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the development, marketing, promotion and sale of their products than we can with respect to our products. They also may make strategic acquisitions or establish cooperative relationships among themselves or with other providers, thereby increasing their ability to provide a broader suite of products, and potentially causing customers to decrease purchases of, or defer purchasing decisions with respect to, our products.

Finally, our competitors may engage in aggressive pricing strategies or discounting. Any of the foregoing may limit our ability to compete effectively in the market and adversely affect our business, financial condition and results of operations.

Our sales cycles can be long and unpredictable, and our sales efforts require considerable time and expense. As a result, our sales and the timing of our sales are difficult to predict and may vary substantially from period to period, which may cause our results of operations to fluctuate significantly.

Our customers are primarily IT departments that are managing a growing set of user and compliance demands, which increases the complexity of customer requirements to be met in the sales cycle. Additionally, a combination of legal, procurement, development and security departments are involved in testing, evaluating and

 

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finally approving purchases, which can also make the sales cycle longer and less predictable. Moreover, sales to large enterprise customers, which we target to grow our revenue, involve challenges that could further increase the complexity and length of the sales cycle.

We may not be able to accurately predict or forecast the timing of sales, which could cause our results to vary significantly. In addition, we might devote substantial time and effort to a particular unsuccessful sales effort, and as a result we could lose other sales opportunities or incur expenses that are not offset by an increase in revenue, which could harm our business.

We have experienced net losses in recent periods and may not achieve or maintain profitability in the future. If we cannot achieve or maintain profitability, our financial performance will be harmed.

We experienced net loss of $15.4 million and $289.1 million (combined predecessor and successor) for fiscal 2015 and fiscal 2016, respectively. While we have experienced revenue growth over these same periods, we may not be able to sustain or increase our growth or achieve profitability in the future or on a consistent basis. In recent years, we have expanded our portfolio of products through multiple technology acquisitions and invested alongside these acquisitions with research and development to enhance their capabilities and integrate them into our platform.

We also expect to continue to invest for future growth. In addition, as a public company, we will incur significant accounting, legal and other expenses that we did not incur as a private company. We will have to generate and sustain increased revenue to achieve future profitability. Achieving profitability will require us to increase revenues, manage our cost structure and avoid significant liabilities. Revenue growth may slow, revenue may decline, or we may incur significant losses in the future for a number of possible reasons, including general macroeconomic conditions, increasing competition, a decrease in the growth of the markets in which we operate, or if we fail for any reason to continue to capitalize on growth opportunities. Additionally, we may encounter unforeseen operating expenses, difficulties, complications, delays and other unknown factors that may result in losses in future periods. If these losses exceed our expectations or our revenue growth expectations are not met in future periods, our financial performance will be harmed and our stock price could experience volatility or decline.

Our gross margin is affected by a number of factors, and we may not be able to sustain it at present levels.

Our gross margin has been and will continue to be affected by a variety of factors, including:

 

    market acceptance of our products and fluctuations in demand for products with different gross margins;

 

    the mix of products, services and subscriptions that we sell;

 

    varying discounting rates among customers;

 

    our ability to increase sales to and retain existing customers, and to sell to new customers;

 

    increased price competition and changes in product pricing;

 

    actions taken by our competitors;

 

    new product introductions and enhancements;

 

    manufacturing and component costs;

 

    availability of sufficient inventory to meet demand;

 

    purchase of inventory in excess of demand;

 

    our execution of our strategy and operating plans;

 

    changes in our sales model;

 

    geographies in which sales are made; and

 

    revenue recognition rules.

 

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Macroeconomic factors and competitive pressures may also require us to lower prices or increase spending, and our business and results of operations may suffer. Even if we achieve our net revenue and operating expense objectives, our net income or loss and operating results may be below our expectations and the expectations of investors if our gross margin is below expectations.

Our business and operations have experienced rapid growth, and if we do not appropriately manage future growth, our business, financial condition, results of operations and prospects may be adversely affected.

We have experienced over the last several years, and it is our intention to continue to pursue, rapid growth, which has placed and will continue to place significant demands on our management, administrative, operational and financial infrastructure. As we have grown, we have had to manage an increasingly larger and more complex array of internal systems and processes to scale all aspects of our business in proportion to such rapid growth, including a new call center system, a new support entitlement system and a new software license management system, as well as increased administrative complexity related to managing increased headcount, particularly within our sales force. 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 continue 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. For example, we are currently upgrading our enterprise resource planning and human resource management systems. We may not be able to successfully implement these or other improvements to our systems and processes in an efficient or timely manner, and we may discover deficiencies in their capabilities or effectiveness. We may experience difficulties in managing improvements to our systems and processes or in integrating with third-party technology. In addition, our systems and processes may not prevent or detect all errors, omissions or fraud. Our failure to improve our systems and processes, or their failure to operate effectively and in the intended manner, may result in disruption of our current operations and customer relationships, our inability to manage the growth of our business and our inability to accurately forecast and report our revenue, expenses and earnings and prevent certain losses.

Our revenue growth rate in recent periods may not be indicative of our future performance.

Our revenue growth rate in recent periods should not be used as an indication of our future performance. We may not achieve similar revenue growth rates in future periods. You should not rely on our revenue growth for any prior quarterly or annual periods as an indication of our future revenue or revenue growth. If we are unable to maintain consistent revenue or revenue growth, our stock price could experience volatility, and our ability to achieve and maintain profitability could be adversely affected.

Our substantial indebtedness could adversely affect our financial condition.

We have a significant amount of indebtedness. As of April 30, 2016, we and our subsidiaries had total outstanding indebtedness of $1,838 million, excluding approximately $100 million of unused commitments available to be borrowed under our senior secured revolving credit facility (excluding issued but undrawn letters of credit, if any) (the “Senior Secured Revolving Credit Facility”). Our substantial indebtedness increases the risk that we may be unable to generate cash sufficient to pay amounts due in respect of our indebtedness. Our substantial indebtedness could have other important consequences to you and significant effects on our business. For example, it could:

 

    increase our vulnerability to adverse changes in general economic, industry and competitive conditions;

 

   

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the availability of our cash flow to fund working capital, capital expenditures, acquisitions, execution of our business strategy and other general corporate purposes;

 

    limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

 

    require us to repatriate cash for debt service from our foreign subsidiaries, resulting in tax costs, or require us to adopt other disadvantageous tax structures to accommodate debt service payments;

 

    restrict us from capitalizing on business opportunities;

 

    make it more difficult to satisfy our financial obligations, including payments of principal and interest on the senior notes and the Senior Secured Credit Facilities;

 

    place us at a competitive disadvantage compared to our competitors that have less debt; and

 

    limit our ability to borrow additional funds for working capital, capital expenditures, acquisitions, debt service requirements, execution of our business strategy or other general corporate purposes.

The terms of our indebtedness may restrict our current and future operations, particularly our ability to respond to changes or to take certain actions.

The credit agreement governing our Senior Secured Credit Facilities and the indenture, as supplemented, governing our senior notes contain a number of restrictive covenants that impose significant operating and financial restrictions on us and may limit our ability to engage in acts that may be in our long-term best interest, including our ability to, among other things:

 

    incur additional indebtedness and guarantee indebtedness;

 

    pay dividends or make other distributions in respect of, or repurchase or redeem, capital stock;

 

    prepay, redeem or repurchase certain debt;

 

    make loans and investments;

 

    sell or otherwise dispose of assets;

 

    sell stock of our subsidiaries;

 

    incur liens;

 

    enter into transactions with affiliates;

 

    enter into agreements restricting certain of our subsidiaries’ ability to pay dividends; and

 

    consolidate, merge or sell all or substantially all of our assets.

In addition, with respect to the Senior Secured Revolving Credit Facility, Blue Coat Holdings, Inc. is required to comply with a maximum consolidated first lien net leverage ratio. This financial covenant is tested quarterly on a trailing four quarter basis on the last day of the most recent four fiscal quarter period for which financial statements were required to be delivered under the Senior Secured Credit Facilities. However, this financial covenant is only tested if, as of the last day of any fiscal quarter of Blue Coat Holdings, Inc. (commencing January 29, 2016), revolving loans under the Senior Secured Revolving Credit Facility (including swingline loans) and certain letter of credit obligations (but excluding undrawn or cash collateralized letters of credit) are outstanding in an aggregate amount greater than 35% of the total commitments under the Senior Secured Revolving Credit Facility at such time. This financial covenant is subject to an equity cure and may be amended or waived with the consent of the lenders holding a majority of the commitments under the Senior Secured Revolving Credit Facility.

As a result of these and other covenants and restrictions, we are and will be limited in how we conduct our business, and we may be unable to raise additional debt or equity financing to compete effectively or to take advantage of new business opportunities. In addition, we may be required to maintain specified financial ratios and satisfy other financial condition tests. The terms of any future indebtedness we may incur could include more restrictive covenants. We cannot assure you that we will be able to maintain compliance with these covenants in the future and, if we fail to do so, that we will be able to obtain waivers from the lenders and/or amend the covenants.

 

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Our failure to comply with the restrictive covenants described above as well as others contained in our future debt instruments from time to time could result in an event of default, which, if not cured or waived, could result in our being required to repay these borrowings before their maturity. If we are forced to refinance these borrowings on less favorable terms, our results of operations and financial condition could be adversely affected. See “Description of Indebtedness.”

Our investments in new or enhanced products and services may not yield the benefits we anticipate.

The success of our business is predicated on our ability to develop new products and technologies and to anticipate future market requirements and applicable industry standards. We presently are investing in each of our six key solution areas. We intend to continue to invest in these solution areas by adding personnel and other resources to our research and development function. We will likely recognize costs associated with these investments earlier than the anticipated benefits. If we do not achieve the anticipated benefits from these investments, or if the achievement of these benefits is delayed, our business, financial condition and results of operations may be adversely affected.

The process of developing new technologies is time consuming, complex and uncertain, and requires the commitment of significant resources well in advance of being able to fully determine market requirements and industry standards. Furthermore, we may not be able to timely execute new product or technical initiatives because of errors in product planning or timing, technical difficulties that we cannot timely resolve, or a lack of appropriate resources. This could result in competitors bringing products to market before we do and a consequent decrease in our market share and net revenue. Our inability to timely and cost-effectively introduce new products and product enhancements, or the failure of these new products or enhancements to achieve market acceptance and comply with industry standards, could seriously harm our business, financial condition and results of operations. Additionally, products and technologies developed by others, and our own introduction of new products and product enhancements, could result in the obsolescence and write-off of previously purchased or committed inventory, which would reduce our net income or increase our net loss.

If we are unable to successfully develop and expand our cloud-based offerings, or if the market for cloud-based information technology security solutions does not evolve as we anticipate, our business and results of operations may be harmed.

We have invested considerable resources in developing our Cloud-Delivered Secure Web Gateway service, Global Intelligence Network and cloud-based offerings, and in building out the infrastructure supporting such offerings, including amounts spent on internal research and development, strategic acquisitions, equipment purchases and long-term leases or service agreements associated with acquiring space for the data centers that support such cloud-based offerings. We expect to continue to invest significant resources in our cloud-based offerings. In 2015, we extended our investment in our cloud-based offerings through our acquisitions of Elastica and Perspecsys. There is no assurance that we will generate sufficient revenue from sales of these products and services to recoup these investments. Given our limited history with our cloud-based offerings we can provide no assurance that we will be successful in continuing to grow revenue from our cloud-based offerings. Moreover, our entry into these and other new markets may adversely affect our gross margin, revenue and expenses as a consequence of the ratable recognition of subscription revenue for our cloud-based offerings and the corresponding requirement to recognize the expense associated with the sale thereof at the time of such sale.

The success of our investments in our cloud-based offerings will also depend to a significant extent on the willingness of organizations to increase their use of the cloud and to rely on cloud-based solutions for their IT security needs. The market for cloud-based IT security solutions is at an early stage relative to on-premise solutions, and as such, it is difficult to predict important market trends, including the potential growth, if any, of the market for these solutions. To date, some organizations have been reluctant to use cloud-based solutions because they have concerns regarding the risks associated with the reliability or security of the technology delivery model associated with these solutions. If other cloud-based service providers experience security incidents, loss of customer data, disruptions in service delivery or other problems, the market for cloud-based

 

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solutions as a whole, including our cloud-based offerings, may be negatively impacted. If the demand for our cloud-based offerings does not continue to grow for any of the reasons discussed above, our business, results of operations and financial condition may be harmed.

Real or perceived defects, errors or vulnerabilities in our products or services, the misconfiguration of our products, the failure of our products or services to block malware or prevent a security breach, or the failure of customers to take action on attacks identified by our products could harm our reputation and adversely impact our business, financial condition and results of operations.

Because our products and services are complex, they have contained and may contain design or manufacturing defects or errors that are not detected before their deployment. Our products also provide our customers with the ability to customize a multitude of settings, and it is possible that a customer could misconfigure our products or otherwise fail to configure our products in an optimal manner. Such defects, errors and misconfigurations of our products could cause our products or services to be vulnerable to security attacks, cause them to fail to secure networks and detect and block threats, or temporarily interrupt the networking traffic of our customers. In addition, because the techniques used by computer hackers to access or sabotage networks change frequently and generally are not recognized until widely deployed, there is a risk that an advanced attack could emerge that our products and services are unable to detect or prevent. Moreover, as our products and services are adopted by an increasing number of enterprises and governments, it is possible that the individuals and organizations behind cyber-attacks will begin to focus on finding ways to defeat our products and services. If this happens, our networks, products and services could be targeted by attacks specifically designed to disrupt our business and undermine the perception that our products and services are capable of providing superior IT security, which, in turn, could have a serious impact on our reputation. Any security vulnerability or perceived security vulnerability of our products or services could materially and adversely affect our business, financial condition and results of operations.

If any of our customers become infected with malware after using our products or services, such customer could be disappointed with our products and services or perceive that our products or services failed to perform their intended purpose, regardless of whether our products or services blocked the theft of any of such customer’s data or would have blocked such theft if configured properly. If any of our customers experience a security breach, such customers and the general public may believe that our products and services failed. Furthermore, if any enterprises or governments that are publicly known to use our products or services are the subject of a cyber-attack that becomes publicized, our other current or potential customers may purchase alternative solutions from our competitors. Real or perceived security breaches of our customers’ networks could cause disruption or damage to their networks or other negative consequences and could result in negative publicity about us, damage to our reputation, declining sales, increased expenses and customer relations problems.

Furthermore, our products and services may fail to detect or prevent malware, viruses, worms or similar threats for any number of reasons, including our failure to enhance and expand our products and services to reflect industry trends, new technologies and new operating environments, the complexity of our customers’ environment and the sophistication of malware, viruses and other threats. In addition, from time to time, firms test our products against other security products. Our products may fail to detect or prevent threats in any particular test for a number of reasons, including misconfiguration. To the extent potential customers, industry analysts or testing firms believe that the occurrence of a failure of our products or services to detect or prevent any particular threat is a flaw or indicates that our products or services do not provide significant value, our reputation and business could be harmed. Failure to keep pace with technological changes in the IT security industry and changes in the threat landscape could adversely affect our ability to protect against security breaches and could cause us to lose customers.

Any real or perceived defects, errors or vulnerabilities in our products and services, or any other failure of our products and services to detect or block threats, could result in:

 

    a loss of existing or potential customers or channel partners;

 

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    delayed or lost revenue and harm to our financial condition and results of operations;

 

    a delay in attaining, or the failure to attain, market acceptance for new products;

 

    the expenditure of significant financial and product development resources in efforts to analyze, correct, eliminate, or work around errors or defects, to address and eliminate vulnerabilities, or to identify and ramp up production with alternative third-party manufacturers;

 

    an increase in warranty claims, or an increase in the cost of servicing warranty claims, either of which would adversely affect our gross margins;

 

    harm to our reputation or brand; and

 

    litigation, regulatory inquiries, or investigations that may be costly and further harm our reputation.

Disruptions or other business interruptions that affect the continuous availability of our cloud-based offerings, including disruptions at any third-party data centers upon which we rely, could adversely impact our business, financial condition and results of operations.

Our customers depend on the continuous availability of our cloud-based offerings. Our cloud-based offerings are vulnerable to damage or interruption from a variety of sources, including damage or interruption caused by telecommunications or computer systems failure, fire, earthquake, power loss, cyber-attack, human error, terrorist acts and war. Our data centers and networks may experience technical failures and downtime, may fail to distribute appropriate updates, or may fail to meet the increased requirements of a growing customer base, any of which could temporarily or permanently expose our customers’ networks, leaving their networks unprotected against the latest security threats or, in the case of technical failures and downtime of a customer’s security operation center, all security threats. Depending upon how customers have configured their use of our products and services, network downtime within our data centers may also prevent certain customers from being able to access the Internet during the period of such network downtime.

In addition, there may be system or network interruptions if customer systems are defective or not installed properly. Moreover, interruptions in our subscription updates could result in a failure of our Global Intelligence Network to effectively update our customers’ products and thereby leave our customers more vulnerable to attacks. Interruptions or failures in our service delivery could cause customers to terminate their subscriptions with us, could adversely affect our renewal rates, and could harm our ability to attract new customers. Our business would also be harmed if our customers believe that our cloud-based offerings are unreliable.

We provide our cloud-based offerings through third-party data center hosting facilities located in the United States and other countries. While we control and have access to our servers and all of the components of our network that are located in such third-party data centers, we do not control the operation of these facilities. Following expiration of the current agreement terms, the owners of the data center facilities have no obligation to renew their agreements with us on commercially reasonable terms, or at all. If we are unable to renew these agreements on commercially reasonable terms, or if one of our data center operators is acquired, we may be required to transfer our servers and other infrastructure to new data center facilities, and we may incur significant costs and possible service interruption in connection with doing so.

If our competitors incorporate security functionality similar to that offered by our products into their existing IT security products, organizations may stop using our products in their network, which would have an adverse effect on our business.

Large, well-established providers of networking equipment offer, and may continue to introduce, enterprise IT security features that compete with our products and services, either in stand-alone IT security products or as additional features in their network infrastructure products. The inclusion of, or the announcement of an intent to include, functionality perceived to be similar to that offered by our security solutions in networking products that are already generally accepted as necessary components of our existing or potential customers’ network architecture may have an adverse effect on our ability to market and sell our products and services.

 

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Furthermore, even if the functionality offered by network infrastructure providers is more limited than our products, current or prospective customers may elect to accept such limited functionality of their existing vendors’ products in lieu of adding our products. Many organizations have invested substantial personnel and financial resources to design and operate their networks and have established deep relationships with other providers of networking products with whom we may compete, which may make them reluctant to add new components such as the products we offer to their networks. In addition, an organization’s existing vendors or new vendors with a broader product offering than our own may be able to offer concessions that we are not able or willing to match. If organizations are reluctant to add additional network infrastructure to incorporate our products or otherwise decide to work with their existing vendors to address their enterprise IT security needs, our ability to increase our market share and improve our financial condition and operating results will be adversely affected.

Reliance on shipments at the end of the quarter could cause our revenue for the applicable period to fall below expected levels.

As a result of customer buying patterns and the efforts of our sales force and channel partners to meet or exceed their quarterly sales objectives, we have historically received a substantial portion of sales orders and generated a substantial portion of revenue during the last few weeks of each fiscal quarter. If expected revenue at the end of any fiscal quarter is delayed for any reason, including the failure of anticipated purchase orders to materialize, our logistics partners’ inability to ship products prior to fiscal quarter-end to fulfill purchase orders received near the end of the fiscal quarter, our failure to manage inventory to meet demand, our inability to release new products on schedule, any failure of our systems related to order review and processing, or any delays in shipments based on trade compliance requirements, our revenue for that quarter could fall below our expectations and the estimates of analysts, which could adversely impact our business and results of operations.

Seasonality may cause fluctuations in our revenue.

Our business is affected by seasonal fluctuations in customer spending patterns, which result in some seasonal trends in the sale of our solutions. Revenue in our third and fourth fiscal quarters is typically stronger due to the calendar year-end. Our first and second fiscal quarters typically experience lower sales, with revenue historically lowest in our first fiscal quarter. Furthermore, our rapid growth rate over recent years may have made seasonal fluctuations more difficult to detect. If our growth rate slows over time, seasonal or cyclical variations in our operations may become more pronounced, and our business, results of operations and financial position may be adversely affected.

A portion of our revenue is generated by sales to government entities, which are subject to a number of challenges and risks.

We currently sell our solutions to various government entities, and we may in the future increase sales to government entities. Sales to U.S. federal government agency customers accounted for 4% of our total revenue for fiscal 2016. Sales to government entities are subject to a number of risks. Selling to government entities can be highly competitive, expensive and time consuming, often requiring significant upfront time and expense without any assurance that we will complete a sale. Government demand and payment for our products and services may be impacted by public sector budgetary cycles and funding authorizations, with funding reductions or delays adversely affecting public sector demand for our products. Sales to government agencies are completed through our network of channel partners, and government entities may have statutory, contractual or other legal rights to terminate contracts with our distributors and resellers for convenience or due to a default. Finally, for purchases by the U.S. government, the government may require certain products to be manufactured in the United States and other high cost manufacturing locations, and we may not manufacture all products in locations that meet the requirements of the U.S. government, and as a result, our business and results of operations may suffer.

 

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We rely on revenue from support services and subscriptions, which may decline, and because we recognize revenue from services and subscriptions over the term of the relevant service period, downturns or upturns in sales of these services and subscriptions are not immediately reflected in full in our operating results.

Adjusted service and subscription revenue accounts for a significant portion of our total adjusted net revenue, comprising 58% of total adjusted net revenue in fiscal 2016, 57% of total adjusted net revenue in fiscal 2015 and 49% of total adjusted net revenue in fiscal 2014. Service and subscription revenue, including the impact of purchase accounting, accounted for 48% of total net revenue in fiscal 2016, 57% of total net revenue in fiscal 2015, and 47% of total net revenue in fiscal 2014. See “Selected Consolidated Financial Data—Reconciliation of Non-GAAP Financial Measures” for a description of adjusted service and subscription revenue, adjusted product revenue and adjusted net revenue, and a reconciliation of these measures to GAAP. Our service and subscription revenue primarily consists of sales of new and renewal support contracts, software subscriptions and our cloud-based offerings. Sales of new or renewal service and subscription contracts may decline and fluctuate as a result of a number of factors, including our 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, and reductions in our customers’ spending levels. If our sales of new or renewal service and subscription contracts decline, our revenue and revenue growth may decline and our business will suffer. In addition, we recognize service and subscription revenue over the term of the contract. These contracts typically have a term of one to three years for new support contracts and subscription contracts, with average terms of approximately two years, and one year for renewal support contracts. As a result, much of the service and subscription revenue we report each fiscal quarter is the recognition of deferred revenue from service and subscription and service contracts entered into during previous fiscal quarters. Consequently, a decline in new or renewed service or subscription contracts in any one fiscal quarter will not be fully or immediately reflected in revenue in that fiscal quarter but will negatively affect our revenue in future fiscal quarters. Accordingly, the effect of significant downturns in new or renewed sales of our services or subscriptions is not reflected in full in our operating results until future periods. Also, it is difficult for us to rapidly increase our service and subscription revenue through additional sales in any period, as revenue from new and renewal service and subscription contracts must be recognized over the applicable term of the contract. Furthermore, any increase in the average term of our services or subscriptions contracts would result in revenue for such contracts being recognized over longer periods of time.

Our acquisitions may not provide the benefits we anticipate and may disrupt our existing business.

Since December 2012, we have acquired Crossbeam Systems, Solera Networks, Norman Shark, the SSL Visibility appliance product line from Netronome Systems, Perspecsys and Elastica. It is likely we will acquire additional businesses or assets in the future. There is no guarantee that such acquisitions will yield the benefits we anticipate.

Acquisitions may also result in risks to our existing business, including:

 

    inability to successfully integrate the operations, technologies, products and personnel of the acquired companies;

 

    diversion of management’s attention from daily operations of the business;

 

    loss of key employees;

 

    substantial transaction costs;

 

    assumption of additional liabilities;

 

    incurrence of additional debt or a decline in available cash;

 

    adverse effects to our financial statements, such as the need to make large and immediate write-offs or the incurrence of restructuring and other related expenses;

 

    liability for intellectual property infringement, other litigation claims or past violations of applicable laws, which we may or may not be aware of at the time of acquisition;

 

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    creation of goodwill or other intangible assets that could result in significant amortization expense or impairment charges; and

 

    incurrence of tax expense related to the effect of acquisitions on our intercompany research and development cost sharing arrangements and legal structure.

The occurrence of any of the above risks could seriously impact our business, financial condition and results of operations.

If our products do not interoperate with our customers’ infrastructures, or if our customers implement certain proprietary encryption protocols, sales of our products could be adversely affected.

Our products must interoperate with our customers’ existing infrastructures, which often have different specifications, rapidly evolve, utilize multiple protocol standards, deploy products and applications from multiple vendors, and contain multiple generations of products that have been added to that infrastructure over time. In addition, our customers may implement proprietary encryption protocols that our products are unable to recognize, de-crypt or otherwise manage. If we are unable to successfully manage and interpret new protocol standards and versions, if we encounter problematic network configurations or settings, or if we encounter proprietary encryption protocols, we may have to modify our software or hardware so that our products will interoperate with our customers’ infrastructures and can manage our customers’ traffic in the manner intended. It may be necessary for us to obtain a license to implement proprietary encryption or other protocols, and there can be no assurance that we will be able to obtain such a license. As a consequence of any of the foregoing, we may suffer delays in the development of our products or our products may be unable to protect or manage our customers’ traffic in, our customers’ infrastructure, which could affect our ability to sell our products, and adversely affect our business, financial condition and results of operations.

We may be unable to raise additional capital on acceptable terms, or at all.

We believe that our available cash and cash equivalents, together with funds from this offering and generated from our operating activities and unused availability under our Senior Secured Revolving Credit Facility will be sufficient to meet our working and other capital requirements for at least the next 12 months. However, if cash is required for unanticipated needs, including in connection with a proposed acquisition of a company or technology, we may need additional capital during that period. The development and marketing of new products and our investment in sales and marketing efforts require a significant commitment of resources. If the markets for our products develop at a slower pace than anticipated, we could be required to raise additional capital. We cannot guarantee that, should it be required, sufficient debt or equity capital will be available to us under acceptable terms, if at all. If we were unable to raise additional capital when required, our business, financial condition and results of operations could be seriously harmed.

The security of our computer systems may be compromised and harm our business.

Increasingly, companies, including us, are subject to a wide variety of attacks on their networks on an ongoing basis. We may also be a more attractive target for cyber-attacks because we provide web security solutions. In addition to traditional computer hackers, malicious code (such as viruses and worms), employee theft or misuse (including threats posed by malicious insiders and other forms of cyber-espionage), denial of service attacks, and nation-state and nation-state supported actors now engage in intrusions and attacks (including advanced persistent threat intrusions), and add to the risks to our internal networks and the information they store and process. In the ordinary course of business, we collect, use, store, disclose, transfer, and otherwise process sensitive or personal information about our employees, customers, vendors, partners, and others. We may also process and store sensitive or personal information in cloud-based services for our or our customers’ purposes. These cloud-based services are hosted by third parties on infrastructure maintained by third parties. Despite efforts to create security barriers to such threats, it is impossible for us to entirely mitigate these risks. Any breach of our security measures or those of our partners, vendors, and service providers could compromise our networks, products or services, creating system disruptions or slowdowns, and the information

 

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stored or processed on our networks could be subject to unauthorized access or acquisition, corrupted, lost, or publicly disclosed, which could subject us to liability and cause us financial harm. Data breaches or security incidents that impact us could also exploit the security vulnerabilities of our products and further result in, or increase the likelihood of, a data breach or security incident that impacts the systems, networks, or data of our customers. Many of our customers have reporting obligations, which could result in increased publicity of any such breaches. As a result, any actual or perceived security breaches of our computer systems may result in damage to our reputation, negative publicity, loss of channel partners, customers and sales, increased costs to respond to and remedy any problem, and costly litigation or regulatory investigations and may therefore adversely impact market acceptance of our products, or our business, financial condition or results of operations.

We rely significantly on third-party channel partners to fulfill sales of our products.

We primarily market and sell our solutions to our customers through a two-tiered indirect channel of solution providers, systems integrators, value-added resellers and distributors worldwide. During fiscal 2015 and 2016, approximately 84% of our revenue was attributable to sales fulfilled through distributors, and 16% of our revenue was made through direct resellers. For fiscal 2016, our two largest distributors accounted for 27% and 26% of our revenue, respectively. For fiscal 2015, our two largest distributors accounted for 26% and 25% of our revenue, respectively. We also rely on a third party to solicit and obtain renewal contracts with existing customers. If we lost one of our distributors or if any of the channel partners responsible for a significant portion of our business becomes insolvent or suffers a deterioration in its financial or business condition and is unable to pay for our products, our results of operations could be harmed. Although we provide support to these channel partners through our direct sales and marketing activities, we depend upon these partners to generate sales opportunities and to independently manage the sales process for opportunities with which they are involved. In order to increase our revenue, we expect we will need to maintain our existing channel partners and continue to train and support them, as well as add new channel partners and effectively train, support and integrate them with our sales process. Additionally, our entry into any new markets will require us to develop appropriate channel partners and to train them to effectively address these markets. If we are unsuccessful in these efforts, this will limit our ability to grow our business and our business, financial condition and results of operations will be adversely affected.

Our current system of channel distribution may not prove effective in maximizing sales of our products and services. Our products are complex and certain sales can require substantial effort. It is possible that our channel partners will be unable or unwilling to dedicate appropriate resources to support those sales. Furthermore, most of our channel partners do not have minimum purchase or resale requirements, and may terminate our agreements with only a short notice period or otherwise cease selling our products at any time. They also may market, sell and support products and services that are competitive with ours, and may devote more resources to the marketing, sales and support of those competitive products. There is no assurance that we will retain these channel partners, or that we will be able to add additional or replacement channel partners in the future. The loss of one or more of our key channel partners in a given geographic area could harm our operating results within that area, as new channel partners typically require extensive training and take several months to achieve acceptable productivity.

We also depend on some of our channel partners to deliver first line service and support for our products. Once our products are deployed within our customers’ networks, our customers depend on the support of our channel partners to resolve any issues relating to the implementation and maintenance of our platform. If our channel partners do not effectively assist our customers in deploying our products, succeed in helping our customers quickly resolve post-deployment issues, or provide effective ongoing support, our customer satisfaction and future sales of our products could be adversely affected.

While we require that our channel partners comply with applicable laws and regulations, they could engage in behavior or practices that expose us to legal or reputational risk. For example, in 2011 we sold certain appliances in compliance with U.S. export law to a Middle Eastern affiliate of one of our channel partners, which thereafter unlawfully diverted the appliances to Syria without our knowledge. We received negative press

 

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coverage and incurred significant time and expense in connection with our internal investigation of the matter and our cooperation with the U.S. government in connection with its review of this third-party diversion of our products.

Our ability to maintain customer satisfaction depends in part on the quality of our customer support services, including the quality of the support provided on our behalf by certain channel partners. Failure to maintain high-quality customer support could have a material adverse effect on our business, financial condition and results of operations.

Once our products are deployed within our customers’ networks, our customers depend on our support and other technical services, as well as the support of our channel partners, to resolve any issues relating to the implementation and maintenance of our products. If we or our channel partners do not effectively assist our end customers in deploying our products, succeed in helping our customers quickly resolve post-deployment issues, or provide effective ongoing support, our ability to sell additional products or services to existing customers would be adversely affected and our reputation with potential customers could be damaged.

Many larger organizations have more complex networks and require higher levels of support than smaller customers. If we fail to meet the requirements of our larger customers, it may be more difficult to expand sales to these customers.

Our continued growth also depends on our ability to maintain high-quality support services for an increasing number of small and mid-sized enterprises. While small and mid-sized customers often have less complex networks and require lower levels of ongoing support, they are often subject to resource constraints that increase the importance of the cost and efficiency of support services. If we and our channel partners are unable to efficiently provide the same high-quality support services for sales made to smaller enterprises, our ability to expand our customer base may be adversely affected and the growth of our business may be harmed.

Additionally, if our channel partners do not effectively provide support to the satisfaction of our customers, we may be required to provide this level of support to those customers, which would require us to hire additional personnel and to invest in additional resources. It can take significant time and resources to recruit, hire, and train qualified support services and other technical support employees. We may not be able to hire such resources fast enough to keep up with demand, particularly when the sales of our products exceed our internal forecasts. To the extent that we or our channel partners are unsuccessful in hiring, training, and retaining adequate support resources, our ability and the ability of our channel partners to provide adequate and timely support to our customers will be negatively impacted, and our customers’ satisfaction with our offerings will be adversely affected.

If we fail to successfully promote or protect our brand, our business and competitive position may be harmed.

Due to the intensely competitive nature of our markets, we believe that building and maintaining our brand and reputation is critical to our success, and that the importance of positive brand recognition will increase as competition in our market further intensifies. We believe that we have a well-established brand and we have invested and expect to continue to invest substantial resources to promote and maintain our brand both domestically and internationally, but there is no guarantee that our brand development strategies will enhance the recognition of our brand or lead to increased revenue.

Furthermore, an increasing number of independent industry analysts and researchers regularly evaluate, compare and publish reviews regarding the functionality of IT security products and services, including our own solutions. The market’s perception of our solutions may be significantly influenced by these reviews. We do not have any control over the content of these independent industry analysts and researchers reports, and our brand could be harmed if they publish negative reviews of our solutions or do not view us as a market leader. The strength of our brand may also be negatively impacted by the marketing efforts of our competitors, which may include incomplete, inaccurate and misleading statements about us, or our products and services. If we are unable to maintain a strong brand and reputation, sales to new and existing customers could be adversely affected, and our financial performance could be harmed.

 

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Our ability to use our net operating loss carry-forwards may be subject to limitation and may result in increased future tax liability to us.

Generally, a change of more than 50% in the ownership of a corporation’s stock owned by certain shareholders, by value, over a three-year period constitutes an ownership change for U.S. federal income tax purposes. An ownership change may limit a company’s ability to use its net operating loss carry-forwards and certain other tax attributes attributable to the period prior to such change. We have previously undergone an ownership change under Section 382 of the Internal Revenue Code as a result of past transactions, including the Bain Acquisition. As a result, if we earn net taxable income, our ability to use our pre-ownership change net operating loss carry-forwards and certain other tax attributes to offset U.S. federal taxable income will be subject to limitations, which could potentially result in increased future tax liability to us. In addition, future changes in our stock ownership could result in additional ownership changes in the future.

Forecasting our estimated annual effective tax rate is complex and subject to uncertainty, and there may be material differences between our forecasted and actual tax rates.

Forecasts of our income tax position and effective tax rate are complex and subject to uncertainty because our income tax position for each year combines the effects of a mix of profits and losses earned by us and our subsidiaries in various tax jurisdictions with a broad range of income tax rates, as well as changes in the valuation of deferred tax assets and liabilities, the impact of various accounting rules and changes to these rules and tax laws, the results of examinations by various tax authorities, and the impact of any acquisition, business combination or other reorganization or financing transaction. For example, the Predecessor’s acquisition by Thoma Bravo in 2012 and the Bain Acquisition, as well as our recent acquisitions of Elastica and Perspecsys, each involved complex tax structuring, consequences and determinations. To forecast our global tax rate, we estimate our pre-tax profits and losses by jurisdiction and forecast our tax expense by jurisdiction. If our mix of profits and losses, our ability to use tax credits, or effective tax rates by jurisdiction is different than those estimated, our actual tax rate could be different than forecasted, which could have a material impact on our financial condition and results of operations.

As a multinational corporation, we conduct our business in many countries and are subject to taxation in many jurisdictions. The taxation of our business is subject to the application of multiple and conflicting tax laws and regulations as well as multinational tax conventions. Our effective tax rate is highly dependent upon the geographic distribution of our worldwide earnings or losses, the tax regulations in each geographic region, the availability of tax credits and carryforwards, and the effectiveness of our tax planning strategies. The application of tax laws and regulations is subject to legal and factual interpretation, judgment and uncertainty. Tax laws themselves are subject to change as a result of changes in fiscal policy, changes in legislation, and the evolution of regulations and court rulings. Consequently, taxing authorities may impose tax assessments or judgments against us that could materially impact our tax liability and/or our effective income tax rate. Furthermore, we may decide to repatriate a portion of our cash and cash equivalents held by our international subsidiaries for various reasons, including but not limited to servicing our debt obligations. If such cash and cash equivalents were to be repatriated, we may incur a United States federal income tax liability that is not currently accrued in our financial statements and could be material.

In addition, we are subject to examination of our income tax returns by the Internal Revenue Service and other tax authorities. If tax authorities challenge the relative mix of our U.S. and international income, our future effective income tax rates could be adversely affected. While we regularly assess the likelihood of adverse outcomes from such examinations and the adequacy of our provision for income taxes, there can be no assurance that such provision is sufficient and that a determination by a tax authority will not have an adverse effect on our business, financial condition and results of operations.

 

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We rely on technology that we license from third parties, including software that is integrated with internally developed software and used with our products.

We rely on technology that we license from third parties, including third-party commercial software and open source software, which is used with certain of our products. If we are unable to continue to license any of this software on commercially reasonable terms, we will face delays in releases of our software or we will be required to delete this functionality from our software until equivalent technology can be licensed or developed and integrated into our current product. In addition, our inability to obtain certain licenses or other rights might require us to engage in litigation regarding these matters, which could have a material adverse effect on our business, financial condition and results of operations.

Our use of open source software could negatively affect our ability to sell our solutions and subject us to possible litigation.

We use open source software in our products and our development environments and expect to continue to use open source software in the future. Open source software is typically provided without assurances of any kind. If open source software programmers do not continue to develop and enhance open source technologies, our development expenses could be increased and our product release and upgrade schedules could be delayed. In addition, we may face claims from others seeking to enforce the terms of open source licenses, including by demanding release of derivative works or our proprietary source code that was developed using such open source software. These claims could also result in litigation, require us to purchase a costly license or require us to devote additional research and development resources to change our products or services, any of which could have a negative effect on our business and operating results. In addition, if the license terms for the open source software we utilize change, we may be forced to reengineer our offerings or incur additional costs. Although we regulate the use and incorporation of open source software into our products, we cannot be certain that we have in all cases incorporated open source software in our products in a manner that is consistent with the applicable open source license terms.

If we fail to accurately predict our manufacturing requirements and manage our supply chain we could incur additional costs or experience manufacturing delays that could harm our business.

We generally provide forecasts of our requirements to our supply chain partners on a rolling basis. If our forecast exceeds our actual requirements, a supply chain partner may assess additional charges or we may have liability for excess inventory, each of which could negatively affect our gross margin. If our forecast is less than our actual requirements, the applicable supply chain partner may have insufficient time or components to produce or fulfill our product requirements, which could delay or interrupt manufacturing of our products or fulfillment of orders for our products, and result in delays in shipments, customer dissatisfaction, and deferral or loss of revenue. Further, we may be required to purchase sufficient inventory to satisfy our future needs in situations where a component or product is being discontinued. If we fail to accurately predict our requirements, we may be unable to fulfill those orders or we may be required to record charges for excess inventory. Any of the foregoing could adversely affect our business, financial condition or results of operations.

We are dependent on original design manufacturers, contract manufacturers and third-party logistics providers to design and manufacture our products and to fulfill orders for our products.

We depend primarily on original design manufacturers (each of which is a third-party original design manufacturer for numerous companies) to co-design and co-develop the hardware platforms for our products. We also depend on independent contract manufacturers (each of which is a third-party contract manufacturer for numerous companies) to manufacture and fulfill our products. These supply chain partners are not committed to design or manufacture our products, or to fulfill orders for our products, on a long-term basis in any specific quantity or at any specific price. In addition, certain of our products or key components of our products are currently manufactured by a single third-party supplier. There are alternative suppliers that could provide components, as our agreements do not provide for exclusivity or minimum purchase quantities, but the transition and qualification from one supplier to another could be lengthy, costly and difficult. Also, from time to time, we may be required to add new supply chain

 

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partner relationships or new manufacturing or fulfillment sites to accommodate growth in orders or the addition of new products. It is time consuming and costly to qualify and implement new supply chain partner relationships and new manufacturing or fulfillment sites, and such additions increase the complexity of our supply chain management. Our ability to ship products to our customers could be delayed, and our business and results of operations could be adversely affected if we fail to effectively manage our supply chain partner relationships; if one or more of our original design manufacturers does not meet our development schedules; if one or more of our independent contract manufacturers experiences delays, disruptions or quality control problems in manufacturing our products; if one or more of our third-party logistics providers experiences delays or disruptions or otherwise fails to meet our fulfillment schedules; or if we are required to add or replace original design manufacturers, independent contract manufacturers, third-party logistics providers or fulfillment sites.

In addition, these supply chain partners have access to certain of our critical confidential information and could wrongly disclose or misuse such information or be subject to a breach or other compromise that introduces a vulnerability or other defect in the products manufactured by our supply chain partners. While we take precautions to ensure that hardware manufactured by our independent contractors is reviewed, any espionage acts, malware attacks, theft of confidential information or other malicious cyber incidents perpetrated either directly or indirectly through our independent contractors, may compromise our system infrastructure, expose us to litigation and associated expenses and lead to reputational harm that could result in a material adverse effect on our financial condition and operating results. In addition, we are subject to risks resulting from the perception that certain jurisdictions, including China, do not comply with internationally recognized rights of freedom of expression and privacy and may permit labor practices that are deemed unacceptable under evolving standards of social responsibility. If manufacturing or logistics in these foreign countries is disrupted for any reason, including natural disasters, IT system failures, military or government actions or economic, business, labor, environmental, public health, or political issues, or if the purchase or sale of products from such foreign countries is prohibited or disfavored, our business, financial condition and results of operations could be adversely affected.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) includes disclosure requirements regarding the use of certain minerals mined from the Democratic Republic of Congo and adjoining countries (“DRC”) and procedures pertaining to a manufacturer’s efforts regarding the source of such minerals. SEC rules implementing these requirements and other international standards, such as the Organization for Economic Co-Operation and Development Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High Risk Areas may have the effect of reducing the pool of suppliers who can supply DRC “conflict free” components and parts, and we may not be able to obtain DRC conflict free products or supplies in sufficient quantities for our products. We may also face reputational challenges with our customers, stockholders and other stakeholders if we are unable to sufficiently verify the origins for the minerals used in our products.

If the protection of our proprietary technology is inadequate, our competitors may gain access to our technology.

Our success is dependent on our ability to create proprietary technology and to protect and enforce our intellectual property rights in that technology, as well as our ability to defend against adverse claims of third parties with respect to our technology and intellectual property. To protect our proprietary technology, we rely primarily on a combination of contractual provisions, confidentiality procedures, trade secrets, copyright and trademark laws, and patents. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or obtain and use information that we regard as proprietary. Policing unauthorized use of our products is difficult. In addition, the laws of some foreign countries, including countries where we sell products and have operations, do not protect our proprietary rights to as great an extent as do the laws of the United States. Our means of protecting our proprietary rights may not be adequate and unauthorized third parties, including current and future competitors, may independently develop similar or superior technology, duplicate or reverse engineer aspects of our products, or design around our patented technology or other intellectual property.

 

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As of April 30, 2016, we had more than 230 issued patents and pending patent applications. There can be no assurance that any of our pending patent applications will issue or that the patent examination process will not result in our narrowing the claims applied for in our patent applications. Furthermore, there can be no assurance that we will be able to detect any infringement of our existing or future patents (if any) or, if infringement is detected, that our patents will be enforceable or that any damages awarded to us will be sufficient to adequately compensate us for the infringement.

There can be no assurance or guarantee that any products, services or technologies that we are presently developing, or will develop in the future, will result in intellectual property that is subject to legal protection under the laws of the United States or a foreign jurisdiction or that produces a competitive advantage for us.

Misuse of our products could harm our reputation and negatively affect our business, financial condition and results of operations.

Certain of our products enable the filtering of Internet content and provide our customer with the ability to selectively block access to certain Web sites. Certain of our products can also log the IP address of network connections that are processed by our products. It is possible that our customers or other third parties may examine or filter content or log IP addresses in a manner that is unlawful or that is believed or found to be contrary to the exercise of personal rights. If this occurs, our ability to distribute and sell those products as presently designed or as customers desire to use them may be negatively affected and our reputation may be harmed.

Our failure to adequately maintain and protect personal information in compliance with evolving legal requirements could have a material adverse effect on our business.

A wide variety of provincial, state, national, and international laws and regulations apply to the collection, use, retention, protection, disclosure, transfer, and other processing of personal information. These data protection and privacy-related laws and regulations are evolving and being tested in courts and may result in ever-increasing regulatory and public scrutiny and escalating levels of enforcement and sanctions. For example, the European Union recently adopted the General Data Protection Regulation (“GDPR”), which will take effect on May 25, 2018. The GDPR imposes new data processing and protection requirements that may limit how we are permitted to process data on behalf of ourselves and our clients, and we may be required to incur significant costs to comply with these new requirements. The GDPR also allows for the imposition of substantial fines for security breaches or failure to comply with the new regulations. Both the adoption of the GDPR and the recent invalidation of the U.S.-E.U. and U.S.-Swiss Safe Harbor Frameworks have caused us to review our business practices to consider whether to make changes to our personal data handling practices to ensure compliance with applicable European law. Our actual or alleged failure to comply with applicable laws and regulations, or to protect such data, could result in regulatory enforcement action against us, including fines, imprisonment of company officials and public censure, claims for damages by employees, customers and other affected individuals, damage to our reputation and loss of goodwill (both in relation to existing customers and prospective customers), any of which could have a material adverse effect on our business, financial condition and results of operations. Evolving and changing definitions of personal data and personal information, within the European Union, the United States, and elsewhere, especially relating to classification of IP addresses, machine identification, location data, and other information, may limit or inhibit our ability to operate or expand our business, including limiting strategic partnerships that may involve the sharing of data. Even the perception of privacy concerns, whether or not valid, may harm our reputation and inhibit adoption of our products by existing and potential customers.

Our international operations expose us to risks.

We currently have operations in a number of foreign countries and make sales to customers throughout the world. Our business is substantially dependent on economic conditions and IT spending in markets outside of North America and Latin America (the “Americas”). In fiscal 2015, approximately 48% of our revenue was derived from customers outside of the Americas and in fiscal 2016, approximately 45% of our revenue was derived from customers outside of the Americas. In addition, we currently perform certain of our research and

 

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development and other operations offshore in lower cost geographies, and we maintain data centers for our cloud-based offerings in geographically dispersed locations outside of the United States. Our international operations and sales into international markets require significant management attention and financial resources, and subject us to certain inherent risks including:

 

    technical difficulties and costs associated with product localization;

 

    challenges associated with coordinating product development efforts among geographically dispersed areas;

 

    potential loss of proprietary information due to piracy, misappropriation or laws that may inadequately protect our intellectual property rights;

 

    greater difficulty in establishing, utilizing and enforcing our intellectual property rights;

 

    our limited experience in establishing a sales and marketing presence, and research and development operations, together with the appropriate internal systems, processes and controls, in certain geographic markets;

 

    political unrest or economic instability, regulatory changes, war or terrorism, and other unpredictable and potentially long-term events in the countries or regions where we or our customers do business, which could result in delayed or lost sales or interruption in our business operations;

 

    longer payment cycles for sales in certain foreign countries;

 

    seasonal reductions in business activity in the summer months in Europe and at other times in various countries;

 

    the significant presence of some of our competitors in some international markets;

 

    potentially adverse tax consequences or changes in applicable tax laws;

 

    import and export restrictions and tariffs and other trade protection initiatives;

 

    potential failures of our foreign employees and channel partners to comply with both U.S. and foreign laws and regulations, including antitrust laws, trade regulations and anti-bribery and corruption laws, including the U.S. Foreign Corrupt Practices Act;

 

    compliance with foreign laws, regulations and other government controls, such as those affecting trade, privacy and data protection the environment, corporations and employment;

 

    management, staffing, legal and other costs of operating a distributed enterprise spread over various countries;

 

    fluctuations in foreign exchange rates, which we currently do not hedge against; and

 

    fears concerning travel or health risks that may adversely affect our ability to sell our products and services in any country in which the business sales culture encourages face-to-face interactions.

To the extent we are unable to effectively manage our international operations and these risks, our international sales or operations may be adversely affected, we may incur additional and unanticipated costs, and we may be subject to litigation or regulatory action. As a consequence, our business, financial condition and results of operations could be seriously harmed.

We face increased exposure to foreign currency exchange rate fluctuations.

Our sales contracts are primarily denominated in U.S. dollars, and therefore, substantially all of our revenue is not subject to foreign currency risk. However, a strengthening of the U.S. dollar could increase the real cost of our products to our customers outside of the United States, which could adversely affect our financial condition and operating results. In addition, increased international sales in the future, including through our channel partners and other partnerships, may result in greater foreign currency denominated sales, increasing our foreign

 

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currency risk. Moreover, an increasing portion of our operating expenses is incurred outside the United States, is denominated in foreign currencies, and is subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Canadian Dollar, British Pound, Australian Dollar and Japanese Yen. If we are not able to successfully hedge against the risks associated with currency fluctuations, our financial condition and operating results could be adversely affected.

We do not currently maintain a program to hedge transactional exposures in foreign currencies. However, in the future, we may use derivative instruments, such as foreign currency forward and option contracts, to hedge certain exposures to fluctuations in foreign currency exchange rates. The use of such hedging activities may not offset any or more than a portion of the adverse financial effects of unfavorable movements in foreign exchange rates over the limited time the hedges are in place. Moreover, the use of hedging instruments may introduce additional risks if we are unable to structure effective hedges with such instruments.

We are subject to governmental export and import controls that could subject us to liability or impair our ability to compete in international markets.

Our products are subject to U.S. export controls, specifically the Export Administration Regulations and economic sanctions enforced by the Office of Foreign Assets Control. We incorporate standard encryption algorithms into our products, which, along with the underlying technology, may be exported outside of the U.S. only with the required export authorizations, including by license, license exception or other appropriate government authorizations, which may require the filing of an encryption registration and classification request. Furthermore, U.S. export control laws and economic sanctions prohibit the shipment of certain products and services to countries, governments, and persons targeted by U.S. sanctions. Even though we take precautions to ensure that we and our channel partners comply with all relevant regulations, any failure by us or our channel partners to comply with such regulations could have negative consequences, including reputational harm, government investigations and penalties. For example, in 2011 we sold certain appliances in compliance with U.S. export law to a Middle Eastern affiliate of one of our channel partners, which thereafter unlawfully diverted the appliances to Syria without our knowledge. We received negative press coverage and incurred significant time and expense in connection with our internal investigation of the matter and our cooperation with the U.S. government in connection with its review of this third-party diversion of our products.

In addition, various countries regulate the import of certain encryption technology, including through import, permit and license requirements, and have enacted laws that could limit our ability to distribute our products or could limit our customers’ ability to implement our products in those countries. Changes in our products or changes in export and import regulations may create delays in the introduction of our products into international markets, prevent our customers with international operations from deploying our products globally or, in some cases, prevent the export or import of our products to certain countries, governments or persons altogether. Any change in export or import regulations, economic sanctions or related legislation, shift in the enforcement or scope of existing regulations, or change in the countries, governments, persons or technologies targeted by such regulations, could result in decreased use of our products by, or in our decreased ability to export or sell our products to, existing or potential customers with international operations. Any decreased use of our products or limitation on our ability to export or sell our products would likely adversely affect our business, financial condition and results of operations.

Economic uncertainty and adverse macroeconomic conditions may harm our business.

Our revenue and margins are dependent on various economic factors, including rates of inflation, currency fluctuations, energy costs, levels of consumer sentiment and other macroeconomic factors, which may impact levels of business spending. These conditions may adversely affect spending for IT products and services in specific geographies or more broadly, and could result in:

 

    a significant reduction in our revenue, gross margin and operating margin;

 

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    increased price competition for our products and services;

 

    risk of excess and obsolete inventory;

 

    higher overhead costs as a percentage of net revenue;

 

    difficulty in accurately forecasting demand for our products and services;

 

    insolvency or credit difficulties confronting our customers and channel partners, affecting their ability to purchase or pay for our products and services; and

 

    insolvency or credit difficulties confronting our key suppliers, which could disrupt our supply chain.

In addition, a significant percentage of our operating expenses are generally fixed in nature, particularly in the short term, which could limit our ability to mitigate any negative impact on our profit margins.

Third parties may assert that our products or services infringe their intellectual property rights.

Third parties have in the past, and may in the future, claim that our current or future products or services infringe their intellectual property rights, and these claims, even if without merit, could harm our business by increasing our costs, reducing our revenue or by creating customer concerns that result in delayed or reduced sales. This is particularly true in the patent area, as an increasing number of U.S. patents covering computer networking and Internet technology have been issued in recent years. Patent owners, including those that do not commercially manufacture or sell products, may claim that one or more of our products infringes a patent they own.

For example, we are currently involved in ongoing legal proceedings with Finjan, Inc. (“Finjan”). On August 28, 2013, Finjan filed a complaint (“Finjan Case 1”) in the U.S. District Court for the Northern District of California alleging that certain Blue Coat products infringe U.S. Patent Nos. 6,154,844, 6,804,780, 6,965,968, 7,058,822, 7,418,731 and 7,647,633. On August 4, 2015, the jury in Finjan Case 1 returned a verdict that certain Blue Coat products infringe five Finjan patents in suit and awarded Finjan lump-sum money damages of $39.5 million. On November 20, 2015, the trial court entered a judgment in Finjan Case 1 in favor of Finjan on the jury verdict and certain non-jury legal issues. Finjan has also filed motions seeking enhanced damages on the judgment, including treble damages, which refers to the tripling of a damages award, as well as interest and attorneys fees, which, if awarded, could be substantial. We intend to vigorously contest this judgment and investigate all available remedies for relief, including currently pending post-trial motions and, if necessary, an appeal. However, we cannot be certain that any of our motions or our appeal, if we choose to appeal, will be successful.

On July 15, 2015, Finjan filed a second complaint (“Finjan Case 2”) in the U.S. District Court for the Northern District of California alleging that certain Blue Coat products infringe U.S. Patent Nos. 6,154,844, 6,965,968, 7,418,731, 8,079,086, 8,225,408, 8,566,580 and 8,677,494. On March 1, 2016, Finjan amended its complaint to allege that certain Blue Coat products also infringe U.S. Patent Nos. 9,141,786, 9,189,621 and 9,219,755. Finjan’s complaint also seeks enhanced damages, including treble damages. We have sought a stay of Finjan Case 2 from the court because, among other reasons, we contest Finjan’s right to recover damages on three patents—6,154,844, 6,965,968 and 7,418,731—for which Finjan was awarded lump-sum money damages that we contend are for the life of such patents in Finjan Case 1. We believe this verdict was in error and intend to vigorously defend Finjan Case 2, regardless of whether the case is stayed. However, we cannot be certain that we will ultimately prevail. If we do not prevail in Finjan Case 2, another large damages payment may be imposed upon us and our business and results of operations may be harmed. Trial in Finjan Case 2 is currently scheduled for October 30, 2017.

We have not recorded a liability with respect to Finjan Case 1 based on our determination that a loss in that case is not probable under applicable accounting standards. Given the early stage of Finjan Case 2, we are unable to estimate the possible losses in that case. Accordingly, any damages payable as a result of a final judgment in

 

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these cases could materially adversely affect our financial condition and results of operations. In addition, any public announcements of the results of any proceedings in Finjan Case 1 or Finjan Case 2 could be negatively perceived by securities analysts and investors, and could cause our stock price to experience volatility or decline.

From time to time, the U.S. Supreme Court, other U.S. federal courts and the U.S. Patent and Trademark Appeals Board, and their foreign counterparts, have made and may continue to make changes to the interpretation of patent laws in their respective jurisdictions. We cannot predict future changes to the interpretation of existing patent laws or whether U.S. or foreign legislative bodies will amend such laws in the future. Any such changes may lead to uncertainties or increased costs and risks surrounding the prosecution, enforcement and defense of our patents and applications, the outcome of third-party patent infringement claims brought against us and the actual or enhanced damages (including treble damages) that may be awarded in connection with any such current or future claims, and could have a material adverse effect on our business and financial condition.

Third parties may bring legal actions against us.

In the past, third parties have brought legal actions against us and other parties to whom we provided indemnification. We incurred substantial costs to defend those lawsuits and related legal proceedings. It is likely that in the future other parties may bring legal actions against us. Such actions, even if without merit, could harm our business. Any material litigation or arbitration inevitably results in the diversion of the attention of our management and other relevant personnel. To the extent uninsured, such claims further require us to incur defense costs for us and for parties to whom we may have indemnification obligations. For example, we have received requests from our channel partners from time to time to indemnify them in response to a request they received from our customers for indemnification for patent litigation brought by third parties against our customers with regard to our customers’ use of products or services sold by our channel partners, including our own products. We also may be required to pay material amounts in settlement costs or damages. Furthermore, if the matter relates to intellectual property infringement, we may be required to enter into royalty or licensing agreements or to develop non-infringing technology, and injunctive relief could be entered against us. Customer concerns with respect to material litigation can result in delayed or lost sales. Any of the foregoing could seriously harm our business and have a material adverse effect on our business, financial condition and results of operations.

Our business operations and the use of our technology are subject to evolving legal regulation regarding privacy.

We currently operate our business in a number of jurisdictions where our operations are subject to evolving privacy or data protection laws and regulations. Certain of our cloud-based offerings also transmit and store customer data in various jurisdictions, which subjects the operation of that service to privacy or data protection laws and regulations in those jurisdictions. While we believe our cloud-based offerings comply with current regulatory and security requirements in the jurisdictions in which we operate these services, there can be no assurance that such requirements will not change or that we will not otherwise be subject to legal or regulatory actions. In addition, our appliances, when configured by our customers, may intercept and examine data in a manner that may subject the use of those appliances to privacy and data protection laws and regulations in those jurisdictions in which our customers operate.

Any failure or perceived failure by us or by our products or services to comply with these laws and regulations may subject us to legal or regulatory actions, damage our reputation or adversely affect our ability to sell our products or services in the jurisdiction that has enacted the law or regulation. Moreover, if these laws and regulations change, or are interpreted and applied in a manner that is inconsistent with our data practices or the operation of our products and services, we may need to expend resources in order to change our business operations, data practices or the manner in which our products or services operate. This could adversely affect our business, financial condition and results of operations.

 

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We and our service providers may also be subject to privacy laws and regulations related to telemarketing, such as the U.S. Telephone Consumer Protection Act, the U.S. Telemarketing Sales Rule, and international and state equivalents; and telephone call monitoring, such as the U.S. Wiretap Act and international and state equivalents. Such laws and regulations create a patchwork of compliance obligations that regularly change and may require us to expend resources to change our business operations to comply with the changes and may affect our ability to generate sales. Any failure by us or our service providers to comply with these laws and regulations may subject us to costly regulatory investigations and class action litigation, which could impact our financial condition.

Our business is subject to the risks of product defects, warranty claims, product returns and product liability.

Our products are highly complex and may contain undetected operating errors or quality problems, particularly when first introduced or as new versions or upgrades are released. Despite testing by us and by current and potential customers, errors or quality problems may not be found in our products or product updates until after commencement of commercial shipments, resulting in customer dissatisfaction and loss of or delay in market acceptance and sales opportunities. This could materially adversely affect our operating results. These errors and quality problems could also cause us to incur significant repair or replacement costs, divert the attention of our engineering personnel from our product development efforts and cause significant customer relations problems. We may also incur significant costs in connection with a product recall and any related indemnification obligations, which could materially adversely affect our operating results. In addition, many of our products operate on our internally developed operating system, and any error in the operating system may affect those products. We have experienced errors or quality problems in the past in connection with products and enhancements to existing products. We expect that errors or quality problems will be found from time to time in our products after commencement of commercial shipments, which could seriously harm our business.

Historically, the amount of warranty claims we have received has not been significant, but there are no assurances that the amount of such claims will not be material in the future. Since our customers install our appliances directly into their network infrastructures, any errors, defects or other problems with our products could negatively impact their networks or other Internet users, resulting in financial or other losses. While we typically seek by contract to limit our exposure to damages, liability limitation provisions in our standard terms and conditions of sale, and those of our channel partners, may not be enforceable under some circumstances or may not fully or effectively protect us from customer claims and related liabilities and costs, including indemnification obligations under our agreements with channel partners or customers. The sale and support of our products also entail the risk of product liability claims. We maintain insurance to protect against certain types of claims associated with the use of our products, but our insurance coverage may not adequately cover any such claims. In addition, even claims that ultimately are unsuccessful could require us to incur costs in connection with litigation and divert management’s time and other resources, and could seriously harm the reputation of our business and products.

We must attract, assimilate and retain key personnel on a cost-effective basis.

We depend on our ability to attract and retain highly qualified and skilled personnel on an ongoing basis. Our success will depend in part on our ability to recruit and retain key personnel. Changes in our executives and other high-level personnel may disrupt our business and could result in other employees leaving our Company.

The majority of our U.S.-based employees, including our executives, are employed on an “at-will” basis, which may make it easier for key employees to move to new employment. Our inability to timely hire replacement or additional employees may impact our operations, since new hires frequently require extensive training before they achieve desired levels of productivity. In addition, we may increase our hiring in locations outside of the U.S., which could subject us to additional geopolitical and exchange rate risks.

Competition for highly skilled personnel is often intense, especially in the San Francisco Bay Area, where we have a substantial presence and need for highly skilled personnel. We may not be successful in attracting, integrating, or retaining qualified personnel to fulfill our current or future needs. Also, to the extent we hire

 

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personnel from competitors, we may be subject to allegations that they have been improperly solicited, or that they have divulged proprietary or other confidential information, or that their former employers own their inventions or other work product.

Our future performance also depends on the continued services and continuing contributions of our senior management to execute our business plan and to identify and pursue new opportunities and product innovations. The loss of services of members of senior management could significantly delay or prevent the achievement of our strategic objectives, which could adversely affect our business, financial condition and results of operations.

We could be subject to additional tax liabilities.

We are subject to federal, state, local and sales taxes in the United States and foreign income taxes, withholding taxes and transaction taxes in numerous foreign jurisdictions. Significant judgment is required in evaluating our tax positions and our worldwide provision for taxes. During the ordinary course of business, there are many activities and transactions for which the ultimate tax determination is uncertain. For example, the Predecessor’s acquisition by Thoma Bravo in 2012 and the Bain Acquisition, as well as our recent acquisitions of Elastica and Perspecsys, each involved complex tax structuring, consequences and determinations. In addition, our tax obligations and effective tax rates could be adversely affected by changes in the relevant tax, accounting and other laws, regulations, principles and interpretations, including those relating to income tax nexus, by recognizing tax losses or lower than anticipated earnings in jurisdictions where we have lower statutory rates and higher than anticipated earnings in jurisdictions where we have higher statutory rates, by changes in foreign currency exchange rates, or by changes in the valuation of our deferred tax assets and liabilities. We may be audited in various jurisdictions, and such jurisdictions may assess additional taxes, sales taxes and value-added taxes against us. Although we believe our tax estimates are reasonable, the final determination of any tax audits or litigation could be materially different from our historical tax provisions and accruals, which could have a material adverse effect on our operating results or cash flows in the period or periods for which a determination is made.

The enactment of legislation implementing changes in the U.S. taxation of international business activities or the adoption of other tax reform policies could materially impact our financial position and results of operations.

Recent changes to U.S. tax laws, including limitations on the ability of taxpayers to claim and utilize foreign tax credits and the deferral of certain tax deductions until earnings outside of the United States are repatriated to the United States, as well as changes to U.S. tax laws that may be enacted in the future, possibly with retroactive effect, could impact the tax treatment of our foreign earnings. Due to expansion of our international business activities, any changes in the U.S. taxation of such activities may increase our worldwide effective tax rate and adversely affect our financial condition and results of operations.

If we fail to maintain an effective system of disclosure controls and internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable regulations could be impaired.

As a public company, we will be required to maintain internal control over financial reporting and to report any material weaknesses in such internal controls. Section 404 of the Sarbanes-Oxley Act requires that we evaluate and determine the effectiveness of our internal control over financial reporting and, beginning with our second annual report following this offering, provide a management report on internal control over financial reporting. However, while we remain an emerging growth company, we will not be required to include an attestation report on internal control over financial reporting issued by our independent registered public accounting firm.

Any failure to develop or maintain effective controls, or any difficulties encountered in their implementation or improvement, could harm our operating results, cause us to fail to meet our reporting obligations, result in a

 

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restatement of our financial statements for prior periods or adversely affect the results of management evaluations and independent registered public accounting firm audits of our internal control over financial reporting that we will eventually be required to include in our periodic reports that will be filed with the SEC. Ineffective disclosure controls and procedures and internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the trading price of our common stock.

We are in the process of designing and implementing the internal control over financial reporting required to comply with Section 404 of the Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act”). This process will be time consuming, costly and complicated. If we are unable to assert that our internal control over financial reporting is effective, or when required in the future, if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports, the market price of our common stock could be adversely affected and we could become subject to investigations by the stock exchange on which our securities are listed, the SEC, or other regulatory authorities, which could require additional financial and management resources.

If we fail to comply with environmental requirements, our business, financial condition, operating results, and reputation could be adversely affected.

Our operations and the sale of our products are subject to various federal, state, local and foreign environmental and safety regulations, including laws adopted by the European Union, such as the Waste Electrical and Electronic Equipment Directive (“WEEE Directive”), and the Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment Directive (“EU RoHS Directive”) of certain metals from global hot spots. The WEEE Directive requires electronic goods producers to be responsible for marking, collection, recycling, and treatment of such products. Changes in the WEEE Directive of the interpretation thereof may cause us to incur additional costs or meet additional regulatory requirements, which could be material.

The EU RoHS Directive and similar laws of other jurisdictions limit the content of certain hazardous materials such as lead, mercury, and cadmium in the manufacture of electrical equipment, including our products. Currently, our products comply with the EU RoHS Directive requirements. However, if there are changes to this or other laws, or to their interpretation, or if new similar laws are passed in other jurisdictions, we may be required to reengineer our products or to use different components to comply with these regulations. This reengineering or component substitution could result in substantial costs to us or disrupt our operations or logistics.

We are also subject to environmental laws and regulations governing the management of hazardous materials, which we use in small quantities in our engineering labs. Our failure to comply with past, present, and future environmental and safety laws could result in increased costs, reduced sales of our products, substantial product inventory write-offs, reputational damage, penalties, third party property damage, remediation costs and other sanctions, any of which could harm our business and financial condition. 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, financial condition our results of operations. We also expect that our business will be affected by new environmental laws and regulations on an ongoing basis, which may be more stringent, imposing greater compliance costs and increasing risks and penalties associated with violations which could harm our business.

Our operations could be significantly hindered by the occurrence of a natural disaster, terrorist attack or other catastrophic event.

Our business operations are susceptible to outages due to fire, floods, power loss, telecommunications failures, terrorist attacks and other events beyond our control, and our sales opportunities may also be affected by

 

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such events. In addition, a substantial portion of our facilities, including our headquarters, are located in Northern California, an area susceptible to earthquakes. We do not carry earthquake insurance for earthquake-related losses. Despite our implementation of network security measures, our servers are vulnerable to computer viruses, break-ins, and similar disruptions from unauthorized tampering with our computer systems. We may not carry sufficient business interruption insurance to compensate us for losses that may occur as a result of any of these events. To the extent that such events disrupt our business or the business of our current or prospective customers, or adversely impact our reputation, such events could adversely affect our business, financial condition and results of operations.

Risks Related to Ownership of Our Common Stock and this Offering

Our Sponsor will continue to have significant influence over us after this offering, including control over decisions that require the approval of stockholders, which could limit your ability to influence the outcome of matters submitted to stockholders for a vote.

We are currently controlled, and after this offering is completed will continue to be controlled, by the Sponsor. Upon completion of this offering, investment funds affiliated with the Sponsor will beneficially own     % of our outstanding common stock (or     % if the underwriters exercise in full their option to purchase additional shares from us). As long as the Sponsor owns or controls at least a majority of our outstanding voting power, it will have the ability to exercise substantial control over all corporate actions requiring stockholder approval, irrespective of how our other stockholders may vote, including the election and removal of directors and the size of our board of directors, any amendment of our certificate of incorporation or bylaws, or the approval of any merger or other significant corporate transaction, including a sale of substantially all of our assets. Even if its ownership falls below 50%, the Sponsor will continue to be able to strongly influence or effectively control our decisions.

Additionally, the Sponsor’s interests may not align with the interests of our other stockholders. The Sponsor is in the business of making investments in companies and may acquire and hold interests in businesses that compete directly or indirectly with us. The Sponsor may also pursue acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us.

Following this offering, our audit committee will be responsible for reviewing all related party transactions for potential conflict of interest situations and approving all such transactions. See “Certain Relationships and Related Party Transactions—Policies and Procedures for Related Party Transactions.” Our audit committee will consist of directors who are “independent” as required by SEC and NYSE rules, subject to the permitted phase-in period afforded by such rules. In addition, our code of ethics, following this offering, will contain provisions designed to address conflicts of interest. However, such provisions may not be effective in limiting the Sponsor’s significant influence over us. Further, our restated certificate of incorporation after this offering will provide that, to the fullest extent permitted by law, the doctrine of “corporate opportunity” will not apply to the Sponsor and its officers, directors, and other related parties in a manner that would prohibit them from investing in competing businesses or doing business with our partners or customers.

Certain of our directors have relationships with the Sponsor, which may cause conflicts of interest with respect to our business.

Following this offering,             of our            directors will be affiliated with the Sponsor. Our Sponsor-affiliated directors have fiduciary duties to us and, in addition, have duties to the Sponsor. As a result, these directors may face real or apparent conflicts of interest with respect to matters affecting both us and the Sponsor, whose interests may be adverse to ours in some circumstances.

 

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Upon the listing of our shares, we will be a “controlled company” within the meaning of the rules of the NYSE and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements; you will not have the same protections afforded to stockholders of companies that are subject to such requirements.

Because our Sponsor will continue to control a majority of the voting power of our outstanding common stock after completion of this offering, we will be a “controlled company” within the meaning of the corporate governance standards of the NYSE. Under these rules, a company of which more than 50% of the voting power for the election of directors is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements, including the requirements that, within one year of the date of the listing of our common stock:

 

    we have a board of directors that is composed of a majority of “independent directors,” as defined under the rules of the NYSE;

 

    we have a compensation committee that is composed entirely of independent directors; and

 

    we have a nominating and governance committee that is composed entirely of independent directors.

Provisions of our corporate governance documents could make an acquisition of our company more difficult and may prevent attempts by our stockholders to replace or remove our current management, even if beneficial to our stockholders.

In addition to the Sponsor’s beneficial ownership of a controlling percentage of our common stock, our certificate of incorporation and bylaws and the Delaware General Corporation Law (the “DGCL”) contain provisions that could make it more difficult for a third party to acquire us, even if doing so might be beneficial to our stockholders.

These provisions include:

 

    the division of our board of directors into three classes and the election of each class for three-year terms;

 

    advance notice requirements for stockholder proposals and director nominations;

 

    the ability of the board of directors to fill a vacancy created by the expansion of the board of directors;

 

    the ability of our board of directors to issue new series of, and designate the terms of, preferred stock, without stockholder approval, which could be used to, among other things, institute a rights plan that would have the effect of significantly diluting the stock ownership of a potential hostile acquirer, likely preventing acquisitions that have not been approved by our board of directors;

 

    limitations on the ability of stockholders to call special meetings and to take action by written consent following the date that investment funds advised by affiliates of Bain Capital, LP no longer beneficially own a majority of our common stock; and

 

    the required approval of holders of at least 75% of the voting power of the outstanding shares of our capital stock to adopt, amend or repeal certain provisions of our certificate of incorporation and bylaws or remove directors for cause, in each case following the date that investment funds advised by affiliates of Bain Capital, LP no longer beneficially own a majority of our common stock.

In addition, Section 203 of the DGCL may affect the ability of an “interested stockholder” to engage in certain business combinations, for a period of three years following the time that the stockholder becomes an “interested stockholder.” While we have elected in our certificate of incorporation not to be subject to Section 203 of the DGCL, our certificate of incorporation contains provisions that have the same effect as Section 203 of the DGCL, except that they provide that investment funds advised by affiliates of Bain Capital, LP will not be deemed to be an “interested stockholder,” and accordingly will not be subject to such restrictions.

 

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These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board. Because our board of directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt to replace current members of our management team. As a result, you may lose your ability to sell your stock for a price in excess of the prevailing market price due to these protective measures, and efforts by stockholders to change the direction or management of the Company may be unsuccessful. See “Description of Capital Stock.”

Our restated certificate of incorporation after this offering will designate courts in the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.

Our restated certificate of incorporation will provide that, subject to limited exceptions, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for:

 

    any derivative action or proceeding brought on our behalf;

 

    any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders;

 

    any action asserting a claim against us arising pursuant to any provision of the DGCL, our certificate of incorporation or our bylaws;

 

    any action to interpret, apply, enforce or determine the validity of our certificate of incorporation or bylaws; or

 

    any other action asserting a claim against us that is governed by the internal affairs doctrine (each, a “Covered Proceeding”).

In addition, our restated certificate of incorporation will provide that if any action the subject matter of which is a Covered Proceeding is filed in a court other than the specified Delaware courts without the approval of our board of directors (each, a “Foreign Action”), the claiming party will be deemed to have consented to (i) the personal jurisdiction of the specified Delaware courts in connection with any action brought in any such courts to enforce the exclusive forum provision described above and (ii) having service of process made upon such claiming party in any such enforcement action by service upon such claiming party’s counsel in the Foreign Action as agent for such claiming party.

Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and to have consented to these provisions. These provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and employees. Alternatively, if a court were to find these provisions of our certificate of incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business and financial condition.

If you purchase shares of common stock in this offering, you will suffer immediate and substantial dilution of your investment.

The initial public offering price of our common stock is substantially higher than the net tangible book deficit per share of our common stock. Therefore, if you purchase shares of our common stock in this offering, you will pay a price per share that substantially exceeds our net tangible book deficit per share after this offering. Based on an assumed initial public offering price of $         per share, which is the midpoint of the price range on the cover of this prospectus, you will experience immediate dilution of $         per share, representing the difference between our as adjusted net tangible book deficit per share after giving effect to this offering and the initial public offering price. In addition, purchasers of common stock in this offering will have contributed     % of the aggregate price

 

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paid by all purchasers of our stock but will own only approximately     % of our common stock outstanding after this offering. We also have a large number of outstanding stock options to purchase common stock with exercise prices that are below the estimated initial public offering price of our common stock. To the extent that these options are exercised, you will experience further dilution. See “Dilution” for more detail.

Your percentage ownership in us may be diluted by future issuances of capital stock, which could reduce your influence over matters on which stockholders vote.

Pursuant to our certificate of incorporation and bylaws, our board of directors has the authority, without stockholder approvals, to issue all or any part of our authorized but unissued shares of common stock, including shares issuable upon the exercise of options, or shares of our authorized but unissued preferred stock. Issuances of common stock or voting preferred stock would reduce your influence over matters on which our stockholders vote and, in the case of issuances of preferred stock, would likely result in your interest in us being subject to the prior rights of holders of that preferred stock.

Market volatility may affect the price of our common stock and the value of your investment.

Following the completion of this offering, the price of our common stock is likely to be volatile, in part because our shares of common stock have not been previously traded publicly. The initial public offering price was determined by negotiations between us and the representatives for the underwriters. You may not be able to resell your shares of common stock above the initial public offering price and may suffer a loss on your investment. In addition, the price of our common stock may fluctuate significantly in response to a number of factors, most of which we cannot predict or control, including:

 

    actual or anticipated changes or fluctuations in our operating results and whether our operating results meet the expectations of securities analysts or investors;

 

    actual or anticipated changes in securities analysts’ estimates and expectations of our financial performance;

 

    announcements of new solutions, commercial relationships, acquisitions or other events by us or our competitors;

 

    general market conditions, including volatility in the market price and trading volume of technology companies in general and of companies in the IT security industry in particular;

 

    changes in how current and potential customers perceive the effectiveness of our platform in protecting against advanced cyber-attacks or other reputational harm;

 

    sales of large blocks of our common stock, including sales by our executive officers, directors and significant stockholders;

 

    announced departures of any of our key personnel;

 

    lawsuits threatened or filed against us or involving our industry, or both;

 

    changing legal or regulatory developments in the United States and other countries;

 

    general economic conditions and trends; and

 

    other events or factors, including those resulting from major catastrophic events, war, acts of terrorism or responses to these events.

In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many technology companies. Stock prices of many technology companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business and adversely affect our business, operating results, financial condition and cash flows.

 

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An active, liquid trading market for our common stock may not develop, which may limit your ability to sell your shares.

Prior to this offering, there was no public market for our common stock. Although we intend to apply to list our common stock on the NYSE under the symbol “BLCT,” an active trading market for our shares may never develop or be sustained following this offering. The initial public offering price will be determined by negotiations between us and the underwriters and may not be indicative of market prices of our common stock that will prevail in the open market after the offering. A public trading market having the desirable characteristics of depth, liquidity and orderliness depends upon the existence of willing buyers and sellers at any given time, and its existence is dependent upon the individual decisions of buyers and sellers over which neither we nor any market maker has control. The failure of an active and liquid trading market to develop and continue would likely have a material adverse effect on the value of our common stock. The market price of our common stock may decline below the initial public offering price, and you may not be able to sell your shares of our common stock at or above the price you paid in this offering, or at all. An inactive market may also impair our ability to raise capital to continue to fund operations by selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration.

As a public company, we will become subject to additional laws, regulations and stock exchange listing standards, which will impose additional costs on us and may strain our resources and divert our management’s attention.

After this offering, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Sarbanes-Oxley Act, the Dodd-Frank Act, the listing requirements of the NYSE, and other applicable securities laws and regulations. Compliance with these laws and regulations will increase our legal and financial compliance costs and make some activities more difficult, time-consuming or costly. For example, the Exchange Act will require us, among other things, to file annual, quarterly and current reports with respect to our business and operating results. We also expect that being a public company and being subject to new rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors may therefore strain our resources, divert management’s attention and affect our ability to attract and retain qualified board members.

A significant portion of our total outstanding shares are restricted from immediate resale but may be sold into the market in the near future. This could cause the market price of our common stock to drop significantly, even if our business is doing well.

Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. After this offering, we will have outstanding             shares of common stock based on the number of shares outstanding as of                    , 2016. This assumes no exercises of outstanding options after                     , 2016. Substantially all of the shares that are not being sold in this offering will be subject to a 180-day lock-up period provided under agreements executed in connection with this offering. These shares will, however, be able to be resold after the expiration of the lock-up agreements described in the “Shares Eligible for Future Sale” section of this prospectus. We also intend to file a Form S-8 under the Securities Act to register all shares of common stock that we may issue under our equity compensation plans. In addition, our Sponsor has certain demand registration rights that could require us in the future to file registration statements in connection with sales of our stock by our Sponsor. See “Certain Relationships and Related Party Transactions—Stockholders’ Agreement.” Such sales by our Sponsor could be significant. Once we register these shares, they can be freely resold in the public market, subject to legal or contractual restrictions, such as the lock-up agreements described in the “Underwriters” section of this prospectus. As restrictions on resale end, the market price of our stock could decline if the holders of currently restricted shares sell them or are perceived by the market as intending to sell them.

 

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Since we have no current plans to pay regular cash dividends on our common stock following this offering, you may not receive any return on investment unless you sell your common stock for a price greater than that which you paid for it.

We do not anticipate paying any regular cash dividends on our common stock following this offering. Any decision to declare and pay dividends in the future will be made at the discretion of our board of directors and will depend on, among other things, our results of operations, financial condition, cash requirements, contractual restrictions and other factors that our board may deem relevant. In addition, our ability to pay dividends is, and may be, limited by covenants of existing and any future outstanding indebtedness we or our subsidiaries incur, including under our Senior Secured Credit Facilities and the indentures governing our outstanding notes. Therefore, any return on investment in our common stock is solely dependent upon the appreciation of the price of our common stock on the open market, which may not occur. See “Dividend Policy” for more detail.

If securities or industry analysts do not publish research or reports about our business, if they adversely change their recommendations regarding our shares or if our results of operations do not meet their expectations, our share price and trading volume could decline.

The trading market for our shares will be influenced by the research and reports that industry or securities analysts publish about us or our business. We do not have any control over these analysts. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our share price or trading volume to decline. Moreover, if one or more of the analysts who cover our Company downgrade our stock or senior notes, or if our results of operations do not meet their expectations, our share price could decline.

We are an “emerging growth company,” and the reduced disclosure requirements applicable to emerging growth companies may make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act, and may remain an emerging growth company for up to five years. For so long as we remain an emerging growth company, we are permitted and intend to rely on exemptions from certain disclosure requirements that are applicable to other public companies that are not emerging growth companies. These exemptions include not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, or Section 404, not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements, reduced disclosure obligations regarding executive compensation 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. In this prospectus, we have not included all of the executive compensation-related information that would be required if we were not an emerging growth company. We cannot predict whether investors will find our common stock less attractive if we rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. We will incur increased costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance initiatives and corporate governance practices.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, and other future conditions. These forward-looking statements speak only as of the date of this prospectus and are subject to a number of risks, uncertainties and assumptions described in the “Risk Factors” section and elsewhere in his prospectus. Forward-looking statements can be identified by words such as “anticipate,” “believe,” “envision,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “target,” “potential,” “will,” “would,” “could,” “should,” “continue,” “contemplate” and other similar expressions, although not all forward-looking statements contain these identifying words. Examples of forward-looking statements include, among others, statements we make regarding:

 

    plans to develop and offer new products and services and enter new markets;

 

    our expectations with respect to the continued stability and growth of our customer base;

 

    expectations with respect to future growth opportunities in domestic and international markets;

 

    changes in and expectations with respect to revenues, including our expectation that we will continue to have meaningful visibility into future revenue;

 

    our expectation regarding the impact of recent strategic acquisitions;

 

    investments or potential investments in acquired businesses and technologies, as well as internally developed technologies;

 

    the effectiveness of our sales force, distribution channel, and marketing activities;

 

    the success of our business strategy and changes in our business model and operations;

 

    the growth and development of our direct and indirect channels of distribution;

 

    our response to emerging and future enterprise security risks;

 

    risks associated with fluctuations in exchange rates of the foreign currencies in which we conduct business;

 

    the impact of macroeconomic conditions on our business; and

 

    the adequacy of our capital resources to fund operations and growth.

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. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. Important factors that could cause actual results and events to differ materially from those indicated in the forward-looking statements include, among others, those described under “Risk Factors” and the following:

 

    the information technology security market is rapidly evolving within the increasingly challenging cyber threat landscape and the industry might not develop as we anticipate;

 

    our business depends substantially on our ability to retain customers and to expand our offerings to them, and a decline in our customer retention or in our ability to expand sales to existing customers rates could harm our future operating results;

 

    if we are unable to successfully expand our sales force while maintaining sales productivity, sales of our products and services and the growth of our business and financial performance could be harmed;

 

    if we are unable to increase sales of our products and services to new customers, our future revenue and operating results will be harmed;

 

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    our operating results may fluctuate significantly, be difficult to predict and may not meet investor expectations;

 

    the markets in which we compete are intensely competitive and certain of our competitors have greater resources and experience;

 

    our sales cycles can be long and unpredictable, and our sales efforts require considerable time and expense;

 

    we have experienced net losses in recent periods and may not achieve or maintain profitability in the future.

 

    our gross margin is affected by a number of factors, and we may not be able to sustain it at present levels;

 

    our business and operations have experienced rapid growth, and if we do not appropriately manage future growth, our business, financial condition, results of operations and prospects may be adversely affected;

 

    our substantial indebtedness could adversely affect our financial condition; and

 

    other factors described under “Risk Factors.”

The forward-looking statements in this prospectus represent our views as of the date of this prospectus. We undertake no obligation to publicly update any forward-looking statements whether as a result of new information, future developments or otherwise.

MARKET, INDUSTRY AND OTHER DATA

We obtained market, industry and other data in this prospectus from our own internal estimates and research as well as from industry and general publications and research, surveys and studies conducted by third parties, including IDC, Gartner, Forrester and Infinity Research Limited (“Technavio”). The Gartner Report(s) described herein, (the “Gartner Report(s)”) represent(s) research opinion or viewpoints published, as part of a syndicated subscription service, by Gartner, Inc. (“Gartner”), and are not representations of fact. Each Gartner Report speaks as of its original publication date (and not as of the date of this prospectus) and the opinions expressed in the Gartner Report(s) are subject to change without notice. Industry publications, studies and surveys generally state that they have been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. While we believe that each of these studies and publications is reliable, we have not independently verified market and industry data from third-party sources. While we believe our internal company research is reliable and the market definitions are appropriate, neither such research nor these definitions have been verified by any independent source.

TRADEMARKS

Several trademarks and tradenames appear in this prospectus. “Blue Coat,” “CacheFlow,” “ProxySG,” and “PacketShaper” are the exclusive properties of Blue Coat Systems, Inc., are registered with the U.S. Patent and Trademark Office, and may be registered or pending registration in other countries. Other trademarks and tradenames are used in this prospectus, which identify other entities claiming the marks and names of their products. We disclaim proprietary interest in such marks and names of others. Solely for convenience, the trademarks, service marks and trade names referred to in this prospectus are listed without the ®, (TM) and (sm) symbols, but we will assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensors to these trademarks, service marks and trade names.

 

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USE OF PROCEEDS

We estimate that the net proceeds to us from the sale of shares of our common stock in this offering will be approximately $        , based upon the assumed initial public offering price of $         per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters’ option to purchase additional shares of our common stock from us is exercised in full, we estimate that the net proceeds to us would be approximately $         million, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

Each $1.00 increase or decrease in the assumed initial public offering price of $        per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, the net proceeds to us from the sale of shares of our common stock in this offering by $        million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase or decrease of 1.0 million shares in the number of shares offered by us would increase or decrease, as applicable, the net proceeds to us from the sale of shares of our common stock in this offering by approximately $         million, assuming the assumed initial public offering price remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

We intend to use a portion of the anticipated net proceeds from this offering to repay certain of our existing indebtedness. We intend to use the remainder of the net proceeds from this offering, if any, for working capital and other general corporate purposes. We may also, in our discretion, use a portion of the net proceeds for the acquisition of, or investment in, businesses, products, services, or technologies that complement our business, although we have no current commitments or agreements to enter into any acquisitions or investments. We will have broad discretion over the uses of the net proceeds of this offering.

 

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DIVIDEND POLICY

Following completion of the offering, our board of directors does not currently intend to pay dividends on our common stock. We currently intend to retain any future earnings to fund business development and growth, and we do not expect to pay any dividends in the foreseeable future. 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 a number of factors, including our financial condition, results of operations, capital requirements, contractual restrictions, general business conditions and other factors that our board of directors may deem relevant. Currently, the provisions of our Senior Secured Credit Facilities place certain limitations on the amount of cash dividends we can pay. See “Description of Indebtedness.” On June 28, 2013, the Predecessor paid a dividend totaling $155.2 million in the aggregate to stockholders of record of its Class A, Class B and Class C common stock.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents, as well as our capitalization, as of April 30, 2016:

 

    on an actual basis;

 

    on a pro forma basis, giving effect to the sale by us of              shares of our common stock in this offering, based upon the assumed initial public offering price of $             per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and the estimated offering expenses payable by us, and the application of the net proceeds from this offering to repay $             million of our long-term indebtedness and as otherwise described in “Use of Proceeds”.

You should read this table together with our consolidated financial statements and related notes, and the sections titled “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” that are included elsewhere in this prospectus.

 

     As of April 30, 2016  
             Actual                 Pro Forma       
     (in thousands, except share data)  

Consolidated Balance Sheet Data:

    

Cash and cash equivalents

   $ 136,563      $                
  

 

 

   

Current and long-term debt, net of borrowing costs

   $ 1,785,374     
  

 

 

   

Stockholders’ Equity:

    

Common stock: $0.001 par value; 150,000,000 shares authorized; 91,172,391 shares issued and outstanding at April 30, 2016 and              shares issued and outstanding pro forma

     91     

Additional paid-in capital

     900,440     

Accumulated other comprehensive loss

     (1,908  

Accumulated deficit

     (271,604  
  

 

 

   

Total stockholders’ equity

     627,019     
  

 

 

   

Total capitalization

   $ 2,412,393     
  

 

 

   

A $1.00 increase (decrease) in the assumed initial public offering price of $              per share, the midpoint of the price range set forth on the cover of this prospectus, would increase (decrease) the pro forma amount of each of cash and cash equivalents, additional paid-in capital and total stockholders’ equity by approximately $              million after deducting underwriting discounts and estimated offering expenses payable by us.

 

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DILUTION

If you invest in our common stock in this offering, your ownership interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the pro forma net tangible book value per share of our common stock immediately after this offering. Net tangible book value dilution per share to new investors represents the difference between the amount per share paid by purchasers of shares of our common stock in this offering and the pro forma net tangible book value per share of our common stock immediately after completion of this offering.

Pro forma net tangible book value per share is determined by dividing our total tangible assets less our total liabilities by the number of shares of our common stock outstanding. Our pro forma net tangible book value as of         was $            , or $             per share, based on the total number of shares of our common stock outstanding as of             .

After giving effect to the sale by us of             shares of our common stock in this offering at the assumed initial public offering price of $         per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma net tangible book value as of             would have been $        million, or $         per share. This represents an immediate increase in pro forma net tangible book value of $         per share to our existing stockholders and an immediate dilution in pro forma net tangible book value of $         per share to investors purchasing shares of our common stock in this offering at the assumed initial public offering price. The following table illustrates this dilution:

 

Assumed initial public offering price per share

      $                

Pro forma net tangible book value per share as of

   $                   

Increase in pro forma net tangible book value per share attributable to new investors in this offering

     
  

 

 

    

Pro forma net tangible book value per share immediately after this offering

      $     
     

 

 

 

Dilution in pro forma net tangible book value per share to new investors in this offering

      $     

Each $1.00 increase or decrease in the assumed initial public offering price of $        per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, our pro forma net tangible book value per share immediately after this offering by $            , and would increase or decrease, as applicable, dilution per share to new investors in this offering by $            , assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions payable by us. Similarly, each increase or decrease of 1.0 million shares in the number of shares offered by us would increase or decrease, as applicable, our pro forma net tangible book value by approximately $             per share and increase or decrease, as applicable, the dilution to new investors by $             per share, assuming the assumed initial public offering price remains the same, and after deducting underwriting discounts and commissions payable by us.

If the underwriters’ option to purchase additional shares of our common stock from us is exercised in full, the pro forma as adjusted net tangible book value per share of our common stock, as adjusted to give effect to this offering, would be $         per share, and the dilution in pro forma net tangible book value per share to new investors in this offering would be $         per share.

 

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The following table presents, as of            , the differences between the existing stockholders and the new investors purchasing shares of our common stock in this offering with respect to the number of shares purchased from us, the total consideration paid or to be paid to us, which includes net proceeds received from the issuance of shares of our common stock and the average price per share paid or to be paid to us at the assumed initial public offering price of $             per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us:

 

     Shares Purchased     Total Consideration     Average Price  
     Number    Percent     Amount      Percent     Per Share  

Existing stockholders

               $                             $                

New investors

                          

Total

        100   $           100   $     

Each $1.00 increase or decrease in the assumed initial public offering price of $         per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, the total consideration paid by new investors and total consideration paid by all stockholders by approximately $        million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

If the underwriters’ option to purchase additional shares of our common stock were exercised in full, our existing stockholders would own    % and our new investors would own    % of the total number of shares of our common stock outstanding upon the completion of this offering.

The number of shares of our common stock that will be outstanding after this offering is based on shares of our common stock outstanding as of        , and excludes:

 

                shares of our common stock issuable upon the exercise of options to purchase shares of our common stock outstanding as of        , with a weighted-average exercise price of $         per share;

 

                shares of our common stock reserved for future issuance under our stock-based compensation plans, consisting of (i)          shares of common stock reserved for future awards under our 2015 Amended and Restated Equity Incentive Plan as of             (which will terminate as of the completion of this offering and no awards will be granted under our 2015 Amended and Restated Equity Incentive Plan thereafter), and (ii)          shares of common stock reserved for issuance under our        , which will become effective on the date of this prospectus.

To the extent that any outstanding options to purchase our common stock are exercised, or new awards are granted under our equity compensation plans, there will be further dilution to investors participating in this offering.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

As a result of the Bain Acquisition, which occurred on May 22, 2015, we applied purchase accounting and a new basis of accounting beginning on the date of the acquisition. We refer to ourselves as Predecessor in the periods before the Bain Acquisition and Successor in the periods after.

The selected consolidated statements of operations and balance sheet data presented below as of April 30, 2015 and for the two years then ended and the period from May 1, 2015 to May 22, 2015 relate to the Predecessor and are derived from audited consolidated financial statements that are included in this prospectus. The selected consolidated statements of operations data for the period from May 23, 2015 to April 30, 2016, and the consolidated balance sheet data as of April 30, 2016, relate to the Successor and are derived from audited consolidated financial statements that are included in this prospectus.

Although the period from May 1, 2015 to May 22, 2015 relates to the Predecessor and the period from May 23, 2015 to April 30, 2016 relates to the Successor, in order to assist in the period to period comparison we have combined these periods as a sum of the amounts without any other adjustments and refer to the combined period as the combined year ended April 30, 2016.

The unaudited consolidated financial statements were prepared on a basis consistent with our audited financial statements and include all adjustments, consisting of normal and recurring adjustments that we consider necessary for a fair presentation of the financial position and results of operations as of and for such periods. Operating results for the periods presented are not necessarily indicative of the results that may be expected in future periods. The following selected consolidated financial data should be read with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

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     Predecessor           Successor        
    

 

Year Ended April 30,

    Period from
May 1 to
May 22,
2015
          Period
from May 23,
2015 to
April 30,
2016
    (Combined)
Year Ended
April 30,
2016
 
     2014     2015           
(In thousands, except per share data)                                  (Unaudited)  

Net revenue:

               

Product

   $ 319,232      $ 274,373      $ 7,032           $ 306,787      $ 313,819   

Service and subscription

     287,240        356,910        22,446             262,072        284,518   
  

 

 

   

 

 

   

 

 

        

 

 

   

 

 

 

Total net revenue

     606,472        631,283        29,478             568,859        598,337   
  

 

 

   

 

 

   

 

 

        

 

 

   

 

 

 

Cost of net revenue:

               

Product(2)

     106,188        106,904        4,687             131,119        135,806   

Service and subscription(2)

     56,447        53,682        3,069             66,642        69,711   
  

 

 

   

 

 

   

 

 

        

 

 

   

 

 

 

Total cost of net revenue

     162,635        160,586        7,756             197,761        205,517   
  

 

 

   

 

 

   

 

 

        

 

 

   

 

 

 

Gross profit

     443,837        470,697        21,722             371,098        392,820   
  

 

 

   

 

 

   

 

 

        

 

 

   

 

 

 

Operating expenses:

               

Sales and marketing(2)

     193,661        190,288        12,024             229,094        241,118   

Research and development(2)

     110,886        110,591        7,050             124,317        131,367   

General and administrative(2)

     69,266        68,131        21,649             126,520        148,169   

Amortization of intangible assets

     37,814        33,111        1,738             121,019        122,757   

Change in fair value of acquisition-related earn-out liability

     9,698                           (970     (970

Restructuring and other charges

     3,020        1,130                    2,857        2,857   
  

 

 

   

 

 

   

 

 

        

 

 

   

 

 

 

Total operating expenses

     424,345        403,251        42,461             602,837        645,298   
  

 

 

   

 

 

   

 

 

        

 

 

   

 

 

 

Operating income (loss)

     19,492        67,446        (20,739          (231,739     (252,478

Interest income

     44        38        1             143        144   

Interest expense

     (63,015     (66,434     (3,986          (99,386     (103,372

Debt extinguishment and refinancing costs

     (11,100                        (3,406     (3,406

Other expense, net

     (1,973     (1,376     (349          (759     (1,108
  

 

 

   

 

 

   

 

 

        

 

 

   

 

 

 

Loss before income taxes

     (56,552     (326     (25,073          (335,147     (360,220

Income tax provision (benefit)

     (5,221     15,104        (7,596          (63,543     (71,139
  

 

 

   

 

 

   

 

 

        

 

 

   

 

 

 

Net loss

     (51,331     (15,430     (17,477          (271,604   $ (289,081
               

 

 

 

Cumulative dividends earned on Class A Common Stock

     (34,535     (32,838     (2,112              
  

 

 

   

 

 

   

 

 

        

 

 

   

Net loss attributable to common stockholders

   $ (85,866   $ (48,268   $ (19,589        $ (271,604  
  

 

 

   

 

 

   

 

 

        

 

 

   

Net loss per share attributable to common stockholders:(1)

               

Basic and diluted

   $ (0.90   $ (0.49   $ (0.20        $ (3.09  
  

 

 

   

 

 

   

 

 

        

 

 

   

Weighted-average shares used to compute net loss per share attributable to common stockholders:(1)

               

Basic and diluted

     95,082        97,927        98,376             87,823     
  

 

 

   

 

 

   

 

 

        

 

 

   

 

(1) Net loss per share information is not presented for the combined year ended April 30, 2016 due to changes in capital structure resulting from the Bain Acquisition on May 22, 2015.

 

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(2) Includes stock-based compensation expense as follows:

 

     Predecessor           Successor         
 
     Year Ended April 30,      Period
from May 1
to May 22,
2015
          Period from
May 23,
2015 to
April 30,
2016
     (Combined)
Year Ended
April 30,
2016
 
         2014              2015                 
(In thousands)                                     (Unaudited)  

Cost of product

   $ 1       $ 22       $ 15           $ 76       $ 91   

Cost of service and subscription

     21         90         44             484         528   

Sales and marketing

     386         514         621             5,395         6,016   

Research and development

     219         476         386             2,801         3,187   

General and administrative

     2,612         1,594         2,585             10,158         12,743   
  

 

 

    

 

 

    

 

 

        

 

 

    

 

 

 

Total stock-based compensation expense

   $ 3,239       $ 2,696       $ 3,651           $ 18,914       $ 22,565   
  

 

 

    

 

 

    

 

 

        

 

 

    

 

 

 

 

     Predecessor           Successor  
(In thousands)    April 30, 2015           April 30, 2016  

Consolidated Balance Sheet Data:

         

Cash and cash equivalents

   $ 202,665           $ 136,563   

Working capital

     92,949             (20,337

Total assets

     1,558,581             3,001,607   

Current and long-term deferred revenue

     353,943             364,223   

Current and long-term debt, net of borrowing costs

     1,047,847             1,785,374   

Total liabilities

     1,515,503             2,374,588   

Total stockholders’ equity

     43,078             627,019   

Non-GAAP Financial Measures

In addition to our results determined in accordance with GAAP, we believe the following non-GAAP measures are useful in evaluating our operating performance because, in the case of adjusted product revenue, adjusted service and subscription revenue, adjusted net revenue and adjusted deferred revenue, they exclude the impact of purchase accounting, which we believe aids in the period to period comparability of our revenue and financial outlook of our business. In the case of adjusted EBITDA, we exclude certain material non-cash items and certain other adjustments we believe are not reflective of our ongoing operations. We believe adjusted EBITDA is a measure commonly used by investors to evaluate companies in our industry. Accordingly, we use these non-GAAP financial measures to measure our financial performance for business planning purposes and to compare our performance to that of our competitors.

 

     Predecessor           Successor         
 
     Year Ended April 30,      Period
from May 1
to May 22,
2015
          Period
from May 23,
2015 to
April 30,
2016
     (Combined)
Year Ended
April 30,
2016
 
     2014      2015             
(In thousands)    (Unaudited)      (Unaudited)           (Unaudited)      (Unaudited)  

Adjusted product revenue

   $ 319,528       $ 274,930       $ 7,081           $ 312,494       $ 319,575   

Adjusted service and subscription revenue

     312,240         367,954         22,778             413,021         435,799   

Adjusted net revenue

     631,768         642,884         29,859             725,515         755,374   

Adjusted EBITDA

     183,179         196,468         7,190             215,658         222,848   

Adjusted deferred revenue ending balance

     305,846         359,079         347,797             443,818         443,818   

 

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Adjusted product revenue, adjusted service and subscription revenue and adjusted net revenue. We define adjusted product revenue, adjusted service and subscription revenue and adjusted net revenue, as product revenue, service and subscription revenue, and net revenue, respectively, excluding the impact of purchase accounting. We regularly monitor these measures to assess our operating performance. On February 15, 2012, in connection with the Thoma Bravo Acquisition, and on May 22, 2015, as part of the Bain Acquisition, we were required to write down our deferred revenue balances due to purchase accounting in accordance with GAAP. In addition, in connection with our other acquisitions, we were also required to make similar adjustments to write down our deferred revenue balances due to purchase accounting in accordance with GAAP. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Impact of Purchase Accounting Related to Mergers and Acquisitions.” The impact on revenue related to purchase accounting as a result of these transactions, particularly as a result of the Bain Acquisition, limits the comparability of our revenue between periods. While the deferred revenue written down in connection with our acquisitions will never be recognized as revenue under GAAP, we do not expect the Bain Acquisition to have an impact on future renewal rates of the contracts included within the deferred revenue write-down, nor do we expect revenue generated from new service and subscription contracts to be similarly impacted by purchase accounting adjustments. Accordingly, we believe presenting adjusted product revenue, adjusted service and subscription revenue and adjusted net revenue to exclude the impact of purchase accounting adjustments, including the deferred revenue write-down, aids in the comparability between periods and in assessing our overall operating performance. If these adjustments were not made, our future revenue growth rates could appear overstated. Adjusted product revenue, adjusted service and subscription revenue and adjusted net revenue have limitations as analytical tools, and you should not consider them in isolation or as substitutes for product revenue, service and subscription revenue or net revenue. Other companies in our industry may calculate these measures differently, which may limit their usefulness as a comparative measure.

Adjusted EBITDA. We regularly monitor adjusted EBITDA, as it is a measure we use to assess our operating performance. We define adjusted EBITDA as net income or loss, excluding the impact of purchase accounting on net revenue, amortization of intangible assets and purchased technology, litigation costs, depreciation expense, acquisition write-up of acquired inventory sold, stock-based compensation expense, restructuring and other charges, acquisition fair value adjustments to earn outs, acquisition transaction costs, acquisition integration, transition, retention and other costs, financial sponsor and debt fees, interest expense, net, debt extinguishment and refinancing costs, other expense, net, and income tax provision (benefit). Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

 

    although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;

 

    adjusted EBITDA excludes the impact of the write-down of deferred revenue due to purchase accounting in connection with our acquisition, and therefore includes revenue that will never be recognized under GAAP;

 

    adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

 

    adjusted EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;

 

    adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us; and

 

    other companies, including companies in our industry, may calculate adjusted EBITDA differently, which reduces its usefulness as a comparative measure.

Because of these limitations, you should consider adjusted EBITDA alongside other financial performance measures, including net income (loss) and our other GAAP results. In evaluating adjusted EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in

 

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this presentation. Our presentation of adjusted EBITDA should not be construed as an inference that our future results will be unaffected by the types of items excluded from the calculation of adjusted EBITDA. Adjusted EBITDA is not a presentation made in accordance with GAAP and the use of the term varies from others in our industry.

Adjusted deferred revenue. We regularly monitor adjusted deferred revenue, as it provides visibility into our anticipated future revenue, primarily for our support and subscription contracts which we generally invoice in full up front and recognize revenue over the contract term, and is a key component in other measures we track to measure our financial performance. We define adjusted deferred revenue as deferred revenue, excluding the write-down of deferred revenue in connection with our acquisitions. While the deferred revenue written down in connection with our acquisitions will never be recognized as revenue under GAAP, we do not expect the Bain Acquisition to have an impact on future renewal rates of the contracts included within the deferred revenue write-down, nor do we expect revenue generated from new service and subscription contracts to be similarly impacted by purchase accounting adjustments. Accordingly, we believe presenting adjusted deferred revenue to exclude the impact of purchase accounting adjustments, including the deferred revenue write-down, aids in the comparability between periods. If these adjustments were not made, our future revenue growth rates could appear overstated. Adjusted deferred revenue has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for deferred revenue. Other companies in our industry may calculate this measure differently, which may limit its usefulness as a comparative measure.

The foregoing financial measures are not intended to represent and should not be considered as alternatives to revenue, net income, operating income or any other performance measures derived in accordance with GAAP as measures of financial performance or operating cash flows or as measures of liquidity.

Reconciliation of Non-GAAP Financial Measures

The following tables reconcile the most directly comparable GAAP financial measure to each of these non-GAAP financial measures.

 

     Predecessor           Successor         
     Year Ended April 30,      Period
from May 1
to May 22,
2015
          Period
from May 23,
2015 to
April 30,
2016
     (Combined)
Year Ended
April 30,
2016
 
     2014      2015             
(In thousands)    (Unaudited)      (Unaudited)           (Unaudited)      (Unaudited)  

Product revenue

   $ 319,232       $ 274,373       $ 7,032           $ 306,787       $ 313,819   

Impact of purchase accounting on product revenue(1)

     296         557         49             5,707         5,756   
  

 

 

    

 

 

    

 

 

        

 

 

    

 

 

 

Adjusted product revenue

   $ 319,528       $ 274,930       $ 7,081           $ 312,494       $ 319,575   
  

 

 

    

 

 

    

 

 

        

 

 

    

 

 

 

Service and subscription revenue

   $ 287,240       $ 356,910       $ 22,446           $ 262,072       $ 284,518   

Impact of purchase accounting on service and subscription revenue(1)

     25,000         11,044         332             150,949         151,281   
  

 

 

    

 

 

    

 

 

        

 

 

    

 

 

 

Adjusted service and subscription revenue

   $ 312,240       $ 367,954       $ 22,778           $ 413,021       $ 435,799   
  

 

 

    

 

 

    

 

 

        

 

 

    

 

 

 

Net revenue

   $ 606,472       $ 631,283       $ 29,478           $ 568,859       $ 598,337   

Impact of purchase accounting on net revenue(1)

     25,296         11,601         381             156,656         157,037   
  

 

 

    

 

 

    

 

 

        

 

 

    

 

 

 

Adjusted net revenue

   $ 631,768       $ 642,884       $ 29,859           $ 725,515       $ 755,374   
  

 

 

    

 

 

    

 

 

        

 

 

    

 

 

 

 

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     Predecessor           Successor        
     Year Ended April 30,     Period
from May 1
to May 22,
2015
          Period
from May 23,
2015 to
April 30,
2016
    (Combined)
Year Ended
April 30,
2016
 
     2014     2015           
(In thousands)    (Unaudited)     (Unaudited)           (Unaudited)     (Unaudited)  

Net income (loss)

   $ (51,331   $ (15,430   $ (17,477        $ (271,604   $ (289,081

Impact of purchase accounting on net revenue(1)

     25,296        11,601        381             156,656        157,037   

Amortization of intangible assets and purchased technology

     80,050        77,006        4,314             161,012        165,326   

Litigation costs

     960        4,423                    9,468        9,468   

Depreciation expense

     16,315        18,440        1,632             18,806        20,438   

Acquisition write-up of acquired inventory sold(2)

     189                           29,210        29,210   

Stock-based compensation expense

     3,239        2,696        3,651             18,914        22,565   

Restructuring and other charges

     3,020        1,130                    2,857        2,857   

Acquisition fair value adjustments to earn-outs(3)

     9,698                           (970     (970

Acquisition transaction costs(4)

     1,662        1,223        15,865             14,552        30,417   

Acquisition integration, transition, retention and other costs(5)

     18,874        8,024        1,831             30,586        32,417   

Financial sponsor and debt fees

     4,384        4,479        255             6,306        6,561   

Interest expense, net

     62,971        66,396        3,985             99,243        103,228   

Debt extinguishment and refinancing costs

     11,100                           3,406        3,406   

Other expense, net

     1,973        1,376        349             759        1,108   

Income tax provision (benefit)

     (5,221     15,104        (7,596          (63,543     (71,139
  

 

 

   

 

 

   

 

 

        

 

 

   

 

 

 

Adjusted EBITDA

   $ 183,179      $ 196,468      $ 7,190           $ 215,658      $ 222,848   
  

 

 

   

 

 

   

 

 

        

 

 

   

 

 

 

 

(1) In connection with the Thoma Bravo Acquisition, the Bain Acquisition, and other acquisitions, we were required to write down our deferred revenue balances to fair value in purchase accounting in accordance with GAAP. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Impact of Purchase Accounting Related to Mergers and Acquisitions.” Recording deferred revenue at fair value in purchase accounting had the effect of reducing acquired deferred revenue and thereby reducing the recognition of revenue in subsequent periods as compared to the amounts we would have otherwise recognized.
(2) In connection with the Thoma Bravo Acquisition, the Bain Acquisition, and other acquisitions, we were required to write up our inventory balances to fair value in purchase accounting in accordance with GAAP. Recording inventory at fair value in purchase accounting had the effect of increasing inventory and thereby increasing the cost of revenue in subsequent periods as compared to the amounts we would have otherwise recognized. The acquisition write-up of acquired inventory sold represents the incremental cost of revenue that was recognized as a result of purchase accounting.
(3) Acquisition earn-outs are required to be recorded at the acquisition-date fair value in purchase accounting, and re-measured at fair value in each subsequent period. Changes in fair value in subsequent periods are required to be recorded in earnings in the consolidated statement of operations in accordance with GAAP. The acquisition fair value adjustments to earn-outs adjustment represents the change in fair value recorded in earnings in the consolidated statement of operations in subsequent periods.
(4) Acquisition transaction costs include financial advisory, legal and accounting professional services costs incurred as a result of our acquisitions during the period.

 

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(5) Acquisition integration, transition, retention and other costs are employee-related integration, transition and retention costs, and the amortization of the write-up of our operating leases, that are incurred as a result of our acquisitions during the period.

 

     Predecessor           Successor         
     Year Ended April 30,      Period
from May 1
to May 22,
2015
          Period
from May 23,
2015 to
April 30,
2016
     (Combined)
Year Ended
April 30,
2016
 
     2014      2015             
(In thousands)    (Unaudited)      (Unaudited)           (Unaudited)      (Unaudited)  

Deferred revenue beginning balance

   $ 211,697       $ 289,109       $ 353,943           $ 343,042       $ 353,943   

Acquisition write-down of deferred revenue beginning balance(6)

     37,406         16,737         5,136             4,755         5,136   
  

 

 

    

 

 

    

 

 

        

 

 

    

 

 

 

Adjusted deferred revenue beginning balance

   $ 249,103       $ 305,846       $ 359,079           $ 347,797       $ 359,079   
  

 

 

    

 

 

    

 

 

        

 

 

    

 

 

 

Deferred revenue ending balance

   $ 289,109       $ 353,943       $ 343,042           $ 364,223       $ 364,223   

Acquisition write-down of deferred revenue ending balance(6)

     16,737         5,136         4,755             79,595         79,595   
  

 

 

    

 

 

    

 

 

        

 

 

    

 

 

 

Adjusted deferred revenue ending balance

   $ 305,846       $ 359,079       $ 347,797           $ 443,818       $ 443,818   
  

 

 

    

 

 

    

 

 

        

 

 

    

 

 

 

Change in adjusted deferred revenue

   $ 56,743       $ 53,233       $ (11,282        $ 96,021       $ 84,739   
  

 

 

    

 

 

    

 

 

        

 

 

    

 

 

 

 

(6) In connection with the Thoma Bravo Acquisition, the Bain Acquisition, and other acquisitions, we were required to write down our deferred revenue balances to fair value in purchase accounting in accordance with GAAP. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Impact of Purchase Accounting Related to Mergers and Acquisitions.” Recording deferred revenue at fair value in purchase accounting had the effect of reducing acquired deferred revenue. The acquisition write-down of deferred revenue balance represents the adjustment to deferred revenue on the consolidated balance sheet as a result of purchase accounting.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read together with our consolidated financial statements and accompanying notes included elsewhere within this prospectus. This discussion includes both historical information and forward-looking information that involves risk, uncertainties and assumptions. Our actual results may differ materially from management’s expectations as a result of various factors, including, but not limited to, those discussed in the section entitled “Risk Factors” and “Special Note Regarding Forward Looking Statements”.

Overview

We are a leading provider of advanced web security solutions for global enterprises and governments. We offer the leading web gateway product with enterprise features and scalability to secure the enterprise and its users. We operated as a public company listed on NASDAQ until our acquisition by Thoma Bravo, LLC in February 2012 and subsequent acquisition by funds controlled by Bain Capital Investors, LLC in May 2015.

We generate revenue from sales of our products, services and subscriptions. Our advanced web security solutions include: Advanced Web and Cloud Security, Advanced Threat Protection, Encrypted Traffic Management, Incident Response, Analytics and Forensics, Web Application Protection, and Network Performance and Optimization. We support and enhance the functionality of our products through our Global Intelligence Network, a part of our subscription services, which offers global threat intelligence sharing amongst our customers to provide a globally distributed, real-time threat identification and analysis network. We primarily market and sell our products and solutions through a direct-touch, channel-leveraged model, which includes solution providers, system integrators, value added resellers, and distributors worldwide whom we refer to as our channel partners. Substantially all of our sales are completed through our network of approximately 2,000 channel partners. When we sell our products, we generally recognize revenue up front, provided all revenue recognition criteria have been met. Our service and subscription revenue primarily consists of sales of new and renewal support contracts, software and subscriptions and cloud-based security-as-a-service solutions. For services and subscription sales, we recognize revenue over the term of the contract, provided all revenue recognition criteria have been met.

Since 2012, we have focused our investment on security product innovation and expanding our product portfolio. We have expanded our offerings from our core secure web gateway and performance products to include our Cloud-Delivered Secure Web Gateway, Encrypted Traffic Management, Incident Response, Analytics & Forensics, Advanced Threat Protection, Web Application Protection, and Cloud Access Security Broker offerings, which together provide our customers with a comprehensive suite of solutions that enhance our leading web security capabilities. We have expanded our portfolio of products through six technology acquisitions since 2012, and have invested alongside these acquisitions with research and development to enhance their capabilities and integrate them into our platform.

We have optimized and expanded our go-to-market model. We have made substantial investments in our sales force and have a disciplined approach to our sales strategy, which has allowed us to grow our business profitably over time. Over the past three years, we have grown our direct-touch salesforce to over 600 employees worldwide and have realigned our channel partner go-to-market strategy. This realignment allowed us to concentrate our sales efforts through a smaller number of higher quality and more focused channel partners. Our direct-touch, channel-leveraged model allows us to use our experienced sales force and the broad reach of our over 2,000 channel partners to expand our footprint in our existing customers’ environment and also capture new customers. During the year ended April 30, 2016, we added over 700 new customers.

These investments have translated into recent strong revenue growth. During the years ended April 30, 2016, 2015 and 2014, our net revenue, excluding the impact of purchase accounting, which we refer to as

 

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adjusted net revenue, was $755.4 million, $642.9 million and $631.8 million, respectively, representing year-over-year growth in fiscal 2016 and fiscal 2015 of approximately 17% and 2%, respectively. Our net revenue in fiscal 2016, 2015 and 2014, which includes the impact of purchase accounting, was $598.3 million, $631.3 million and $606.5 million, respectively. In fiscal 2014 there was approximately $50 million more refresh product revenue than fiscal 2015, related to the expected wind-down from our SWG 8100 refresh program.

Our business has historically experienced a major product refresh cycle approximately once every five years, as hardware appliances reach end of life. Customers typically refresh their installed base of our hardware appliance products with our latest equipment, replacing older versions of hardware that reach the end of their useful life and are no longer supported under service contracts. Historically, these refresh cycles trigger buying cycles for new versions of our products, which typically offer greater capacity and additional features, as well as new service contracts. In 2012, we launched a refresh program for our SWG 8100, our high-end ProxySG product, which we no longer supported as of March 2013 regardless of when a customer purchased this product. Following our SWG 8100 product refresh cycle in 2013, we changed the end-of-life policy for all of our hardware appliance products such that our hardware appliances now generally have an end-of-life date that is five years from the date of purchase, which we expect will extend refresh cycles over a multi-year period and reduce the impact of a product refresh cycle in any one period.

A growing portion of our revenues is shifting towards subscriptions and services. We sell our products through a combination of appliances, perpetual software licenses and software subscriptions. We have made significant investments recently in cloud- and subscription-based products through product development and technology acquisitions. We expect the proportion of our revenue derived from these offerings to continue to grow over time as we continue to leverage our direct-touch sales force to sell our newly developed and acquired products.

Nearly all of our customers enter into service contracts at the time they purchase our products. We typically bill in advance for our service and subscription contracts, which increases our deferred revenue balance and provides visibility into future revenue. Our adjusted revenue from services and subscriptions has grown from 49% of our adjusted net revenue in fiscal 2014 to 57% of our adjusted net revenue in fiscal 2015 to 58% of our adjusted net revenue in fiscal 2016, and our adjusted deferred revenue balance as of April 30, 2015 was $359.1 million and as of April 30, 2016 was $443.8 million. Our revenue from services and subscriptions, including the impact of purchase accounting, has changed from 47% of our net revenue in fiscal 2014 to 57% of our net revenue in fiscal 2015 and to 48% of our net revenue in fiscal 2016. Our deferred revenue balance as of April 30, 2015 was $353.9 million and as of April 30, 2016 was $364.2 million.

We have evolved our business while maintaining strong financial performance. As a result of our initiatives and strategic investments, our business has experienced strong growth in recent periods, while maintaining profitability and cash flows. Our adjusted EBITDA was $222.8 million, $196.5 million and $183.2 million for fiscal 2016, 2015 and 2014, respectively, representing approximately 30%, 31% and 29% of adjusted net revenue. Our net loss for fiscal 2016, which included the impact of purchase accounting adjustments related to the Bain Acquisition, fiscal 2015 and fiscal 2014 was $289.1 million, $15.4 million and $51.3 million, respectively.

Key Factors Affecting Our Performance

Customer Retention. We derive a significant and growing share of our total revenue from our existing customers, which we are able to retain at a high rate. Since fiscal 2012, we have maintained an annual customer retention rate for our top 1,000 customers of greater than 95%. We define our retention rate as the percentage of our top 1,000 customers in one fiscal year who contributed revenue to us in that fiscal year as well as in the subsequent fiscal year. We believe our installed base of customers purchase additional products from us and have a high rate of renewal for support contracts because our products are critical to them, thereby fostering strong customer loyalty. Our ability to maintain our existing customers during refresh cycles and maintain high renewal rates will have a material impact on our future financial performance. The chart below illustrates the importance of maintaining our existing customers, as the top 250 customers in fiscal 2012 continue to drive significant

 

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revenue through fiscal 2016. The chart below shows adjusted revenue derived from our top 250 customers beginning in fiscal 2012, along with the incremental amount of adjusted revenue generated from those same customers in each year thereafter through fiscal 2016.

 

LOGO

New Product Adoption. We have strategically expanded our offerings to include encryption management, advanced threat protection, cloud access security, cloud delivery, and threat intelligence, which together provide our customers with a comprehensive suite of solutions that enhance our leading web security capabilities on premises and in the cloud. We have been successful in selling new offerings to our existing customers, with over 70% of our current top 250 customers buying product lines that were introduced after fiscal 2012, including our Cloud-Delivered Secure Web Gateway, Encrypted Traffic Management, Incident Response, Analytics & Forensics, Advanced Threat Protection, Web Application Firewall, X-Series and Cloud Access Security Broker product lines. Our ability to sell products to our customers to address their needs, and our ability to upsell new products and technologies as new demands arise, will have a material impact on our future financial performance.

Sales Performance. We have made substantial investments in our sales force and have a disciplined approach to our sales strategy, which has allowed us to grow the business profitably, on an adjusted EBITDA basis. Our sales team focuses on named enterprise accounts and sells our portfolio of products into these accounts, eliminating the need for multiple, disparate touch points into our customers. We focus on our addressable market potential and our deep understanding of sales capacity per quota-carrying sales representative based on our tenured quota-carrying sales representatives and historical data, in order to set quota. We carefully manage our pipeline to determine opportunities and booking potential for future periods. Our ability to manage our sales productivity and yield are important factors to the success of our business.

Acquisition Strategy and Integration. We have a history of making targeted acquisitions that facilitate our growth by complementing our existing products and services and addressing new or adjacent market opportunities. Our ability to select the right technologies for our portfolio and integrate these acquisitions into our business will be important to our success. We believe our track record of integrating our previous six acquisitions over the past four years demonstrates our ability to successfully integrate acquisitions.

Subscription-Based Offerings. We have made significant investments in cloud- and subscription-based products through product development and acquisitions, and expect the proportion of our revenue derived from these offerings to grow over time. Revenue recognition for cloud- and subscription-based products differs from

 

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revenue recognition for appliance and perpetual software licenses, in that revenue is recognized over the term of the contract for cloud and subscription products, instead of upfront in the case of appliance and perpetual software. Support, software subscriptions and cloud subscriptions typically have a term of one to three years, with average terms of approximately two years.

Impact of Purchase Accounting Related to Mergers and Acquisitions

On February 15, 2012, we were acquired by funds affiliated with Thoma Bravo, LLC, a private equity investment firm, and its co-investors and on May 22, 2015, we were acquired by funds controlled by Bain Capital Investors, LLC, a private equity investment firm, and its co-investors. As a result of these acquisitions, we were required by GAAP to record all assets and liabilities at their fair value, including our deferred revenue balances, as of the effective date of the respective acquisitions, which in some cases was different than the historical book values. In each case, adjusting our deferred revenue balance to fair value on the date of the relevant acquisition had the effect of reducing revenue from that which would have otherwise been recognized in subsequent periods.

In addition, we have acquired a number of companies and, as required by GAAP, recorded the acquired assets and liabilities at fair value on the date of acquisition, which similarly impacted deferred revenue balances and reduced revenue from that which would have otherwise been recognized in subsequent periods, including in fiscal 2014 and 2015, for the period from May 1, 2015 to May 22, 2015, and for the period from May 23, 2015 to April 30, 2016.

The impact on revenue related to purchase accounting for these acquisitions limits the comparability of our revenue between periods. As a result, we have presented adjusted net revenue, a non-GAAP financial measure, which represents the amount of revenue we would have recognized excluding the impact of purchase accounting. The table below provides a reconciliation of net revenue to adjusted net revenue for the periods indicated.

 

     Predecessor           Successor         
 
     Year Ended April 30,      Period
from May 1
to May 22,
2015
          Period
from May 23,
2015
to April 30,
2016
     (Combined)
Year

Ended
April 30,
2016
 
     2014      2015             
(In thousands)    (Unaudited)      (Unaudited)           (Unaudited)      (Unaudited)  

Product revenue

   $ 319,232       $ 274,373       $ 7,032           $ 306,787       $ 313,819   

Impact of purchase accounting on product revenue

     296         557         49             5,707         5,756   
  

 

 

    

 

 

    

 

 

        

 

 

    

 

 

 

Adjusted product revenue

   $ 319,528       $ 274,930       $ 7,081           $ 312,494       $ 319,575   
  

 

 

    

 

 

    

 

 

        

 

 

    

 

 

 

Service and subscription revenue

   $ 287,240       $ 356,910       $ 22,446           $ 262,072       $ 284,518   

Impact of purchase accounting on service and subscription revenue

     25,000         11,044         332             150,949         151,281   
  

 

 

    

 

 

    

 

 

        

 

 

    

 

 

 

Adjusted service and subscription revenue

   $ 312,240       $ 367,954       $ 22,778           $ 413,021       $ 435,799   
  

 

 

    

 

 

    

 

 

        

 

 

    

 

 

 

Net revenue

   $ 606,472       $ 631,283       $ 29,478           $ 568,859       $ 598,337   

Impact of purchase accounting on net revenue

     25,296         11,601         381             156,656         157,037   
  

 

 

    

 

 

    

 

 

        

 

 

    

 

 

 

Adjusted net revenue

   $ 631,768       $ 642,884       $ 29,859           $ 725,515       $ 755,374   
  

 

 

    

 

 

    

 

 

        

 

 

    

 

 

 

 

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Components of Financial Performance

Net Revenue

We generate revenue from the sales of our products, services and subscriptions. As discussed further in “Critical Accounting Policies and Estimates—Revenue Recognition” below, revenue is recognized when persuasive evidence of an arrangement exists, delivery or performance has occurred, the sales price is fixed or determinable, and collection is probable.

Our total net revenue is comprised of the following:

 

    Product revenue. Product revenue primarily consists of revenue from sales of our appliances, which primarily includes our Secure Web Gateway (including ProxySG), Encrypted Traffic Management and Network Performance Optimization product lines. Product revenue also includes our perpetual software sales and primarily includes licenses for our Incident Response, Analytics and Forensics products. We generally invoice for our product revenue up front and record revenue when the product is delivered, assuming all other revenue recognition criteria have been met.

 

    Service and subscription revenue. Service and subscription revenue primarily consists of new and renewal support contracts, software subscriptions, cloud subscriptions, and to a lesser extent professional services and training. Virtually all of our new appliances are sold with support contracts due to our customers’ demand for support and maintenance. Our software subscriptions are primarily made up of sales of virtual appliance versions of substantially all of our hardware appliance products above. Our cloud subscriptions primarily include our Cloud-Delivered Secure Web Gateways, Cloud Access Security Broker solutions and subscriptions to our Global Intelligence Network services. Our professional services primarily include installation, implementation, training and consulting. We generally invoice in full up front for our support services, software subscriptions and cloud subscriptions, and record revenue over the life of the contract, assuming all other revenue recognition criteria have been met. Professional services are invoiced upon completion and accounted for less than 1% of net revenue in fiscal 2014, 2015 and 2016.

Cost of Net Revenue

Our total cost of net revenue consists of cost of product revenue and cost of service and subscription revenue, which includes certain personnel and allocated costs, and amortization of acquired intangible assets. Personnel costs associated with our operations and global customer support organizations consist of salaries, benefits, bonuses, royalties and share-based compensation. Allocated costs consist of certain facilities, depreciation, benefits, recruiting, and IT costs allocated based on headcount.

 

    Cost of product revenue. Cost of product revenue primarily consists of third-party manufacturing costs of our appliances, personnel costs associated with our internal operations team, and amortization of acquired intangible assets.

 

    Cost of service and subscription revenue. Cost of service and subscription revenue primarily consists of personnel, hosting and related costs associated with our technical support and cloud operations, and amortization of acquired intangible assets.

Gross Margin

Gross margin, or gross profit as a percentage of net revenue, has been and will continue to be affected by a variety of factors, including the average sales price of our products, manufacturing costs, product mix, the mix of revenue between products and services, and the amount and timing of amortization of acquired intangible assets.

 

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Operating Expenses

Our operating expenses consist of sales and marketing, research and development and general and administrative expenses. In addition, we have incurred certain costs associated with our acquisitions and restructuring activities. Personnel costs are the most significant component of operating expenses and consist of salaries, benefits, bonuses, share-based compensation, and with regard to sales and marketing expense, sales commissions. We expect operating expenses to increase in absolute dollars, although they may fluctuate as a percentage of revenue from period to period, as we continue to grow to support expected demand for our products, services and subscriptions.

 

    Sales and Marketing. Sales and marketing expense consists primarily of personnel costs including commission costs. Sales and marketing expense also includes costs for market development programs, promotional and other marketing costs, travel costs, office equipment and software, depreciation of capital equipment, professional services, and allocated facilities costs. In the last 12 months, we have substantially increased the size of our sales force. We expect sales and marketing expense to continue to increase in absolute dollars as we continue to expand the size of our sales and marketing organizations in order to drive growth.

 

    Research and Development. Research and development expense consists primarily of personnel costs. Research and development expense also includes prototype development related expenses, professional services and allocated facilities costs. We expect research and development expense to increase in absolute dollars as we continue to invest in our future products and services.

 

    General and Administrative. General and administrative expense consists of personnel costs as well as professional services. General and administrative personnel include our executive, IT, finance, human resources, and legal organizations. Professional services consist primarily of legal, auditing, accounting, advisory and other consulting costs. We expect general and administrative expense to increase in absolute dollars following the completion of this offering due to additional legal fees and costs, and accounting, insurance, investor relations, and other costs associated with being a public company. Refer to the discussion under “Business-Legal Proceedings” for information related to pending litigation.

 

    Amortization of Intangible Assets. Amortization of intangible assets includes the amortization of customer relationship assets associated with our acquisitions, including but not limited to the Bain Acquisition in May 2015, and the Thoma Bravo Acquisition in February 2012.

 

    Change in Fair Value of Acquisition-related Earn-out Liability. In May 2013, we acquired the SSL Visibility business from Netronome for an upfront payment of $25.0 million followed by an additional contingent cash earn-out of $25.0 million. The initial estimated fair value of the earn-out of $8.4 million was recorded on the date of acquisition. In April 2014, the fair value of the earn-out was increased by $9.7 million to $18.1 million, and the adjustment was recognized through the consolidated statements of operations. In July 2015, we acquired Perspecsys, Inc. and estimated an acquisition date fair value of the contingent earn-out of $1.0 million, which was subsequently adjusted to zero and recognized through the consolidated statements of operations in the three months ended April 30, 2016.

 

    Restructuring and Other Charges. In connection with certain acquisitions and global realignments intended to reduce our combined operating cost structure and eliminate operating redundancies, we incurred restructuring and other charges that primarily consisted of severance and related costs resulting from the reduction of headcount.

Interest Income

Interest income consists of interest income earned on our cash and cash equivalents. Our cash historically has been invested in highly liquid investments such as time deposits held at major banks, commercial paper, U.S. government agency discount notes, money market mutual funds and other money market securities with maturities of 90 days or less at the date of purchase.

 

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Interest Expense

Interest expense primarily relates to outstanding indebtedness under our credit facilities and our 8.375% Senior Notes due 2023.

Debt Extinguishment and Refinancing Costs

Debt extinguishment and refinancing costs are fees associated with the refinancing of our term loans.

Other Expense, Net

Other expense, net, consists primarily of foreign currency exchange gains or losses, and non-recurring gains or losses realized outside our normal course of business.

Income Tax Provision (Benefit)

The provision for (benefit from) income taxes primarily reflects current and deferred U.S. federal and state taxes and foreign income taxes in taxable foreign jurisdictions. We have recorded a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized in future periods. In addition, due to ownership change provisions of the Internal Revenue Code that limit the use of tax attributes in certain circumstances and similar state tax provisions, we have reduced our net operating losses carryforwards and credit carryforwards accordingly.

Consolidated Statements of Operations Data

On May 22, 2015, we were acquired in the Bain Acquisition. Although the period from May 1, 2015 to May 22, 2015 relates to the Predecessor and the period from May 23, 2015 to April 30, 2016 relates to the Successor, for the purpose of the comparisons below we have combined these periods as a sum of the amounts without any other adjustments and refer to the combined period as the combined year ended April 30, 2016.

 

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The following table sets forth, in dollar amounts, consolidated statements of operations data for the periods indicated:

 

     Predecessor          Successor        
    

 

Year Ended April 30,

    Period from
May 1 to
May 22,
2015
         Period from
May 23,
2015 to
April 30,
2016
    (Combined)
Year
Ended
April 30,
2016
 
     2014     2015           
(In thousands, except per share data)                                 (Unaudited)  

Net revenue:

             

Product

   $ 319,232      $ 274,373      $ 7,032         $ 306,787      $ 313,819   

Service and subscription

     287,240        356,910        22,446           262,072        284,518   
  

 

 

   

 

 

   

 

 

      

 

 

   

 

 

 

Total net revenue

     606,472        631,283        29,478           568,859        598,337   
  

 

 

   

 

 

   

 

 

      

 

 

   

 

 

 

Cost of net revenue:

             

Product

     106,188        106,904        4,687           131,119        135,806   

Service and subscription

     56,447        53,682        3,069           66,642        69,711   
  

 

 

   

 

 

   

 

 

      

 

 

   

 

 

 

Total cost of net revenue

     162,635        160,586        7,756           197,761        205,517   
  

 

 

   

 

 

   

 

 

      

 

 

   

 

 

 

Gross profit

     443,837        470,697        21,722           371,098        392,820   
  

 

 

   

 

 

   

 

 

      

 

 

   

 

 

 

Operating expenses:

             

Sales and marketing

     193,661        190,288        12,024           229,094        241,118   

Research and development

     110,886        110,591        7,050           124,317        131,367   

General and administrative

     69,266        68,131        21,649           126,520        148,169   

Amortization of intangible assets

     37,814        33,111        1,738           121,019        122,757   

Change in fair value of acquisition-related earn-out liability

     9,698                         (970     (970

Restructuring and other charges

     3,020        1,130                  2,857        2,857   
  

 

 

   

 

 

   

 

 

      

 

 

   

 

 

 

Total operating expenses

     424,345        403,251        42,461           602,837        645,298   
  

 

 

   

 

 

   

 

 

      

 

 

   

 

 

 

Operating income (loss)

     19,492        67,446        (20,739        (231,739     (252,478

Interest income

     44        38        1           143        144   

Interest expense

     (63,015     (66,434     (3,986        (99,386     (103,372

Debt extinguishment and refinancing costs

     (11,100                      (3,406     (3,406

Other expense, net

     (1,973     (1,376     (349        (759     (1,108
  

 

 

   

 

 

   

 

 

      

 

 

   

 

 

 

Loss before income taxes

     (56,552     (326     (25,073        (335,147     (360,220

Income tax provision (benefit)

     (5,221     15,104        (7,596        (63,543     (71,139
  

 

 

   

 

 

   

 

 

      

 

 

   

 

 

 

Net loss

     (51,331     (15,430     (17,477        (271,604   $ (289,081
             

 

 

 

Cumulative dividends earned on Class A Common Stock

     (34,535     (32,838     (2,112            
  

 

 

   

 

 

   

 

 

      

 

 

   

Net loss attributable to common stockholders

   $ (85,866   $ (48,268   $ (19,589      $ (271,604  
  

 

 

   

 

 

   

 

 

      

 

 

   

Net loss per share attributable to common stockholders:

             

Basic and diluted

   $ (0.90   $ (0.49   $ (0.20      $ (3.09  
  

 

 

   

 

 

   

 

 

      

 

 

   

Weighted-average shares used to compute net loss per share attributable to common stockholders:

             

Basic and diluted

     95,082        97,927        98,376           87,823     
  

 

 

   

 

 

   

 

 

      

 

 

   

 

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The following table sets forth, as a percentage of net revenue, consolidated statements of operations data for the periods indicated (totals may not foot due to rounding):

 

     Predecessor           Successor        
     Year Ended April 30,     Period
from May 1
to May 22,
2015
          Period
from May 23,
2015 to
April 30,
2016
    (Combined)
Year Ended
April 30,
2016
 
     2014     2015           
                                   (Unaudited)  

Net revenue:

               

Product

     53     43     24          54     52

Service and subscription

     47     57     76          46     48

Total net revenue

     100     100     100          100     100

Cost of net revenue:

               

Product

     18     17     16          23     23

Service and subscription

     9     9     10          12     12

Total cost of net revenue

     27     25     26          35     34

Gross profit

     73     75     74          65     66

Operating expenses:

               

Sales and marketing

     32     30     41          40     40

Research and development

     18     18     24          22     22

General and administrative

     11     11     73          22     25

Amortization of intangible assets

     6     5     6          21     21

Change in fair value of acquisition-related earn-out liability

     2     0     0          0     0

Restructuring and other charges

     0     0     0          1     0

Total operating expenses

     70     64     144          106     108

Operating income (loss)

     3     11     (70 )%           (41 )%      (42 )% 

Interest income

     0     0     0          0     0

Interest expense

     (10 )%      (11 )%      (14 )%           (17 )%      (17 )% 

Debt extinguishment and refinancing costs

     (2 )%      0     0          (1 )%      (1 )% 

Other expense, net

     0     0     (1 )%           0     0

Loss before income taxes

     (9 )%      0     (85 )%           (59 )%      (60 )% 

Income tax provision (benefit)

     (1 )%      2     (26 )%           (11 )%      (12 )% 

Net income (loss)

     (8 )%      (2 )%      (59 )%           (48 )%      (48 )% 

Comparison of the Fiscal Years Ended April 30, 2015 and April 30, 2016 (combined year ended April 30, 2016 is unaudited, dollars are in thousands, percentages may not foot due to rounding)

Revenue

 

     Year Ended April 30,              
     2015     2016 (Combined)     Change  
     Amount      % of Total
Net
Revenue
    Amount      % of Total
Net
Revenue
    Amount     %  
           (Unaudited)              

Net revenue:

        

Product

   $ 274,373         43   $ 313,819         52   $ 39,446        14

Service and subscription

     356,910         57     284,518         48     (72,392     (20 )% 
  

 

 

      

 

 

      

 

 

   

Total net revenue

   $ 631,283         100   $ 598,337         100   $ (32,946     (5 )% 
  

 

 

      

 

 

      

 

 

   

 

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In connection with the Thoma Bravo Acquisition on February 15, 2012, the Bain Acquisition on May 22, 2015, and certain other acquisitions, we were required to write down our deferred revenue balances due to purchase accounting. See “—Impact of Purchase Accounting Related to Mergers and Acquisitions” above. The impact to net revenue as a result of these purchase accounting adjustments for the year ended April 30, 2015 and 2016 are shown in the table below:

 

     Year Ended April 30,        
     2015     2016 (Combined)     Change  
           (Unaudited)        

Impact to net revenue as a result of deferred revenue write down:

      

Product

   $ (557   $ (5,756   $ (5,199

Service and subscription

     (11,044     (151,281     (140,237
  

 

 

   

 

 

   

 

 

 

Total impact to net revenue as a result of deferred revenue write down

   $ (11,601   $ (157,037   $ (145,436
  

 

 

   

 

 

   

 

 

 

Total net revenue decreased $32.9 million, or 5%, from $631.3 million for the year ended April 30, 2015 to $598.3 million for the year ended April 30, 2016. The decrease is primarily due to the impact of the deferred revenue write down in connection with the purchase accounting adjustments, which resulted in a decrease to net revenue of $145.4 million. This decrease was partially offset by an increase of $112.5 million, driven by increases in our product and service and subscription revenues.

Product revenue increased $39.4 million, or 14%, from $274.4 million for the year ended April 30, 2015 to $313.8 million for the year ended April 30, 2016. This increase was driven by an increase of $44.6 million in product revenue, primarily due to an increase in our ProxySG product sales. This increase was partially offset by the impact of the deferred product revenue write down in connection with the purchase accounting adjustments, which resulted in a decrease of $5.2 million to product revenue.

Service and subscription revenue decreased $72.4 million, or 20%, from $356.9 million for the year ended April 30, 2015 to $284.5 million for the year ended April 30, 2016. The decrease is primarily due to the impact of the deferred revenue write down in connection with the purchase accounting adjustments, which resulted in a decrease of $140.2 million to service and subscription revenue. This decrease was partially offset by an increase of $67.8 million in service and subscription revenue, driven by increases in new support revenue of $23.8 million, support renewals of $26.7 million, and subscription and other service revenue of $17.3 million.

Cost of Net Revenue

 

     Year Ended April 30,              
     2015     2016 (Combined)     Change  
     Amount      Gross
Margin
    Amount      Gross
Margin
    Amount     %  
           (Unaudited)              

Cost of net revenue:

      

Product

   $ 106,904         $ 135,806         $ 28,902        27

Service and subscription

     53,682           69,711           16,029        30
  

 

 

      

 

 

      

 

 

   

 

 

 

Total cost of net revenue

   $ 160,586         $ 205,517         $ 44,931        28
  

 

 

      

 

 

      

 

 

   

 

 

 

Gross profit:

              

Product

   $ 167,469         61   $ 178,013         57   $ 10,544        6

Service and subscription

     303,228         85     214,807         75     (88,421     (29 )% 
  

 

 

      

 

 

      

 

 

   

Total gross profit

   $ 470,697         75   $ 392,820         66   $ (77,877     (17 )% 
  

 

 

      

 

 

      

 

 

   

 

 

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Table of Contents

Total cost of net revenue increased $44.9 million, or 28%, from $160.6 million for the year ended April 30, 2015 to $205.5 million for the year ended April 30, 2016. The increase in cost of revenue was partially driven by the fair value write-up to product inventory as a result of the Bain Acquisition completed on May 22, 2015. The effect of this write-up was an increase of $29.2 million to cost of net revenue in the year ended April 30, 2016 compared to the year ended April 30, 2015. Absent this effect, cost of net revenue increased $15.7 million, which is consistent with the increase in shipments during the same period.

Our overall gross margin decreased from 75% for the year ended April 30, 2015 to 66% for the year ended April 30, 2016 due primarily to the decrease in net revenues as a result of the deferred revenue write down of $145.4 million, and the increase in product costs as a result of the inventory fair value write up of $29.2 million in the year ended April 30, 2016. Excluding the impact of these purchase accounting adjustments, overall gross margin would have increased from 75% for the year ended April 30, 2015 to 77% for the year ended April 30, 2016.

Operating Expenses

 

     Year Ended April 30,              
     2015     2016 (Combined)     Change  
     Amount      % of Total
Net
Revenue
    Amount     % of Total
Net
Revenue
    Amount     %  
                  (Unaudited)              

Operating expenses:

             

Sales and marketing

   $ 190,288         30   $ 241,118        40   $ 50,830        27

Research and development

     110,591         18     131,367        22     20,776        19

General and administrative

     68,131         11     148,169        25     80,038        117

Amortization of intangible assets

     33,111         5     122,757        21     89,646        271

Change in fair value of acquisition-related earn-out liability

                 (970         (970     (100 )% 

Restructuring and other charges

     1,130             2,857            1,727        153
  

 

 

      

 

 

     

 

 

   

Total operating expenses

   $ 403,251         64   $ 645,298        108   $ 242,047        60
  

 

 

      

 

 

     

 

 

   

Sales and Marketing

Sales and marketing expenses increased $50.8 million, or 27%, from $190.3 million for the year ended April 30, 2015 to $241.1 million for year ended April 30, 2016. The increase in sales and marketing expense was primarily attributable to a $18.2 million increase in salaries and related expenses associated with additional sales headcount, an increase in commission expense of $19.4 million, an increase of $5.5 million in stock-based compensation, and an increase of $7.7 million in various other sales expenses, including travel and sales events. We increased the size of our sales organization in the year ended April 30, 2016 compared to the year ended April 30, 2015 in order to drive growth.

Research and Development

Research and development expense increased $20.8 million, or 19%, from $110.6 million for the year ended April 30, 2015 to $131.4 million for the year ended April 30, 2016. The increase in research and development expense was largely attributable to an increase in personnel-related costs of $17.5 million driven by increases in bonus expense and acquisition-related headcount, an increase of $2.7 million in stock-based compensation and an increase of $3.0 million in project and other miscellaneous costs, partially offset by a decrease of $2.4 million in amortization of purchased licenses and other costs.

 

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General and Administrative

General and administrative expense increased $80.0 million, or 117%, from $68.1 million for the year ended April 30, 2015 to $148.2 million for the year ended April 30, 2016. The increase was driven primarily by an increase of $42.0 million in financial advisory, legal and accounting professional services costs primarily related to the Bain, Perspecsys and Elastica acquisitions. In addition, the increase was driven by an increase of $11.1 million in stock-based compensation, an increase of $1.5 million in fees paid to our sponsors under our management services agreement with their management companies, an increase in personnel-related costs of $20.6 million, primarily driven by an increase in bonus expense, and an increase of $4.8 million in miscellaneous costs, primarily driven by an increase in consulting costs.

Amortization of Intangible Assets

Amortization of intangible assets increased $89.6 million, or 271%, from $33.1 million for the year ended April 30, 2015 to $122.8 million for the year ended April 30, 2016, due to the increased amortization related to the intangible assets acquired as part of the Bain, Perspecsys, and Elastica acquisitions.

Change in Fair Value of Acquisition-Related Earn-Out Liability

Change in fair value of acquisition-related earn-out liability decreased $1.0 million, or 100%, from zero for the year ended April 30, 2015 to a benefit of $1.0 million for the year ended April 30, 2016, due to the subsequent adjustment to fair value of the contingent earn-out related to the Perspecsys acquisition, as we determined it was unlikely the net revenue targets would be met within the first year following the acquisition.

Restructuring and Other Charges

During the year ended April 30, 2015, we incurred $1.1 million of restructuring costs related to acquisitions and realignment. During the year ended April 30, 2016, we incurred $2.9 million of restructuring costs primarily related to the Bain and Perspecsys acquisitions and organization realignment, consisting primarily of severance and contract termination costs.

Interest and Other Income (Expense)

 

     Year Ended April 30,     Change  
     2015     2016
(Combined)
    Amount     %  
           (Unaudited)              

Interest income

   $ 38      $ 144      $ 106        279

Interest expense

     (66,434     (103,372     (36,938     56

Debt extinguishment and refinancing costs

            (3,406     (3,406     (100 )% 

Other expense, net

     (1,376     (1,108     268        (19 )% 

Interest Income

Interest income related to our cash and cash equivalents was not material for the year ended April 30, 2015 and 2016.

Interest Expense

Interest expense increased $36.9 million, or 56%, from $66.4 million for the year ended April 30, 2015 to $103.4 million for the year ended April 30, 2016, due to additional net borrowings associated with the Bain and Elastica acquisitions.

 

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Debt Extinguishment and Refinancing Costs

We incurred debt extinguishment and refinancing costs of $3.4 million in the year ended April 30, 2016 related to the increase in our senior secured term loan facility in connection with the Elastica acquisition.

Other Expense, Net

Other expense, net decreased $0.3 million, or 19%, from $1.4 million for the year ended April 30, 2015 to $1.1 million for the year ended April 30, 2016. The decrease in other expense, net, primarily relates to the change in foreign currency exchange gains and losses.

Provision for (Benefit from) Income Taxes

The benefit for income taxes increased $86.2 million from a provision of $15.1 million for the year ended April 30, 2015 to a benefit of $71.1 million for the year ended April 30, 2016. The increase in the income tax benefit is primarily due to a larger pre-tax loss and more tax deductible transaction costs in the year ended April 30, 2016 compared to the year ended April 30, 2015. These benefits were partially offset by an increase in the tax provision related to a larger deemed dividend in the year ended April 30, 2016 compared to the year ended April 30, 2015.

Comparison of the Fiscal Years Ended April 30, 2014 and April 30, 2015 (dollars in thousands, percentages may not foot due to rounding)

Revenue

 

     Year Ended April 30,              
     2014     2015     Change  
     Amount      % of Total
Net
Revenue
    Amount      % of Total
Net
Revenue
    Amount     %  

Net revenue:

        

Product

   $ 319,232         53   $ 274,373         43   $ (44,859     (14 )% 

Service and subscription

     287,240         47     356,910         57     69,670        24
  

 

 

      

 

 

      

 

 

   

Total net revenue

   $ 606,472         100   $ 631,283         100   $ 24,811        4
  

 

 

      

 

 

      

 

 

   

In connection with the Thoma Bravo Acquisition on February 15, 2012, and certain other acquisitions, we were required to write down our deferred revenue balances due to purchase accounting. See “—Impact of Purchase Accounting Related to Mergers and Acquisitions” above. The impact to net revenue as a result of these purchase accounting adjustments for the fiscal 2014 and fiscal 2015 are shown in the table below:

 

     Year Ended April 30,        
     2014     2015     Change  

Impact to net revenue as a result of deferred revenue write down:

      

Product

   $ (296   $ (557   $ (261

Service and subscription

     (25,000     (11,044     13,956   
  

 

 

   

 

 

   

 

 

 

Total impact to net revenue as a result of deferred revenue write down

   $ (25,296   $ (11,601   $ 13,695   
  

 

 

   

 

 

   

 

 

 

Total net revenue increased $24.8 million, or 4%, from $606.5 million for the year ended April 30, 2014 to $631.3 million for the year ended April 30, 2015. The increase was partially driven by the impact of the deferred revenue write down in connection with the purchase accounting adjustments, which resulted in an increase to net

 

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Table of Contents

revenue of $13.7 million. In addition, the increase was due to an increase in service and subscription revenue due to our increased installed base and improved renewal rates, offset by a decrease of approximately $50 million due to the substantial completion of our SWG 8100 refresh program at the end of fiscal 2014.

Product revenue decreased $44.9 million, or 14%, from $319.2 million for the year ended April 30, 2014 to $274.4 million for the year ended April 30, 2015. The decrease was primarily due to approximately $50 million more refresh revenue for fiscal 2014 than for fiscal 2015 related to our SWG 8100 refresh program, which was substantially completed at the end of fiscal 2014. This decrease was partially offset by an increase in revenue from our Advanced Threat Protection products.

Service and subscription revenue increased $69.7 million, or 24%, from $287.2 million for the year ended April 30, 2014 to $356.9 million for the year ended April 30, 2015. The increase was partially driven by the impact of the deferred revenue write-down in connection with the purchase accounting adjustments, which resulted in an increase to net service and subscription revenue of $14.0 million. In addition to the impact of the deferred revenue write-down, new support revenue increased by $7.5 million, renewal support revenue increased by $40.0 million, and subscription and other service revenue increased by $8.2 million. The $40.0 million increase in renewal service revenue was driven by higher renewal rates and favorable pricing charged on our maintenance contracts.

Cost of Net Revenue

 

     Year Ended April 30,              
     2014     2015     Change  
     Amount      Gross
Margin
    Amount      Gross
Margin
    Amount     %  

Cost of net revenue:

              

Product

   $ 106,188         $ 106,904         $ 716        1

Service and Subscription

     56,447           53,682           (2,765     (5 )% 
  

 

 

      

 

 

      

 

 

   

Total cost of net revenue

   $ 162,635         $ 160,586         $ (2,049     (1 )% 
  

 

 

      

 

 

      

 

 

   

Gross profit:

        

Product

   $ 213,044         67   $ 167,469         61   $ (45,575     (21 )% 

Service and Subscription

     230,793         80     303,228         85     72,435        31
  

 

 

      

 

 

      

 

 

   

Total gross profit

   $ 443,837         73   $ 470,697         75   $ 26,860        6
  

 

 

      

 

 

      

 

 

   

Total cost of net revenue decreased $2.0 million, or 1%, from $162.6 million for the year ended April 30, 2014 to $160.6 million for the year ended April 30, 2015. The overall decrease in cost of net revenue was primarily attributable to the decrease in cost of service and subscription revenue due to improved efficiency of our worldwide service delivery model through system and operations improvements. Product cost of revenue increased slightly, despite a decrease in product revenue, due primarily to changes in product mix and an increase in amortization of acquired intangibles and other costs of revenue. The change in product of mix was driven by the substantial completion of our SWG 8100 refresh in fiscal 2014, which resulted in increased sales of our high-end Secure Web Gateway appliances, which had higher gross margins in fiscal 2014 compared to fiscal 2015.

Overall gross margin increased from 73% for the year ended April 30, 2014 to 75% for the year ended April 30, 2015, due primarily to the mix between product and service and subscription revenue. Service and subscription revenue increased as a percentage of total revenue in fiscal 2015, which generally carries higher gross margins than product revenue. This was partially due to the increase in net service and subscription revenues as a result of the deferred revenue write down purchase accounting adjustment, which had a larger impact on fiscal 2014 net revenue.

 

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Operating Expenses

 

     Year Ended April 30,              
     2014     2015     Change  
     Amount      % of Total
Net
Revenue
    Amount      % of Total
Net
Revenue
    Amount     %  

Operating expenses:

          

Sales and marketing

   $ 193,661         32   $ 190,288         30   $ (3,373     (2 )% 

Research and development

     110,886         18     110,591         18     (295    

General and administrative

     69,266         11     68,131         11     (1,135     (2 )% 

Amortization of intangible assets

     37,814         6     33,111         5     (4,703     (12 )% 

Change in fair value of acquisition-related earn-out liability

     9,698         2                 (9,698     (100 )% 

Restructuring and other charges

     3,020             1,130             (1,890     (63 )% 
  

 

 

      

 

 

      

 

 

   

Total operating expenses

   $ 424,345         70   $ 403,251         64   $ (21,094     (5 )% 
  

 

 

      

 

 

      

 

 

   

Sales and Marketing

Sales and marketing expenses decreased $3.4 million, or 2%, from $193.7 million for the year ended April 30, 2014 to $190.3 million for the year ended April 30, 2015. The decrease in sales and marketing expense was primarily due to a decrease in fiscal 2015 of $2.8 million in commissions and other variable compensation and $3.8 million in marketing programs. The decrease was partially offset by an increase in salaries and related benefits, and other miscellaneous costs of $3.2 million, which was driven by the increase in the sales force in fiscal 2015 compared to fiscal 2014.

Research and Development

Research and development expense decreased $0.3 million, or less than 1%, from $110.9 million for the year ended April 30, 2014 to $110.6 million for the year ended April 30, 2015. The decrease in research and development expense was primarily due to a decrease in employee-related costs in fiscal 2015, including bonus expense, of $2.9 million in fiscal 2015. The fiscal 2014 bonus expense was higher compared to fiscal 2015 due to over-performance versus plan in that year. The decrease in employee-related costs was partially offset by miscellaneous costs of $2.6 million in fiscal 2015, largely attributable to equipment expenses and depreciation.

General and Administrative

General and administrative expense decreased $1.1 million, or 2%, from $69.3 million for the year ended April 30, 2014 to $68.1 million for the year ended April 30, 2015. The decrease in general and administrative expense was primarily due to a decrease in employee-related costs of $0.6 million in fiscal 2015, largely attributable to a decrease in bonus expense, and a decrease in other miscellaneous expenses of $0.5 million. The fiscal 2014 bonus expense was higher compared to fiscal 2015 due to over-performance versus plan in that year.

Amortization of Intangible Assets

Amortization of intangible assets decreased $4.7 million, or 12%, from $37.8 million for the year ended April 30, 2014 to $33.1 million for the year ended April 30, 2015, due to certain customer relationship intangibles becoming fully amortized during the year ended April 30, 2014.

Change in Fair Value of Acquisition-Related Earn-Out Liability

In April 2014, the estimated fair value of the earn-out related to our acquisition of the SSL Visibility business from Netronome was increased by $9.7 million to $18.1 million, with the adjustment recognized through the consolidated statement of operations.

 

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Restructuring and Other Charges

During the year ended April 30, 2014, we incurred $3.0 million of restructuring costs related to our Netronome, Solera and Norman Shark acquisitions, consisting primarily of personnel-related severance and other headcount costs. During the year ended April 30, 2015, we incurred $1.1 million of restructuring costs related to our acquisitions and organization alignment, consisting primarily of personnel-related severance costs.

Interest and Other Income (Expense)

 

     Year Ended April 30,              
     2014     2015     Change     % Change  

Interest income

   $ 44      $ 38      $ (6     (14 )% 

Interest expense

     (63,015     (66,434     (3,419     5

Debt extinguishment and refinancing costs

     (11,100            11,100        (100 )% 

Other expense, net

     (1,973     (1,376     597        (30 )% 

Interest Income

Interest income related to our cash and cash equivalents was not material for the years ended April 30, 2014 and 2015.

Interest Expense

Interest expense increased $3.4 million, or 5%, from $63.0 million for the year ended April 30, 2014 to $66.4 million for the year ended April 30, 2015, due to a full year of interest expense for the year ended April 30, 2015 related to additional borrowings during fiscal 2014.

Debt Extinguishment and Refinancing Costs

In June 2013 and February 2014, we entered into additional credit agreements and incurred transaction fees and expenses of $9.3 million and $10.0 million, respectively. Of these amounts, $11.1 million was recorded as expense in the statement of operations for the year ended April 30, 2014, and the remaining amount was capitalized. We did not incur any debt extinguishment or refinancing costs during the year ended April 30, 2015.

Other Expense, Net

Other expense, net decreased $0.6 million, or 30%, from $2.0 million for the year ended April 30, 2014 to $1.4 million for the year ended April 30, 2015. The fluctuation in other expense, net, primarily relates to the change in foreign currency exchange gains and losses.

Provision for (Benefit from) Income Taxes

The benefit for income taxes was $5.2 million for the year ended April 30, 2014, compared to a provision of $15.1 million for the year ended April 30, 2015. The change in the provision (benefit) for income taxes primarily relates to a provision of $13.9 million related to expected repatriation and the effect of deferred taxes from intercompany transactions for the year ended April 30, 2015. Income tax in the year ended April 30, 2014 benefited from a loss before income taxes driven in part by debt extinguishment and refinancing costs, and restructuring costs that are tax deductible in the United States. These benefits were partially offset by a tax provision in the United States related to the gain on the sale of acquired intangibles to its foreign affiliate recognized in 2014. There were no such transactions in fiscal 2015.

 

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Quarterly Results of Operations

The following tables set forth selected unaudited quarterly statements of operations data for each of the eight fiscal quarters ended April 30, 2016, as well as the percentage that each line item represents of total revenue. The information for each of these quarters has been prepared on the same basis as the audited annual financial statements included elsewhere in this prospectus and, in the opinion of management, includes all adjustments, which include only normal recurring adjustments, necessary for the fair statement of the results of operations for these periods. This data should be read in conjunction with our audited consolidated financial statements and related notes included elsewhere in this prospectus. These quarterly operating results are not necessarily indicative of our operating results for a full year or any future period.

 

    Three Months Ended                 Three Months Ended  
    (Predecessor)    

(Predecessor)

   

(Successor)

    (Combined)     (Successor)  
    July 31,
2014
    October 31,
2014
    January 31,
2015
    April 30,
2015
    May 1 - May  22,
2015
    May 23 -July  31,
2015
    July 31,
2015
    October 31,
2015
    January 31,
2016
    April 30,
2016
 
(In thousands, except
per share data)
  (Unaudited)           (Unaudited)     (Unaudited)     (Unaudited)  

Net revenue:

                   

Product

  $ 61,628      $ 64,812      $ 72,186      $ 75,747      $ 7,032      $ 59,494      $ 66,526      $ 75,025      $ 88,678      $ 83,590   

Service and subscription

    81,939        88,299        92,403        94,269        22,446        35,357        57,803        60,356        76,151        90,208   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenue

    143,567        153,111        164,589        170,016        29,478        94,851        124,329        135,381        164,829        173,798   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net revenue:

                   

Product

    26,109        25,766        26,811        28,218        4,687        30,031        34,718        39,580        37,255        24,253   

Service and subscription

    13,698        12,764        13,131        14,089        3,069        11,893        14,962        15,512        18,994        20,243   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of net revenue

    39,807        38,530        39,942        42,307        7,756        41,924        49,680        55,092        56,249        44,496   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    103,760        114,581        124,647        127,709        21,722        52,927        74,649        80,289        108,580        129,302   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

                   

Sales and marketing

    44,904        45,883        47,931        51,570        12,024        38,925        50,949        55,187        63,966        71,016   

Research and development

    28,627        26,180        26,907        28,877        7,050        20,890        27,940        28,675        34,888        39,864   

General and administrative

    16,933        16,296        17,492        17,410        21,649        26,153        47,802        23,950        41,346        35,071   

Amortization of intangible assets

    8,278        8,278        8,278        8,277        1,738        30,165        31,903        30,256        30,295        30,303   

Change in fair value of acquisition-related earn-out liability

                                                                   (970

Restructuring and other charges

    16        244        13        857               813        813        593        1,258        193   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    98,758        96,881        100,621        106,991        42,461        116,946        159,407        138,661        171,753        175,477   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    5,002        17,700        24,026        20,718        (20,739     (64,019     (84,758     (58,372     (63,173     (46,175

Interest income

    3        23        7        5        1        2        3        13        56        72   

Interest expense

    (17,051     (16,433     (16,542     (16,408     (3,986     (19,254     (23,240     (25,025     (27,546     (27,561

Debt extinguishment and refinancing costs

                                                            (3,406       

Other income (expense), net

    (617     (333     (562     136        (349     (436     (785     (571     6