e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
|
|
|
þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended January 31, 2010
OR
|
|
|
o |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period from to
Commission File Number 001-33923
ArcSight, Inc.
(Exact name of the Registrant as Specified in its Charter)
|
|
|
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
|
|
52-2241535
(I.R.S. Employer
Identification No.) |
5 Results Way
Cupertino, California 95014
(Address of Principal Executive Offices, including Zip Code)
(408) 864-2600
(Registrants Telephone Number, including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). YES
o NO o
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 o
|
|
Accelerated filer þ
|
|
Non-accelerated filer o
|
|
Smaller reporting company o |
|
|
|
|
(Do not check if a smaller reporting company) |
|
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
Shares of ArcSight, Inc. common stock, $0.00001 par value per share, outstanding as of March
1, 2010: 33,970,980 shares.
ARCSIGHT, INC.
FORM 10-Q
Quarterly Period Ended January 31, 2010
TABLE OF CONTENTS
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARCSIGHT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts and par value)
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
As of |
|
|
|
January 31, |
|
|
April 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(Unaudited) |
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
111,821 |
|
|
$ |
90,467 |
|
Marketable securities |
|
|
19,994 |
|
|
|
|
|
Accounts receivable, net of allowance for doubtful accounts of $257 and $262, respectively |
|
|
24,046 |
|
|
|
34,184 |
|
Capitalized software licenses, current |
|
|
2,303 |
|
|
|
144 |
|
Other prepaid expenses and current assets |
|
|
5,994 |
|
|
|
3,717 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
164,158 |
|
|
|
128,512 |
|
Property and equipment, net |
|
|
7,076 |
|
|
|
4,416 |
|
Goodwill |
|
|
5,746 |
|
|
|
5,746 |
|
Acquired intangible assets, net |
|
|
652 |
|
|
|
1,319 |
|
Capitalized software licenses, non-current |
|
|
761 |
|
|
|
|
|
Other long-term assets |
|
|
341 |
|
|
|
1,168 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
178,734 |
|
|
$ |
141,161 |
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
2,286 |
|
|
$ |
1,432 |
|
Accrued compensation and benefits |
|
|
9,476 |
|
|
|
11,671 |
|
Obligations for software licenses, current |
|
|
3,048 |
|
|
|
363 |
|
Other accrued liabilities |
|
|
5,137 |
|
|
|
4,337 |
|
Deferred revenues, current |
|
|
43,755 |
|
|
|
36,160 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
63,702 |
|
|
|
53,963 |
|
Deferred revenues, non-current |
|
|
10,325 |
|
|
|
8,888 |
|
Obligations for software licenses, non-current |
|
|
589 |
|
|
|
|
|
Other long-term liabilities |
|
|
1,993 |
|
|
|
1,637 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
76,609 |
|
|
|
64,488 |
|
Commitments and contingencies (see Note 5) Stockholders equity: |
|
|
|
|
|
|
|
|
Preferred stock, $0.00001 par value per share, 10,000,000 shares authorized; no shares
issued and outstanding |
|
|
|
|
|
|
|
|
Common stock, $0.00001 par value per share; 150,000,000 shares authorized; 33,954,661 and
32,248,116 issued and outstanding as of January 31, 2010 and April 30, 2009, respectively |
|
|
|
|
|
|
|
|
Additional paid-in capital |
|
|
133,412 |
|
|
|
113,781 |
|
Accumulated other comprehensive loss |
|
|
(234 |
) |
|
|
(314 |
) |
Accumulated deficit |
|
|
(31,053 |
) |
|
|
(36,794 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
102,125 |
|
|
|
76,673 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
178,734 |
|
|
$ |
141,161 |
|
|
|
|
|
|
|
|
See accompanying Notes to Condensed Consolidated Financial Statements.
3
ARCSIGHT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
January 31, |
|
|
January 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
$ |
26,555 |
|
|
$ |
21,775 |
|
|
$ |
72,838 |
|
|
$ |
56,746 |
|
Maintenance |
|
|
14,702 |
|
|
|
10,004 |
|
|
|
39,238 |
|
|
|
28,102 |
|
Services |
|
|
4,853 |
|
|
|
4,613 |
|
|
|
14,092 |
|
|
|
12,042 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
46,110 |
|
|
|
36,392 |
|
|
|
126,168 |
|
|
|
96,890 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
|
3,824 |
|
|
|
2,637 |
|
|
|
8,918 |
|
|
|
6,136 |
|
Maintenance(1) |
|
|
2,497 |
|
|
|
1,637 |
|
|
|
6,856 |
|
|
|
4,931 |
|
Services(1) |
|
|
3,283 |
|
|
|
2,587 |
|
|
|
9,117 |
|
|
|
7,017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues |
|
|
9,604 |
|
|
|
6,861 |
|
|
|
24,891 |
|
|
|
18,084 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
36,506 |
|
|
|
29,531 |
|
|
|
101,277 |
|
|
|
78,806 |
|
Operating expenses(1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
6,429 |
|
|
|
5,201 |
|
|
|
18,603 |
|
|
|
15,939 |
|
Sales and marketing |
|
|
18,563 |
|
|
|
12,298 |
|
|
|
51,930 |
|
|
|
41,521 |
|
General and administrative |
|
|
6,767 |
|
|
|
4,943 |
|
|
|
19,121 |
|
|
|
14,155 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
31,759 |
|
|
|
22,442 |
|
|
|
89,654 |
|
|
|
71,615 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
4,747 |
|
|
|
7,089 |
|
|
|
11,623 |
|
|
|
7,191 |
|
Interest income |
|
|
34 |
|
|
|
154 |
|
|
|
97 |
|
|
|
909 |
|
Other income (expense), net |
|
|
(115 |
) |
|
|
3 |
|
|
|
(446 |
) |
|
|
(107 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes |
|
|
4,666 |
|
|
|
7,246 |
|
|
|
11,274 |
|
|
|
7,993 |
|
Provision for income taxes |
|
|
2,438 |
|
|
|
2,183 |
|
|
|
5,533 |
|
|
|
2,415 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,228 |
|
|
$ |
5,063 |
|
|
$ |
5,741 |
|
|
$ |
5,578 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share, basic |
|
$ |
0.07 |
|
|
$ |
0.16 |
|
|
$ |
0.17 |
|
|
$ |
0.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share, diluted |
|
$ |
0.06 |
|
|
$ |
0.15 |
|
|
$ |
0.16 |
|
|
$ |
0.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic net income per common share |
|
|
33,840 |
|
|
|
31,499 |
|
|
|
33,260 |
|
|
|
31,115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing diluted net income per common share |
|
|
36,169 |
|
|
|
33,494 |
|
|
|
35,649 |
|
|
|
33,324 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Stock-based compensation expense included in above (see Note 8): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of maintenance revenues |
|
$ |
123 |
|
|
$ |
56 |
|
|
$ |
305 |
|
|
$ |
156 |
|
Cost of services revenues |
|
|
64 |
|
|
|
34 |
|
|
|
140 |
|
|
|
106 |
|
Research and development |
|
|
595 |
|
|
|
322 |
|
|
|
1,542 |
|
|
|
995 |
|
Sales and marketing |
|
|
987 |
|
|
|
466 |
|
|
|
2,450 |
|
|
|
1,969 |
|
General and administrative |
|
|
1,071 |
|
|
|
786 |
|
|
|
2,818 |
|
|
|
1,366 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
4
ARCSIGHT, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
January 31, |
|
|
|
2010 |
|
|
2009 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
5,741 |
|
|
$ |
5,578 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
1,827 |
|
|
|
1,871 |
|
Amortization of acquired intangibles |
|
|
667 |
|
|
|
631 |
|
Loss on disposal of property and equipment |
|
|
21 |
|
|
|
15 |
|
Stock-based compensation |
|
|
7,255 |
|
|
|
4,592 |
|
Excess tax benefit from stock-based compensation |
|
|
(4,098 |
) |
|
|
|
|
Provision for allowance for doubtful accounts |
|
|
134 |
|
|
|
157 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
10,004 |
|
|
|
4,278 |
|
Prepaid expenses and other assets |
|
|
(606 |
) |
|
|
2,667 |
|
Accounts payable |
|
|
854 |
|
|
|
(1,885 |
) |
Accrued compensation and benefits |
|
|
(2,195 |
) |
|
|
(4,107 |
) |
Other accrued liabilities |
|
|
5,183 |
|
|
|
2,297 |
|
Deferred revenues |
|
|
9,032 |
|
|
|
(3,772 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
33,819 |
|
|
|
12,322 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Restricted cash |
|
|
842 |
|
|
|
|
|
Purchase of marketable securities |
|
|
(19,994 |
) |
|
|
|
|
Purchase of property and equipment |
|
|
(3,960 |
) |
|
|
(1,809 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(23,112 |
) |
|
|
(1,809 |
) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Excess tax benefit from stock-based compensation |
|
|
4,098 |
|
|
|
|
|
Proceeds from exercise of stock options, net of repurchases |
|
|
8,278 |
|
|
|
2,395 |
|
Payment of capital lease and software license obligations |
|
|
(1,803 |
) |
|
|
(1,667 |
) |
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
10,573 |
|
|
|
728 |
|
Effect of exchange rate changes on cash |
|
|
74 |
|
|
|
(296 |
) |
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
21,354 |
|
|
|
10,945 |
|
Cash and cash equivalents at beginning of period |
|
|
90,467 |
|
|
|
71,946 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
111,821 |
|
|
$ |
82,891 |
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
Capitalized software obligations |
|
$ |
4,606 |
|
|
$ |
|
|
See accompanying Notes to Condensed Consolidated Financial Statements.
5
ARCSIGHT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Description of Business
ArcSight, Inc. (ArcSight or the Company) is a leading provider of security and compliance
management solutions that protect enterprises and government agencies. The Companys products help
customers comply with corporate and regulatory policies, safeguard their assets and processes and
control risk. The Companys platform collects and correlates user activity and event data across
the enterprise so that businesses can rapidly identify, prioritize and respond to compliance
violations, policy breaches, cybersecurity attacks and insider threats. The Companys products
collect and correlate massive numbers of events from thousands of security point solutions, network
and computing devices and applications, enabling intelligent identification, prioritization and
response to compliance and corporate policy violations and external and insider threats. The
Company also provides complementary software that delivers pre-packaged analytics and reports
tailored to specific security and compliance initiatives, as well as appliances that streamline
event log collection, storage, analysis and reporting. The Company is headquartered in Cupertino,
California, and was incorporated on May 3, 2000 under the laws of the state of Delaware.
2. Significant Accounting Policies
Basis of Presentation and Consolidation
The condensed consolidated balance sheet as of April 30, 2009 is derived from audited
financial statements as of that date but does not include all of the information and footnotes
required by accounting principles generally accepted in the United States for complete financial
statements. The accompanying unaudited condensed consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All significant inter-company
transactions have been eliminated on consolidation. These condensed consolidated financial
statements should be read in conjunction with the consolidated financial statements and related
notes included in the Companys Annual Report on Form 10-K, filed with the Securities and Exchange
Commission (SEC) on July 9, 2009.
Unaudited Interim Financial Information
The accompanying interim consolidated balance sheet as of January 31, 2010, and the
consolidated statements of income for the three and nine months ended January 31, 2010 and 2009,
and the consolidated statement of cash flows for the nine months ended January 31, 2010 and 2009,
are unaudited. The unaudited interim condensed consolidated financial statements have been prepared
on the same basis as the annual consolidated financial statements and, in the opinion of
management, reflect all adjustments, which include normal recurring adjustments, necessary to
present fairly the Companys financial position as of January 31, 2010, its results of operations
for the three and nine months ended January 31, 2010 and 2009, and its statement of cash flows for
the nine months ended January 31, 2010 and 2009. The results of operations for the three and nine
months ended January 31, 2010 are not necessarily indicative of the results to be expected for
fiscal 2010 or for any other interim period or for any other future year.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting
principles (GAAP)requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements as well as the reported amounts of revenues and expenses during the
reporting period. The Company bases its estimates and judgments on its historical experience,
knowledge of current conditions, and its beliefs on what could occur in the future, given available
information. Estimates, assumptions and judgments, are used for, but are not limited to, revenue
recognition, determination of fair value of stock and stock-based awards, valuation of goodwill and
intangible assets acquired in business combinations, impairment of goodwill and other intangible
assets, amortization of intangible assets, contingencies and litigation, accounting for income
taxes, including the valuation reserve on deferred tax assets and uncertain tax positions,
allowances for doubtful accounts, valuations of cash equivalents and marketable securities, and
accrued liabilities such as bonus accruals. Actual results may differ from those estimates, and
such differences may be material to the financial statements.
6
Cash and Cash Equivalents
The Company maintains its cash and cash equivalents in accounts consisting of high-credit
quality financial instruments. The Company considers all highly liquid investments purchased with a
maturity of three months or less at the date of purchase to be cash equivalents. The Companys cash
equivalents consist of money market accounts on deposit with three banks and are stated at cost,
which approximates fair value.
Marketable Securities
Marketable securities were $20.0 million as of January 31, 2010. There were no marketable
securities as of April 30, 2009. The Company determines the appropriate classification of the
securities at the time of purchase and re-evaluates the designation as of each balance sheet date.
As of January 31, 2010, all marketable securities are considered available-for-sale. Marketable
securities consist principally of taxable, short-term marketable certificates of deposit, with
maturities between three and nine months. Marketable securities are stated at estimated fair value
with unrealized gains and losses reported in accumulated other comprehensive loss. A decline in the
market value of any available-for sale security below cost that is deemed to be
other-than-temporary results in an impairment to reduce the carrying amount to fair value. The
impairment is charged to earnings and a new cost basis for the security is established. To
determine whether an impairment is other-than-temporary, the Company considers whether it has the
ability and intent to hold the investment until a market price recovery and considers whether
evidence indicating the costs of the investment is recoverable outweighs evidence to the contrary.
Evidence considered in this assessment includes the reason for the impairment, the severity and
duration of the impairment, changes in value subsequent to period-end, and the general market
conditions. There were no other-than-temporary impairments for the three or nine months ended
January 31, 2010. The specific identification method is used to determine the costs of securities
disposed of, with realized gains and losses reflected in other expense, net. Investments are
anticipated to be used for current operations.
Fair Value of Financial Instruments
The carrying amounts of cash equivalents, marketable securities, trade accounts receivable,
accounts payable, and other accrued liabilities approximate their respective fair values due to the
relatively short-term maturities. The carrying amounts of marketable securities and derivative
financial instruments approximate their respective fair values due to adjusting these investments
to their respective market values each reporting period.
Foreign Currency Translation
The functional currency of the Companys foreign subsidiaries is the local currency.
Adjustments resulting from translating foreign functional currency financial statements into U.S.
dollars are recorded as a separate component of accumulated other comprehensive loss. Income and
expense accounts are translated into U.S. dollars at average rates of exchange prevailing during
the periods presented. All assets and liabilities denominated in a foreign currency are translated
into U.S. dollars at the exchange rates in effect on the balance sheet dates.
Net foreign currency transaction gains (losses) of approximately ($0.1) million and $26,000
for the three months ended January 31, 2010 and 2009, and ($0.3) million and ($3,000) for the nine
months ended January 31, 2010 and 2009, respectively, were primarily the result of the settlement
of inter-company transactions and are included in other income (expense), net.
Derivative Financial Instruments
The majority of the Companys sales are denominated in United States dollars; however, there
are some sales transactions denominated in foreign currencies. In addition, the Companys foreign
subsidiaries pay their expenses in local currency. Therefore, movements in exchange rates could
cause net sales and expenses to fluctuate, affecting the Companys profitability and cash flows.
The Companys general practice is to use foreign currency forward contracts to reduce its exposure
to foreign currency exchange rate fluctuations. Unrealized gains and losses associated with these
foreign currency contracts are reflected in the Companys balance sheet and recorded in prepaid
expenses and other current assets or accrued expenses and other current liabilities. Changes in
fair value and premiums paid for foreign currency contracts are recorded directly in other income
and expense in the consolidated statements of income. Cash flows from such derivatives are
classified as operating activities. The objective of these contracts is to reduce the impact of
foreign currency exchange rate movements on the Companys net income. During the first two quarters
of fiscal 2009 and 2008, the
7
Company considered the net results of the use of foreign currency
forward contracts to be an effective mechanism to minimize the
fluctuations and movements in exchange rates that affect the Companys profitability and cash
flows. All of the Companys foreign currency forward contracts mature within 12 months from the
balance sheet date. The Company does not use derivatives for speculative or trading purposes, nor
does the Company designate its derivative instruments as hedging instruments, as defined by the
Financial Accounting Standard Board (FASB) under Accounting Standards Codification (ASC) Topic
815, Accounting for Derivative Instruments in Hedging Activities (ASC 815).
At January 31, 2010 and April 30, 2009, the notional amount of outstanding foreign currency
derivatives classified as other current liabilities not designated as hedging instruments under the
guidance was $3.1 million, and $1.4 million, respectively. As of January 31, 2010, approximately
71% of the notional amount of the Companys outstanding foreign currency derivatives is
attributable to the Euro currency. At January 31, 2010 and April 30, 2009, the fair value
adjustment to mark these instruments to market was ($0.1) million and $28,000, respectively, and
are included in accrued expenses and other current liabilities in the accompanying condensed
consolidated balance sheets. For the three months ended January 31, 2010 and 2009, the Company
recorded ($0.1) million and ($17,000), respectively, in other income (expense), net, associated
with foreign currency derivative contracts. For the nine months ended January 31, 2010 and 2009,
the Company recorded ($35,000) and $26,000, respectively, in other income (expense), net,
associated with foreign currency derivative contracts.
Concentration of Credit Risk and Business Risk
Financial instruments that potentially subject the Company to concentrations of credit risk
consist principally of cash equivalents, marketable securities, foreign currency forward contracts
and accounts receivable. The Company is exposed to credit risk in the event of default by the
financial institutions holding its cash, cash equivalents, marketable securities, and foreign
currency forward contracts to the extent recorded on its balance sheet. Risks associated with cash
equivalents, marketable securities, and foreign currency forward contracts are mitigated by banking
with high-credit quality institutions. Cash deposits and investments may be in excess of insured
limits. Management believes that the financial institutions that hold the Companys investments are
financially sound and, accordingly, minimal credit risk exists with respect to these investments.
To date, the Company has not experienced any losses on its cash, cash equivalents and marketable
securities and minimal losses on its foreign currency forward contracts. The Company performs
periodic evaluations of the relative credit standing of the financial institutions.
The Company sells its products and maintenance and services directly to customers or through
resellers in Asia Pacific, Europe, the Middle East and Africa (collectively, EMEA) and the
Americas, with the majority of its sales in the United States. The Company monitors its exposure
within accounts receivable and records an allowance against doubtful accounts as necessary. The
Company performs ongoing credit evaluations of its customers and extends credit in the normal
course of business and generally does not require collateral. Historically, the Company has not
experienced significant credit losses on its accounts receivable. Management believes that any risk
of loss for trade receivables is mitigated by the Companys ongoing credit evaluations of its
customers.
No customer or reseller accounted for more than 10% of total revenues for either the three or
nine months ended January 31, 2010 or January 31, 2009. The Company had one reseller with an
accounts receivable balance totaling 11% of the Companys net accounts receivable as of January 31,
2010. The Company had two customers with accounts receivable balances greater than 10% of the
Companys net accounts receivable, with balances of 17% and 11% of net accounts receivable as of
April 30, 2009.
The majority of the Companys revenues are derived from sales of the Companys security and
compliance management products, primarily ArcSight ESM and Logger, and the Company expects this to
continue for the foreseeable future. The Company primarily uses one source for manufacturing and
fulfillment for its Logger and other appliance products. Demand for the Companys products is
affected by a number of factors, some of which are beyond the Companys control, including the
timing of development and release of new products by the Company and its competitors, technological
change, lower-than-expected growth or a contraction in the worldwide market for enterprise security
and compliance management solutions and other risks.
Revenue Recognition
The Company derives its revenues from three sources: (1) sales of software licenses and
related appliances (products); (2) fees for maintenance to provide unspecified upgrades and
customer technical support (maintenance); and (3) fees for services, which includes services
performed in connection with time-and-materials based consulting agreements (services).
8
For all sales, revenues are recognized in accordance with GAAP, subject to the guidance for
Software Revenue Recognition under ASC Topic 985-605 (ASC 985-605), as amended.
The Company enters into software license agreements through direct sales to customers and
through resellers. The license agreements include post-contract customer support and may include
professional services deliverables. Post-contract customer support includes rights to receive
unspecified software product updates and upgrades, maintenance releases and patches released during
the term of the support period, and Internet and telephone access to technical support personnel
and content. Professional services include installation and implementation of the Companys
software, staffing and management services for customer security operation centers (SOCs) and
customer training. Professional services are not essential to the functionality of the associated
licensed software.
For all sales, revenues attributable to an element in a customer arrangement are recognized
when persuasive evidence of an arrangement exists and delivery has occurred, provided the fee is
fixed or determinable and collectibility is reasonably assured.
The Company typically uses a binding purchase order in conjunction with either a signed
contract or a reference on the purchase order to the terms and conditions of the Companys
shrinkwrap or end-user license agreement as evidence of an arrangement. In circumstances where the
customer does not issue purchase orders separate from a signed contract, the Company uses the
signed contract as evidence of the arrangement. Sales through its significant resellers are
evidenced by a master agreement governing the relationship.
Resellers and systems integrators purchase products for specific end-users and do not hold
inventory. Resellers and systems integrators perform functions that include delivery to the end
customer, installation or integration and post-sales service and support. The agreements with these
resellers and systems integrators have terms that are generally consistent with the standard terms
and conditions for the sale of the Companys products and services to end-users and do not provide
for product rotation or pricing allowances. For sales to direct end-users, resellers and systems
integrators, the Company recognizes product revenue upon transfer of title and risk of loss, which
is generally upon shipment, provided all other criteria for revenue recognition have been met.
Where sales are made through resellers, revenue is generally recorded only upon shipment to the
end-users, when all other criteria for revenue recognition have been met. In a limited number of
instances, where delivery is to be made to a reseller upon the request of either the end-user or
the reseller, and all other criteria for revenue recognition have been met, it is the Companys
practice to recognize revenue on shipment to a reseller but only where an end-user has been
identified prior to shipment. For end-users, resellers and system integrators, the Company
generally has no significant obligations for future performance such as rights of return or pricing
credits.
At the time of each transaction, the Company assesses whether the fees associated with the
transaction are fixed or determinable. If a significant portion of a fee is due after the Companys
normal payment terms, currently up to three months (payment terms beyond three months are
considered to be extended terms), or if as a result of customer acceptance provisions, the price is
subject to refund or forfeiture, concession or other adjustment, then the Company considers the fee
to not be fixed or determinable. In the limited instances in which these cases occur, revenues are
deferred and recognized when payments become due and payable, or the right to refund or forfeiture,
concession or adjustment, if any, lapses upon customer acceptance.
The Company assesses whether collection is reasonably assured based on a number of factors
including the creditworthiness of the customer as determined by credit checks and analysis, past
transaction history, geographic location and financial viability. The Company generally does not
require collateral from customers. If the determination is made at the time of the transaction that
collection of the fee is not reasonably assured, then all of the related revenues are deferred
until the time that collection becomes reasonably assured, which in some cases requires the
collection of cash prior to recognition of the related revenues.
The Company uses shipping documents, contractual terms and conditions and customer acceptance,
when applicable, to verify delivery to the customer. For software license fees in arrangements that
do not include customization, or services that are not considered essential to the functionality of
the licenses, delivery is deemed to occur when the product is delivered to the customer. Services
and consulting arrangements that are not essential to the functionality of the licensed product are
recognized as revenues as these services are provided. Delivery of maintenance agreements is
considered to occur on a straight-line basis ratably over the life of the contract, typically 12
months.
Vendor-specific objective evidence of fair value (VSOE) for maintenance and support services
is based on separate sales and/or renewals to other customers or upon renewal rates quoted in
contracts when the quoted renewal rates are deemed substantive in both rate and term. VSOE for
professional services is established based on prices charged to customers when such services are
sold
9
separately. For deliverables and multiple element arrangements subject to the guidance, when
VSOE exists for all of the undelivered elements of the arrangement, but does not exist for the
delivered elements in the arrangement, the Company recognizes revenues under the residual method.
Under the residual method, at the outset of the arrangement with a customer, revenues are deferred
for the fair value of the undelivered elements and revenues are recognized for the remainder of the
arrangement fee attributable to the delivered elements (typically products) when all of the
applicable criteria in the guidance have been met. In the event that VSOE for maintenance services
does not exist, and this represents the only undelivered element, revenues for the entire
arrangement are recognized ratably over the performance period. Revenues from maintenance and
support agreements are recognized on a straight-line basis ratably over the life of the contract.
Revenues from time-based (term) license sales that include ongoing delivery obligations throughout
the term of the arrangement are recognized ratably over the term because the Company does not have
VSOE for the undelivered elements.
Many of the Companys product contracts include implementation and training services. When
products are sold together with consulting services, license fees are recognized upon delivery,
provided that (i) the criteria of software revenue recognition have been met, (ii) payment of the
license fees is not dependent upon the performance of the services, and (iii) the services do not
provide significant customization of the products and are not essential to the functionality of the
software that was delivered. The Company does not typically provide significant customization of
its software products. These services are typically recognized on a time-and-materials basis.
The cost of providing the Companys products and maintenance and services consists primarily
of direct material costs for products and the fully burdened cost of the Companys service
organization for maintenance and services. Shipping and handling charges incurred and billed to
customers for product shipments are recorded in product revenue and related cost of product
revenues in the accompanying consolidated statements of income. If it becomes probable that the
amount allocated to an undelivered element will result in a loss on that element of the
arrangement, the loss is recognized.
Deferred revenues consist primarily of deferred product revenues, deferred maintenance fees
and deferred services fees. Deferred revenues are recorded net of pre-billed services,
post-contract customer support billings for which the term has not commenced and invoices for cash
basis customers. Deferred product revenues generally relate to product sales being recognized
ratably over the term of the licensing arrangement, and, to a lesser extent, partial shipments when
the Company does not have VSOE for the undelivered elements and products that have been delivered
but await customer acceptance. Deferred maintenance fees and consulting services generally relate
to payments for maintenance and consulting services in advance of the time of delivery of services.
These deferred amounts are expected to be recognized as revenues based on the policy outlined
above.
Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts for potential future estimated losses
resulting from the inability or unwillingness of certain customers to make all of their required
payments. The allowance for doubtful accounts is based on the Companys assessment of the
collectibility of customer accounts. The Company regularly reviews the allowance by considering
factors such as historical experience, credit quality, the age of the accounts receivable balances,
and current economic conditions that may affect a customers ability to pay. This assessment
requires significant judgment. When facts and circumstances indicate the collection of specific
amounts or from specific customers is at risk, the Company assesses the impact on amounts recorded
for bad debts and, if necessary, records a charge in the period the determination is made. If the
financial condition of its customers or any of the other factors the Company uses to analyze
creditworthiness were to worsen, additional allowances may be required, resulting in future
operating losses that are not included in the allowance for doubtful accounts as of January 31,
2010 and April 30, 2009.
10
The following describes activity in the allowance for doubtful accounts for fiscal 2009 and
the nine months ended January 31, 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Addition |
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
Charged to |
|
|
|
|
|
|
Balance at |
|
|
|
Beginning |
|
|
Costs and |
|
|
|
|
|
|
End |
|
Period |
|
of Period |
|
|
Expenses |
|
|
Deductions(1) |
|
|
of Period |
|
Fiscal 2009 |
|
$ |
133 |
|
|
$ |
142 |
|
|
$ |
(13 |
) |
|
$ |
262 |
|
Nine months ended January 31, 2010 |
|
$ |
262 |
|
|
$ |
134 |
|
|
$ |
(139 |
) |
|
$ |
257 |
|
|
|
|
(1) |
|
Uncollectible amounts written off, net of recoveries. |
Capitalized Software Licenses Obligations
On May 31, 2009, the Company renewed the software license agreement with Oracle USA, Inc. that
authorizes the Company to integrate Oracle database software with the ArcSight ESM products and
distribute ArcSight ESM products with the embedded database software as a component of the product.
The agreement has a two year term that commenced on May 31, 2009 when the prior agreement with
Oracle expired. The supporting royalty and technical support payments total $4.8 million over the
license term. These software licenses represent purchases by the Company of the right to utilize
and incorporate as a component of its product, the intellectual property of certain third parties.
As a result of these purchases, the Company is contractually obligated to pay minimum royalties on
fixed and determinable dates over a two-year period regardless of product sales being generated.
These purchases have been recorded on the accompanying consolidated balance sheets based on the
discounted present value of the Companys contractual payment obligations. The capitalized software
licenses are being amortized ratably over the respective two-year terms of the agreements and are
included as a component of cost of product revenues and cost of maintenance revenues in the amount
of $0.4 million and $0.2 million for the three months ended January 31, 2010, and $0.3 million and
$0.2 million for the three months ended January 31, 2009, respectively. Amortization included as a
component of cost of product revenues and cost of maintenance revenues for the nine months ended
January 31, 2010 was $1.2 million and $0.6 million, and for the nine months ended January 31, 2009
was $0.8 million and $0.3 million, respectively. During the three months ended January 31, 2010 and
January 31, 2009 payments under these agreements amounted to $0.6 million and $0.5 million with
related interest expense of $28,000 and $19,000, respectively. During the nine months ended January
31, 2010 and January 31, 2009 payments under these agreements amounted to $1.8 million and $1.4
million each with related interest expense of $0.1 million, respectively.
Impairment of Long-Lived Assets
Long-lived assets, such as property, plant and equipment and acquired intangible assets
subject to amortization, are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Among the factors and
circumstances considered by management in determining assessments of recoverability are: (i) a
significant decrease in the market price of a long-lived asset; (ii) a significant adverse change
in the extent or manner in which a long-lived asset is being used or in its physical condition;
(iii) a significant adverse change in legal factors or in the business climate that could affect
the value of a long-lived asset, including an adverse action or assessment by a regulator; (iv) an
accumulation of costs significantly in excess of the amount originally expected for the acquisition
or construction of a long-lived asset; (v) current-period operating or cash flow loss combined with
a history of operating or cash flow losses or a projection or forecast that demonstrates continuing
losses associated with the use of a long-lived asset; and (vi) a current expectation that, more
likely than not, a long-lived asset will be sold or otherwise disposed of significantly before the
end of its previously estimated useful life. Under the guidance, recoverability of assets to be
held and used is measured by a comparison of the carrying amount of an asset to the estimated
undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an
asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by
which the carrying amount of the asset exceeds the fair value of the asset. There have been no
indicators of impairment and no impairment losses have been recorded by the Company in any period
presented.
Property and Equipment, Net
Property and equipment are carried at cost, net of accumulated depreciation and amortization.
Depreciation is computed using the straight-line method over the estimated useful lives of the
property and equipment typically ranging from two to five years. Leasehold
11
improvements are recorded at cost with any reimbursement from the landlord being accounted for
as an offset to rent expense using the straight-line method over the lease term. Leasehold
improvements are amortized over the shorter of the remaining operating lease term or the useful
lives of the assets.
Goodwill
Goodwill is not amortized, but rather it is periodically assessed for impairment.
The Company tests goodwill for impairment annually on November 1 of each fiscal year, and more
frequently if events merit. Future goodwill impairment tests could result in a charge to earnings.
Software Development Costs
Costs incurred for the development of new software products are expensed as incurred until
technological feasibility is established. Development costs are capitalized beginning when a
products technological feasibility has been established and ending when the product is available
for general release to customers. Technological feasibility is reached when the product reaches the
beta stage using the working model approach. To date, the period of time between the establishment
of a technologically feasible working model and the subsequent general release of the product have
been of a relatively short duration of time and have resulted in insignificant amounts of costs
qualifying for capitalization for all periods presented. Thus, all software development costs have
been expensed as incurred in research and development expense.
Cost of Computer Software Developed or Obtained for Internal Use
The Company capitalizes certain costs incurred for computer software developed or obtained for
internal use, which are incurred during the application development stage. These capitalized costs
are to be amortized on a straight-line basis over the expected useful life of the software. Costs
related to preliminary project activities and post-implementation activities are expensed as
incurred. For the three and nine months ended January 31, 2010, ArcSight has capitalized software
costs for the development of internal use software amounting to $0.8 million and $2.3 million,
respectively. No software costs were capitalized for the three and nine months ended January 31,
2009. Amortization of these costs capitalized in accordance with the guidance will begin when the
new software is ready for its intended use and will be amortized over the estimated useful life of
the software generally on a straight-line basis unless another systematic and rational basis is
more representative of the softwares use.
Research and Development Expenses
The Company expenses research and development expenses in the period in which these costs are
incurred.
Advertising Expenses
Advertising costs are expensed as incurred.
Stock-Based Compensation Expense
Effective May 1, 2006, the Company adopted the provisions and guidance under ASC Topic 718
Compensation-Stock Compensation (ASC 718), using the prospective-transition method. In
accordance with the guidance, measurement and recognition of compensation expense for all awards
made to employees and directors beginning on May 1, 2006 is recognized based on estimated fair
values. In accordance with the guidance, the Company uses the Black-Scholes-Merton
(Black-Scholes) pricing model to determine the fair value of the stock options on the grant
dates, and the Company amortizes the fair value of compensation on a straight-line basis.
The Companys 2007 Employee Stock Purchase Plan (ESPP) became effective upon the
effectiveness of the Companys initial public offering (IPO) on February 14, 2008. The ESPP is
compensatory and results in compensation cost accounted for under the guidance. The Black-Scholes
option pricing model is used to estimate the fair value of rights to acquire stock granted under
the ESPP, and the Company amortizes the fair value over the offering period.
12
Comprehensive Income (Loss)
Comprehensive income (loss) includes certain unrealized gains and losses that are recorded as
a component of stockholders equity and excluded from the determination of net income. The
Companys accumulated other comprehensive income (loss) consisted of cumulative currency
translation adjustments resulting from the translation of the financial statements of its foreign
subsidiaries and unrealized losses on marketable securities. The tax effects on the foreign
currency translation adjustments and unrealized gains and losses on marketable securities have not
been significant.
Fair Value Measurement
In accordance with the guidance under ASC Topic 820-10 Fair Value Measurements and
Disclosures (ASC 820-10), the Company measures its financial assets and liabilities at fair
value. On May 1, 2009, the Company adopted the guidance for non-financial assets and liabilities
measured at fair value. Non-recurring non-financial assets and non-financial liabilities include
those measured at fair value in goodwill impairment tests and intangible assets measured at fair
value for impairment. The adoption of the guidance did not impact the condensed consolidated
results of operations, financial condition or cash flows.
The guidance clarifies that fair value is an exit price, representing the amount that would be
received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants. As such, fair value is a market-based measurement that should be determined based on
assumptions that market participants would use in pricing an asset or liability. The guidance
establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value
as follows:
|
|
|
Level 1 observable inputs such as unadjusted quoted prices in active
markets for identical assets and liabilities; |
|
|
|
|
Level 2 observable inputs such as quoted prices for similar assets and
liabilities in active markets that are observable either directly or indirectly; and |
|
|
|
|
Level 3 unobservable inputs in which there is little or no market data,
which require the Company to develop its own assumptions. |
This hierarchy requires the Company to use observable market data, when available, and to minimize
the use of unobservable inputs when determining fair value. A financial asset or liabilitys
classification within the hierarchy is determined based on the lowest level input that is
significant to the fair value measurement. On a recurring basis, the Company measures certain
financial assets, comprised of money market accounts and certificates of deposit based on Level 1
inputs at fair value. The Company is required to measure and disclose the fair value of outstanding
financial liabilities on a recurring basis. The fair value of financial obligations relating to the
capitalized software licenses, based on quoted interest rates (Level 2 inputs) for the remaining
duration of the liabilities, approximated carrying value.
In accordance with the guidance, the following table represents the Companys fair value
hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as
of January 31, 2010 and April 30, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
As of January 31, 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
111,821 |
|
|
|
|
|
|
|
|
|
|
$ |
111,821 |
|
Marketable securities |
|
|
19,994 |
|
|
|
|
|
|
|
|
|
|
|
19,994 |
|
Capitalized software license obligations |
|
|
|
|
|
$ |
3,637 |
|
|
|
|
|
|
|
3,637 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
131,815 |
|
|
$ |
3,637 |
|
|
|
|
|
|
$ |
135,452 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
As of April 30, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
90,467 |
|
|
|
|
|
|
$ |
|
|
|
$ |
90,467 |
|
Restricted cash |
|
|
842 |
|
|
|
|
|
|
|
|
|
|
|
842 |
|
Capitalized software license obligations |
|
|
|
|
|
|
363 |
|
|
|
|
|
|
|
363 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
91,309 |
|
|
$ |
363 |
|
|
$ |
|
|
|
$ |
91,672 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recent Accounting Pronouncements
In December 2007, the FASB issued revised guidance under ASC Topic 805-10, Business
Combinations (ASC 805-10). This guidance establishes principles and requirements for how an
acquirer recognizes and measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and non-controlling interests in the acquiree and the goodwill acquired, in
connection with a business combination. This guidance also establishes disclosure requirements.
This guidance is effective for fiscal years beginning after December 15, 2008. The Company adopted
this guidance effective May 1, 2009, and its adoption did not impact the condensed consolidated
results of operations, financial condition or cash flows.
In April 2008, the FASB issued revised guidance under ASC Topic 350-30, Intangibles-Goodwill
and Other Intangible Assets, Determination of the Useful Life of Intangible Assets (ASC 350-30).
This guidance amends the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset. The intent of the
guidance is to improve the consistency between the useful life of a recognized intangible asset
under the guidance and the period of expected cash flows used to measure the fair value of the
asset under ASC 805-10, and other U.S. generally accepted accounting principles. This guidance is
effective for financial statements issued for fiscal years beginning after December 15, 2008, and
early adoption is not permitted. The Company adopted this guidance effective May 1, 2009, and its
adoption did not impact the condensed consolidated results of operations, financial condition or
cash flows.
In February 2009, the FASB issued revised guidance under ASC Topic 805-20, Business
Combinations, (ASC 805-20). This guidance amends the provisions related to the initial
recognition and measurement, subsequent measurement and disclosure of assets and liabilities
arising from contingencies in a business combination. This guidance establishes principles and
requirements for pre-acquisition contingencies and an acquirees pre-existing contingent
consideration arrangement in a business combination measured under the guidance. In addition, this
guidance requires separate disclosure of recognized and unrecognized contingencies. This guidance
has the same effective date as ASC 805-10, and is effective for fiscal years beginning after
December 15, 2008. The Company adopted this guidance effective May 1, 2009, and its adoption did
not impact the condensed consolidated results of operations, financial condition or cash flows.
In April 2009, the FASB issued revised guidance under ASC Topic 825-10, Financial
Instruments-Interim Disclosures about Fair Value of Financial Instruments (ASC 825-10). This
guidance requires a public entity to disclose in the body or in the accompanying notes of its
summarized financial information for interim reporting periods and in its financial statements for
annual reporting periods the fair value of all financial instruments for which it is practicable to
estimate that value, whether recognized or not recognized in the statement of financial position,
as required by ASC 825-10. This guidance is effective for interim periods ending after June 15,
2009. The Company adopted this guidance effective May 1, 2009, and its adoption did not impact the
condensed consolidated results of operations, financial condition or cash flows.
In May 2009, the FASB issued revised guidance under ASC Topic 855-10, Subsequent Events,
(ASC 855-10), which establishes principles and requirements for subsequent events. Subsequent
events are events or transactions that occur after the balance sheet date but before financial
statements are issued or are available to be issued. There are two types of subsequent events: (i)
the first type consists of events or transactions that provide additional evidence about conditions
that existed at the date of the balance sheet and (ii) the second type consists of events that
provide evidence about conditions that did not exist at the date of the balance sheet but arose
after that date. An entity shall recognize in its financial statements the effects of all
subsequent events that provide additional evidence about conditions that existed at the date of the
balance sheet, including the estimates inherent in the process of preparing financial statements.
This guidance is effective for interim or annual financial periods ending after June 15, 2009. The
Company adopted this guidance effective May 1, 2009.
14
In June 2009, the FASB issued ASC Topic 105-10 The FASB Accounting Standards Codification and
the Hierarchy of Generally Accepted Accounting Principles, (ASC 105-10), which approved the FASB
Accounting Standards Codification (Codification) as the single source of authoritative United
States accounting and reporting standards for all non-governmental entities, except for guidance
issued by the SEC. The Codification, which changes the referencing of financial standards, is
effective for interim or annual financial periods ending after September 15, 2009. The Company
adopted the guidance effective August 1, 2009. All references made to generally accepted accounting
principles in the United States (U.S. GAAP) will use the new Codification numbering system
prescribed by the FASB. As the Codification is not intended to change or alter existing U.S. GAAP,
it did not have any impact on the Companys condensed consolidated results of operations, financial
condition or cash flows.
In October 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-13, Revenue
Recognition (Topic 605) Multiple-Deliverable Element Arrangements a consensus of the FASB
Emerging Issues Task Force (ASU 2009-13). This guidance impacts the determination of when the
individual deliverables included in a multiple-element arrangement may be treated as separate units
of accounting. Additionally, this guidance modifies the manner in which the transaction
consideration is allocated across the separately identified deliverables by no longer permitting
the residual method of allocating arrangement consideration. This revised guidance is effective for
annual financial periods beginning after June 15, 2010, and early adoption is permitted. The
Company is currently evaluating the potential impact, if any, the adoption of this new guidance
will have on its consolidated results of operations, financial condition or cash flows.
In October 2009, the FASB issued ASU No. 2009-14, Software (Topic 985) Certain Arrangements
That Contain Software Elements a consensus of the FASB Emerging Issues Task Force (ASU
2009-14). This guidance amends the scope of pre-existing software revenue guidance by removing
from the guidance non-software components of tangible products and certain software components of
tangible products. This revised guidance is effective for annual financial periods beginning after
June 15, 2010, and early adoption is permitted. The Company is currently evaluating the potential
impact, if any, the adoption of this new guidance will have on its consolidated results of
operations, financial condition or cash flows.
In February 2010, the FASB issued ASU No. 2010-09, amending Subsequent Events (Topic 855)
Certain Recognition and Disclosure Requirements (ASU 2010-09). This guidance addresses the
interaction between Topic 855 and related SEC reporting requirements. The amendment removes the
requirement for SEC filers to disclose a date through which subsequent events have been evaluated.
The amendment is effective upon issuance and has been adopted for our fiscal quarter ended January
31, 2010, the adoption of which did not impact the condensed consolidated results of operations,
financial condition or cash flows.
3. Net Income Per Common Share
Basic and diluted net income per common share is computed using the weighted-average number of
shares of common stock outstanding during the period. Diluted net income per share is computed
giving effect to all potentially dilutive common shares that were outstanding during the period on
a weighted average basis. Potentially dilutive common shares consist of various employee stock
awards including, common shares issuable upon exercise of stock options, and shares purchasable
under the ESPP.
15
The following table sets forth the computation of basic and diluted net income per share (in
thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
January 31, |
|
|
January 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Numerator for basic and diluted net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,228 |
|
|
$ |
5,063 |
|
|
$ |
5,741 |
|
|
$ |
5,578 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares, net of weighted-average
shares subject to repurchase, used in computing net
income per common share-basic |
|
|
33,840 |
|
|
|
31,499 |
|
|
|
33,260 |
|
|
|
31,115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used above, basic |
|
|
33,840 |
|
|
|
31,499 |
|
|
|
33,260 |
|
|
|
31,115 |
|
Stock options |
|
|
2,313 |
|
|
|
1,994 |
|
|
|
2,386 |
|
|
|
2,150 |
|
Shares purchasable under employee stock purchase plan |
|
|
16 |
|
|
|
|
|
|
|
3 |
|
|
|
8 |
|
Shares subject to repurchase |
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net income per share: |
|
|
36,169 |
|
|
|
33,494 |
|
|
|
35,649 |
|
|
|
33,324 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share, basic |
|
$ |
0.07 |
|
|
$ |
0.16 |
|
|
$ |
0.17 |
|
|
$ |
0.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share, diluted |
|
$ |
0.06 |
|
|
$ |
0.15 |
|
|
$ |
0.16 |
|
|
$ |
0.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the weighted-average number of shares subject to potentially
dilutive outstanding securities, including the Companys common stock options, that were excluded
from the computation of diluted net income per share for the periods presented because including
them would have had an anti-dilutive effect (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
January 31, |
|
|
January31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Options to purchase common stock |
|
|
187 |
|
|
|
2,926 |
|
|
|
247 |
|
|
|
2,382 |
|
4. Balance Sheet Details
Property
and Equipment, Net
Property and equipment consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
As of |
|
|
|
January 31, |
|
|
April 30, |
|
|
|
2010 |
|
|
2009 |
|
Computers and equipment |
|
$ |
6,880 |
|
|
$ |
7,064 |
|
Furniture and fixtures |
|
|
1,232 |
|
|
|
1,072 |
|
Software |
|
|
3,099 |
|
|
|
788 |
|
Leasehold improvements |
|
|
2,399 |
|
|
|
2,337 |
|
|
|
|
|
|
|
|
|
|
|
13,610 |
|
|
|
11,261 |
|
Less: accumulated depreciation and amortization |
|
|
(6,534 |
) |
|
|
(6,845 |
) |
|
|
|
|
|
|
|
Property and equipment, net |
|
$ |
7,076 |
|
|
$ |
4,416 |
|
|
|
|
|
|
|
|
Depreciation expense was $0.5 million and $0.5 million for the three months ended January 31,
2010 and 2009, respectively, and $1.4 million and $1.5 million for the nine months ended January
31, 2010 and 2009, respectively. Amortization expense was $0.1 million and $0.1 million for the
three months ended January 31, 2010 and 2009, respectively, and $0.4 million and $0.4 million for
the nine months ended January 31, 2010 and 2009, respectively.
16
Goodwill and Intangible Assets, Net
The estimated useful lives, gross carrying amount, accumulated amortization and net book value
of goodwill and intangible assets as of January 31, 2010 and April 30, 2009 are as follows (dollars
in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
|
Useful Lives |
|
|
Carrying |
|
|
Accumulated |
|
|
Carrying |
|
As of January 31, 2010: |
|
in Years |
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
Core and developed technologies |
|
|
5.00 |
|
|
$ |
1,970 |
|
|
$ |
(1,449 |
) |
|
$ |
521 |
|
Customer installed-base relationships |
|
|
6.00 |
|
|
|
80 |
|
|
|
(63 |
) |
|
|
17 |
|
Employee non-compete agreements |
|
|
5.00 |
|
|
|
1,160 |
|
|
|
(1,046 |
) |
|
|
114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
3,210 |
|
|
$ |
(2,558 |
) |
|
$ |
652 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,746 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
|
Useful Lives |
|
|
Carrying |
|
|
Accumulated |
|
|
Carrying |
|
As of April 30, 2009: |
|
in Years |
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
Core and developed technologies |
|
|
5.00 |
|
|
$ |
1,970 |
|
|
$ |
(960 |
) |
|
$ |
1,010 |
|
Customer installed-base relationships |
|
|
6.00 |
|
|
|
80 |
|
|
|
(53 |
) |
|
|
27 |
|
Employee non-compete agreements |
|
|
5.00 |
|
|
|
1,160 |
|
|
|
(878 |
) |
|
|
282 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
3,210 |
|
|
$ |
(1,891 |
) |
|
$ |
1,319 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,746 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired intangible assets other than goodwill are amortized over their respective estimated
useful lives to match the amortization to the benefits received. The total amortization expense
related to intangible assets was $0.2 million for both the three months ended January 31, 2010 and
2009 and $0.7 million and $0.6 million for the nine months ended January 31, 2010 and 2009,
respectively.
There was no impairment of goodwill or intangible assets for the nine months ended January 31,
2010 or in fiscal 2009.
As of January 31, 2010, future estimated amortization costs per year for the Companys
existing intangible assets other than goodwill are estimated as follows (in thousands):
|
|
|
|
|
|
|
Estimated |
|
|
|
Amortization |
|
As of January 31, 2010: |
|
Expense |
|
Remainder of fiscal 2010 |
|
$ |
222 |
|
Fiscal 2011 |
|
|
425 |
|
Fiscal 2012 |
|
|
5 |
|
|
|
|
|
Total |
|
$ |
652 |
|
|
|
|
|
Deferred Revenues
Deferred revenues consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
As of |
|
|
|
January 31, |
|
|
April 30, |
|
|
|
2010 |
|
|
2009 |
|
Deferred product revenues |
|
$ |
13,073 |
|
|
$ |
9,786 |
|
Deferred maintenance revenues |
|
|
37,877 |
|
|
|
32,408 |
|
Deferred services revenues |
|
|
3,130 |
|
|
|
2,854 |
|
|
|
|
|
|
|
|
Total deferred revenues |
|
|
54,080 |
|
|
|
45,048 |
|
Less deferred revenues, current portion |
|
|
(43,755 |
) |
|
|
(36,160 |
) |
|
|
|
|
|
|
|
Deferred revenues, non-current |
|
$ |
10,325 |
|
|
$ |
8,888 |
|
|
|
|
|
|
|
|
17
5. Commitments and Contingencies
The Company and its subsidiaries operate from leased premises in the United States, Asia and
Europe with lease periods expiring through fiscal 2018. In November 2009, the Company entered into
a lease extension through June 2017, adding additional office space to the lease for the corporate
headquarters. This lease agreement includes a rent escalation clause of 3% per annual lease term
through expiration in June 2017. The Company recognizes expense for scheduled rent increases on a
straight-line basis over the lease term beginning with the date the Company takes possession of the
leased space.
Future minimum lease payments under the Companys noncancelable operating leases as of January
31, 2010 are as follows (in thousands):
|
|
|
|
|
|
|
Amount of |
|
As of January 31, 2010: |
|
Payments |
|
Remainder of fiscal 2010 |
|
$ |
524 |
|
2011 |
|
|
3,261 |
|
2012 |
|
|
3,020 |
|
2013 |
|
|
3,038 |
|
2014 and thereafter |
|
|
13,664 |
|
|
|
|
|
Total future minimum lease payments |
|
$ |
23,507 |
|
|
|
|
|
Rent expense under all operating leases was approximately $0.9 million and $0.8 million for
the three months ended January 31, 2010 and 2009, and $2.6 million and $2.4 million for the nine
months ended January 31, 2010 and 2009, respectively.
From time to time, the Company is subject to various claims, complaints and legal actions in
the normal course of business. The Company does not believe it is party to any currently pending
litigation, the outcome of which will have a material adverse effect on its operations or financial
position.
6. Indemnification and Warranties
The Company from time to time enters into certain types of contracts that contingently require
it to indemnify various parties against claims from third parties. These contracts primarily relate
to (i) certain real estate leases under which the Company may be required to indemnify property
owners for environmental and other liabilities and other claims arising from the Companys use of
the applicable premises, (ii) the Companys bylaws, under which it must indemnify directors and
executive officers, and may indemnify other officers and employees, for liabilities arising out of
their relationship, (iii) contracts under which the Company must indemnify directors and certain
officers for liabilities arising out of their relationship, (iv) contracts under which the Company
may be required to indemnify customers or resellers against certain claims, including claims that a
Company product infringes a patent, copyright or other intellectual property right, and (v)
procurement, consulting, or license agreements under which the Company may be required to indemnify
vendors, consultants or licensors for certain claims, including claims that may be brought against
them arising from the Companys acts or omissions with respect to the supplied products or
technology.
In the event that one or more of these matters were to result in a claim against the Company,
an adverse outcome, including a judgment or settlement, may cause a material adverse effect on the
Companys future business, operating results or financial condition. It is not possible to
determine the maximum potential amount under these indemnification agreements due to the limited
history of prior indemnification claims and the unique facts and circumstances involved in each
particular agreement.
The Company maintains director and officer insurance, which may cover certain liabilities
arising from its obligation to indemnify its directors.
From time to time, the Company may receive indemnification claims in the normal course of
business. The Company does not believe it is party to any currently pending claims the outcome of
which will have a material adverse effect on its operations or financial position.
18
The Company generally provides a warranty for its products and services to its customers. To
date, the Companys product warranty expense has not been significant. Accordingly, the Company has
not recorded a warranty reserve as of January 31, 2010 or April 30, 2009.
7. Stockholders Equity
Common Stock Reserved for Issuance
Number of shares of common stock reserved for future issuance is as follows:
|
|
|
|
|
|
|
As of January 31, |
|
|
|
2010 |
|
Options available for future grant under the 2007 Equity Incentive Plan |
|
|
4,206,809 |
|
Options outstanding under the stock option plans |
|
|
7,023,447 |
|
ESPP shares reserved for future issuance |
|
|
1,163,017 |
|
|
|
|
|
Total shares reserved |
|
|
12,393,273 |
|
|
|
|
|
Stock Plans
2007 Equity Incentive Plan. A total of 4,569,015 shares of the Companys common stock were
originally authorized for future issuance under the 2007 Equity Incentive Plan, including shares
that became available for grant upon the concurrent termination of the Companys 2002 Stock Plan.
During fiscal 2009 and 2010, the Company registered 2,618,006 additional shares of the Companys
common stock to be issuable under the 2007 Equity Incentive Plan. As of January 31, 2010, since
adoption of the 2007 Equity Incentive Plan, an aggregate of 778,140 of additional shares issued
under the Companys prior stock option plans, have become available for grant and issuance as a
result of forfeitures or repurchases by the Company.
2007 Employee Stock Purchase Plan. A total of 1,000,000 shares of the Companys common stock
were originally authorized. During fiscal 2009 and 2010, a total of 654,501 additional shares were
registered for issuance under the ESPP.
Stock Plan Activity
A summary of the option activity under the 2007 Equity Incentive Plan, the 2002 Stock Plan and
the 2000 Stock Incentive Plan for the nine months ended January 31, 2010, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
|
|
Shares |
|
|
|
|
|
|
Exercise |
|
|
Remaining |
|
|
Aggregate |
|
|
|
Available |
|
|
Number of |
|
|
Price |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
for Grant |
|
|
Shares |
|
|
per Share |
|
|
Term (Years) |
|
|
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
Options outstanding as of April 30, 2009 |
|
|
4,520,099 |
|
|
|
6,940,996 |
|
|
|
6.10 |
|
|
|
7.30 |
|
|
$ |
62,464 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options authorized |
|
|
1,357,590 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted |
|
|
(1,918,061 |
) |
|
|
1,918,061 |
|
|
|
20.06 |
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
|
|
|
|
(1,588,429 |
) |
|
|
19.98 |
|
|
|
|
|
|
|
|
|
Options canceled |
|
|
247,181 |
|
|
|
(247,181 |
) |
|
|
12.02 |
|
|
|
|
|
|
|
|
|
Shares repurchased |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding as of January 31, 2010 |
|
|
4,206,809 |
|
|
|
7,023,447 |
|
|
|
10.07 |
|
|
|
7.54 |
|
|
|
96,091 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest as of January 31, 2010, net of anticipated forfeitures |
|
|
|
|
|
|
6,309,865 |
|
|
|
10.07 |
|
|
|
7.54 |
|
|
|
86,328 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable as of January 31, 2010 |
|
|
|
|
|
|
3,435,860 |
|
|
|
5.88 |
|
|
|
6.46 |
|
|
|
61,390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic values shown in the table above are equal to the difference between
the per share exercise price of the underlying stock options and the fair value of the Companys
common stock as of the respective dates in the table.
19
The following table summarizes additional information regarding outstanding options as of
January 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
Options Vested and Exercisable |
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Remaining |
|
|
|
|
|
Average |
|
|
Number |
|
Contractual |
|
Number of |
|
Exercise |
Exercise Price |
|
Outstanding |
|
Life (Years) |
|
Shares |
|
Price per Share |
$0.12-0.80
|
|
|
674,025 |
|
|
|
4.00 |
|
|
|
674,025 |
|
|
$ |
0.37 |
|
$4.00-5.98
|
|
|
728,324 |
|
|
|
6.81 |
|
|
|
503,606 |
|
|
|
4.12 |
|
$6.08-6.80
|
|
|
1,573,461 |
|
|
|
6.78 |
|
|
|
1,285,311 |
|
|
|
6.57 |
|
$7.17-8.95
|
|
|
1,139,361 |
|
|
|
8.19 |
|
|
|
388,928 |
|
|
|
8.27 |
|
$9.00-10.00
|
|
|
1,020,173 |
|
|
|
7.69 |
|
|
|
542,081 |
|
|
|
9.83 |
|
$11.08-17.65
|
|
|
271,667 |
|
|
|
9.29 |
|
|
|
9,384 |
|
|
|
11.58 |
|
$18.00-24.47
|
|
|
1,129,253 |
|
|
|
8.94 |
|
|
|
32,525 |
|
|
|
22.06 |
|
$24.49-28.15
|
|
|
487,183 |
|
|
|
9.84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,023,447 |
|
|
|
7.54 |
|
|
|
3,435,860 |
|
|
$ |
5.88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intrinsic value of options exercised for the nine months ended January 31, 2010 was
$24.7 million, determined at the date of option exercise.
8. Stock-Based Compensation
During the three and nine months ended January 31, 2010 and 2009, the Company recorded
stock-based compensation under ASC 718 as described below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
January 31, |
|
|
January 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Stock-based compensation under ASC 718 |
|
$ |
2,485 |
|
|
$ |
1,433 |
|
|
$ |
6,330 |
|
|
$ |
3,813 |
|
Stock-based compensation under prospective transition method for option awards granted prior to the
adoption of ASC 718 |
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
19 |
|
Amortization of restricted stock awards in connection with the acquisition of Enira Technologies, LLC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33 |
|
Stock-based compensation under employee stock purchase plan |
|
|
355 |
|
|
|
228 |
|
|
|
925 |
|
|
|
727 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,840 |
|
|
$ |
1,664 |
|
|
$ |
7,255 |
|
|
$ |
4,592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounting for Stock-Based Compensation
On May 1, 2006, the Company adopted ASC 718, which establishes standards for the accounting of
transactions in which an entity exchanges its equity instruments for goods or services, primarily
focusing on accounting for transactions where an entity obtains employee services in stock-based
payment transactions. The guidance requires the Company to measure the cost of employee services
received in exchange for an award of equity instruments, including stock options, based on the
grant-date fair value of the award and to recognize it as compensation expense over the period the
employee is required to provide service in exchange for the award, usually the vesting period.
The Company used the Black-Scholes option pricing model to determine the fair value of option
awards granted. The Black-Scholes model requires, among other inputs, an estimate of the fair value
of the underlying common stock on the date of grant and assumptions as to volatility of the
Companys stock over the term of the related options, the expected term of the options, the
risk-free interest rate and the option forfeiture rate. These assumptions used in the pricing model
are determined by the Company at each grant date. The Company has not paid and does not anticipate
paying cash dividends on outstanding shares of common stock
Cash flows resulting from the tax benefits resulting from tax deductions in excess of the
compensation cost recognized for those option exercises are classified as financing cash flows. For
the three and nine months ended January 31, 2010, the Company recorded excess tax benefits
resulting from tax deductions in excess of the compensation cost recognized amounting to $2.2
million and $4.1 million, respectively. Due to the Companys historical loss position and current
valuation allowance, no tax benefits have been
20
realized or recorded for any of the prior periods presented. Prior to the adoption of ASC
718 those benefits would have been reported as operating cash flows had the Company received any
tax benefits related to stock option exercises.
Valuation and Expense Information
The weighted-average fair value calculations for options granted within the period are based
on the following weighted-average assumptions set forth in the table below and assume no dividends
will be paid. Options that were granted in prior periods are based on assumptions prevailing at the
date of grant.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
January 31, |
|
|
January 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Risk free interest rate |
|
|
2.55 |
% |
|
|
2.90 |
% |
|
|
2.40 |
% |
|
|
3.19 |
% |
Expected volatility |
|
|
57.1 |
% |
|
|
52.6 |
% |
|
|
57.5 |
% |
|
|
51.7 |
% |
Expected life (years) |
|
5.66 years |
|
|
5.74 years |
|
|
5.64 years |
|
|
5.75 years |
|
Based on these calculations, the weighted-average fair value per option granted to acquire a
share of common stock was $13.28 and $2.53 per share for the three months ended January 31, 2010
and 2009, and $10.80 and $3.91 per share for the nine months ended January 31, 2010 and 2009,
respectively. The compensation costs that have been included in the Companys results of operations
for these stock-based compensation arrangements for the three and nine months ended January 31,
2010 and 2009, as a result of the Companys adoption of ASC 718, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
January 31, |
|
|
January 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Cost of maintenance revenues |
|
$ |
123 |
|
|
$ |
36 |
|
|
$ |
305 |
|
|
$ |
98 |
|
Cost of services revenues |
|
|
64 |
|
|
|
26 |
|
|
|
140 |
|
|
|
77 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation expense included in cost of revenues |
|
|
187 |
|
|
|
62 |
|
|
|
445 |
|
|
|
175 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
595 |
|
|
|
226 |
|
|
|
1,542 |
|
|
|
653 |
|
Sales and marketing |
|
|
987 |
|
|
|
387 |
|
|
|
2,450 |
|
|
|
1,721 |
|
General and administrative |
|
|
1,071 |
|
|
|
758 |
|
|
|
2,818 |
|
|
|
1,264 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation expense included in operating expenses |
|
|
2,653 |
|
|
|
1,371 |
|
|
|
6,810 |
|
|
|
3,638 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation expense included in net income |
|
$ |
2,840 |
|
|
$ |
1,433 |
|
|
$ |
7,255 |
|
|
$ |
3,813 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Because the amount of stock-based compensation associated with the Companys cost of products
is not significant, no amounts have been capitalized for any of the periods presented.
As of January 31, 2010, there was $22.8 million of total unrecognized stock based compensation
expenses under ASC 718, net of estimated forfeitures, that the Company expects to recognize over
the requisite service period. Total unrecognized stock based compensation expenses related to
non-vested awards are expected to be recognized over a weighted-average period of 2.97 years. The
total fair value of all shares vested during the quarter ended January 31, 2010 was $1.6 million.
The total fair value of all shares vested during the first three quarters of fiscal 2010 was $5.3
million.
During the nine months ended January 31, 2010, the Company granted 1,918,061 options. These
options have exercise prices equal to the closing price of the Companys common stock as quoted on
the NASDAQ on the day of grant (or the most recent trading day if the date of grant is not a NASDAQ
trading day), with exercise prices ranging from $14.33 to $28.15 per share at a weighted-average
per share price of $20.06.
Employee Stock Purchase Plan
In November 2007, the Board of Directors and the Companys stockholders approved the ESPP,
which became effective upon the Companys IPO on February 14, 2008. A total of 1,654,501 shares of
the Companys common stock have been reserved for issuance under the ESPP since inception,
including the annual increases each January pursuant to its evergreen provision. Under the ESPP,
employees may purchase shares of common stock at a price that is 85% of the lesser of the fair
market value of the Companys
21
common stock as of beginning or the end of each offering period. The ESPP provides for
consecutive offering periods of six months each, except for the first such offering period which
commenced on February 14, 2008 and ended on September 15, 2008.
In fiscal 2009, 373,368 shares were purchased under the ESPP at a weighted average purchase
price per share of $7.37. Total cash proceeds from the purchase of shares under the ESPP was $2.8
million. During the first nine months of fiscal 2010, 118,116 shares were purchased under the ESPP
at a weighted average purchase price per share of $10.07. Total cash proceeds from the purchase of
shares under the ESPP was $1.2 million and $2.8 million, for the first nine months of fiscal 2010
and fiscal 2009, respectively. As of January 31, 2010 there was an aggregate of 1,163,017 shares of
common stock available for issuance pursuant to future rights to acquire stock under the ESPP.
The ESPP is compensatory and results in compensation cost accounted for under ASC 718. The
Black-Scholes option pricing model is used to estimate the fair value of rights to acquire stock
granted under the ESPP. The weighted-average fair value calculations for rights to acquire stock
under the ESPP within the period are based on the following weighted-average assumptions set forth
in the table below, assuming no dividends will be paid, and based on assumptions prevailing as of
the enrollment date of the offering period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
January 31, |
|
|
January 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Risk-free interest rate |
|
|
0.20 |
% |
|
|
1.52 |
% |
|
|
0.35 |
% |
|
|
1.80 |
% |
Expected volatility |
|
|
66.5 |
% |
|
|
48.9 |
% |
|
|
73.2 |
% |
|
|
50.9 |
% |
Expected life (years) |
|
0.50 years |
| |
0.50 years |
| |
0.50 years |
| |
0.54 years | |
Based on these calculations, the weighted-average fair value per right to acquire shares of
common stock was $7.46 and $2.47 per share for the three months ended January 31, 2010 and 2009,
respectively, and was $5.73 and $2.61 per share for the nine months ended January 31, 2010 and
2009, respectively. For the three months ended January 31, 2010 and 2009, the Company recorded
stock-based compensation expense associated with its ESPP of $0.4 million and $0.2 million,
respectively. For the nine months ended January 31, 2010 and 2009, the Company recorded stock-based
compensation expense associated with its ESPP of $0.9 million and $0.7 million, respectively. As of
January 31, 2010, there was $0.2 million of total unrecognized compensation expenses under the
guidance, net of expected forfeitures, related to common stock purchase rights that the Company
expects to amortize over the remaining offering period ending March 15, 2010.
9. Segment Information
The Company operates in one industry segment selling security and compliance management
solutions.
Operating segments are defined as components of an enterprise for which separate financial
information is available and is evaluated regularly by the chief operating decision maker, or
decision making group, in deciding how to allocate resources and in assessing performance. The
Companys chief operating decision maker is the Chief Executive Officer (CEO). The CEO reviews
financial information presented on a consolidated basis for evaluating financial performance and
allocating resources. There are no segment managers who are held accountable for operations below
the consolidated financial statement level. Accordingly, the Company has determined that it
operates in a single reportable segment.
The CEO evaluates performance based primarily on revenues in the geographic locations in which
the Company operates. Revenues are attributed to geographic locations based on the ship-to location
of the Companys customers. The Companys assets are primarily located in the United States and not
allocated to any specific region. Therefore, geographic information is presented only for total
revenues. As of January 31, 2010 and 2009, long-lived assets, which represent property, plant and
equipment, goodwill and intangible assets, net of accumulated depreciation and amortization,
located outside the Americas were immaterial and less than one percent of the total net assets as
of these dates.
22
Total revenues by geographical region are based on the ship-to location and are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
January 31, |
|
|
January 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Total revenues by geography: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
$ |
14,747 |
|
|
$ |
14,813 |
|
|
$ |
49,357 |
|
|
$ |
40,574 |
|
Maintenance |
|
|
11,173 |
|
|
|
7,345 |
|
|
|
29,361 |
|
|
|
20,864 |
|
Services |
|
|
3,877 |
|
|
|
3,444 |
|
|
|
10,915 |
|
|
|
9,345 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
29,797 |
|
|
|
25,602 |
|
|
|
89,633 |
|
|
|
70,783 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EMEA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
|
8,112 |
|
|
|
3,638 |
|
|
|
16,472 |
|
|
|
9,056 |
|
Maintenance |
|
|
1,983 |
|
|
|
1,581 |
|
|
|
5,554 |
|
|
|
4,342 |
|
Services |
|
|
556 |
|
|
|
618 |
|
|
|
1,654 |
|
|
|
1,637 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
10,651 |
|
|
|
5,837 |
|
|
|
23,680 |
|
|
|
15,035 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asia Pacific: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
|
1,769 |
|
|
|
1,414 |
|
|
|
3,503 |
|
|
|
3,496 |
|
Maintenance |
|
|
615 |
|
|
|
477 |
|
|
|
1,713 |
|
|
|
1,345 |
|
Services |
|
|
94 |
|
|
|
205 |
|
|
|
305 |
|
|
|
487 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2,478 |
|
|
|
2,096 |
|
|
|
5,521 |
|
|
|
5,328 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Americas: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
|
1,927 |
|
|
|
1,910 |
|
|
|
3,506 |
|
|
|
3,620 |
|
Maintenance |
|
|
931 |
|
|
|
601 |
|
|
|
2,610 |
|
|
|
1,550 |
|
Services |
|
|
326 |
|
|
|
346 |
|
|
|
1,218 |
|
|
|
574 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
3,184 |
|
|
|
2,857 |
|
|
|
7,334 |
|
|
|
5,744 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
46,110 |
|
|
$ |
36,392 |
|
|
$ |
126,168 |
|
|
$ |
96,890 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10. Income Taxes
Provision for income taxes is calculated in accordance with ASC 740, Accounting for Income
Taxes, Interim Financial Reporting, and FASB interpretation under ASC 740 related to Accounting
for Income Taxes in the Interim Period, as amended.
The difference between the provision for income taxes that would be derived by applying the
statutory rate to our income before tax and the income tax provision actually recorded is primarily
due to the impact of non-deductible stock-based compensation expenses and other currently
non-deductible items, movement in our valuation allowance and various discrete items, offset by the
use of net operating loss carry-forwards and tax credits.
The Company estimates income taxes in each of the jurisdictions in which it operates. This
process involves determining income tax expense together with calculating the deferred income tax
expense related to temporary differences resulting from the differing treatment of items for tax
and accounting purposes, such as accruals and allowances not currently deductible for tax purposes.
These temporary differences result in deferred tax assets and liabilities. Deferred tax assets and
liabilities are measured using tax rates currently in effect for the year in which those temporary
differences are expected to be recovered or settled. Deferred tax assets are recognized for
deductible temporary differences, along with net operating loss and credits carry-forwards, if it
is more likely than not that the tax benefits will be realized. To the extent a deferred tax asset
cannot be recognized under the preceding criteria, a valuation allowance is established. Changes in
the Companys estimates may result in significant increases or decreases to the Companys tax
provision in a period in which such estimates are charged, which would affect net income.
For the quarter ended January 31, 2010 and in accordance with ASC 740, the Company has
evaluated its need for a valuation allowance based on historical evidence, trends in profitability
and expectations of future taxable income. The Company maintained a valuation allowance against its
net deferred tax assets because the Company expects that it is more likely than not that all
deferred tax assets will not be realized in the foreseeable future. The Company continuously
monitors the circumstances impacting the expected realization of its deferred tax assets for each
jurisdiction. The Company considers all available evidence, both positive and negative, including
historical levels of income in each jurisdiction, expectations and risks associated with estimates
of future taxable income and
23
ongoing prudent and feasible tax planning strategies in assessing the need for the valuation
allowance. If the Company determines it is more likely than not that some or all of its deferred
tax assets will be realized in the foreseeable future, the Company will adjust its valuation
allowance accordingly. A change in the Companys assessment regarding the realization of its
deferred tax assets will impact its effective tax rate in the period the Company revises its
assessment and in subsequent periods. In the event the Company were to determine that it would be
able to realize deferred tax assets in the future in excess of the net recorded deferred tax asset,
an adjustment to the net deferred tax asset could materially increase net income in the period such
determination was made. The Company will continue to monitor available positive and negative
evidence in future periods to determine if any or all of the remaining valuation allowance should
be released.
24
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should
be read in conjunction with the (1) unaudited condensed consolidated financial statements and the
related notes thereto included elsewhere in this Quarterly Report on Form 10-Q, and (2) the audited
consolidated financial statements and notes thereto and managements discussion and analysis of
financial condition and results of operations for the fiscal year ended April 30, 2009 included in
our Annual Report on Form 10-K filed with the Securities and Exchange Commission, or the SEC, on
July 9, 2009. This Quarterly Report on Form 10-Q contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. These statements are often identified by the use of words such as
may, will, expect, believe, anticipate, intend, could, estimate, or continue, and
similar expressions or variations. Such forward-looking statements are subject to risks,
uncertainties and other factors that could cause actual results and the timing of certain events to
differ materially from future results expressed or implied by such forward-looking statements.
Factors that could cause or contribute to such differences include, but are not limited to, those
identified herein, and those discussed in the section titled Risk Factors, set forth in Part II,
Item 1A of this Form 10-Q and in our other SEC filings, including our Annual Report on Form 10-K
for the fiscal year ended April 30, 2009. We disclaim any obligation to update any forward-looking
statements to reflect events or circumstances after the date of such statements.
Overview
We are a leading provider of security and compliance management solutions that protect
enterprises and government agencies. Our products help customers comply with corporate and
regulatory policies, safeguard their assets and processes and control risk. Our platform collects
and correlates user activity and event data across the enterprise so that businesses can rapidly
identify, prioritize and respond to compliance violations, policy breaches, cybersecurity attacks
and insider threats. Our products collect and correlate massive numbers of events from thousands of
security point solutions, network and computing devices and applications, enabling intelligent
identification, prioritization and response to compliance and corporate policy violations, and
external and insider threats and compliance. We also provide complementary software that delivers
pre-packaged analytics and reports tailored to specific security and compliance initiatives, as
well as appliances that streamline event log collection, storage, analysis and reporting.
We were founded in May 2000 and first sold our initial ESM product in June 2002. We initially
funded our operations primarily through convertible preferred stock financings that raised a total
of $26.8 million. Our revenues have grown from $32.8 million in fiscal 2005 to $136.2 million in
fiscal 2009, and were $126.2 million in our first three quarters of fiscal 2010.
In February 2008, we completed our initial public offering or IPO, in which we sold 6,000,000
shares of common stock, at an issue price of $9.00 per share. We raised a total of $54.0 million in
gross proceeds from our IPO, or $45.9 million in net proceeds after deducting underwriting
discounts of $3.8 million and offering expenses of $4.3 million.
We achieved positive cash flows from operations in fiscal 2004 through 2009. We generated
$33.8 million and $12.3 million in cash from our operating activities during the nine months ended
January 31, 2010 and 2009, respectively, and we generally expect to continue to generate positive
cash flows from operating activities on an annual basis. As of January 31, 2010, we had cash, cash
equivalents and marketable securities of $131.8 million, net accounts receivable of $24.0 million,
and an aggregate of $19.9 million in accounts payable and accrued liabilities.
Important Factors Affecting Our Operating Results and Financial Condition
We believe that the market for our products is in the early stages of development. We have
identified factors that we expect to play an important role in our future growth and profitability.
These factors are:
Sales of ESM Products and Appliance Products to New Customers. The market for security and
compliance management software solutions is growing, with new purchases often driven by corporate
compliance initiatives. We typically engage in a proof of concept with our customers to demonstrate
the capabilities of our ESM products in their specific environment. A new sale usually involves the
sale of licenses for one or more ESM Managers, licenses for the number and type of devices the
customer intends to manage with ArcSight ESM, licenses for our console and web interfaces,
installation services, training and an initial maintenance arrangement. In many cases, customers
will also purchase one of our complementary software modules which enable them to implement
specific sets
25
of off-the-shelf rules for our event correlation engine that address specific security and
compliance issues and business risks. In addition, customers may purchase our ArcSight Logger
products to address their log archiving needs. A key component of our growth will depend on our
ability to sell our products to new customers and our subsequent ability to generate follow-on
sales from these customers. We also anticipate that a growing proportion of future new customers
will be a result of initial sales of ArcSight Logger product, our ArcSight Express product and our
other products sold in an appliance form factor.
Continued Sales to Our Installed Base. Many customers make an initial purchase from us and
then decide whether to use our products with respect to a larger portion of their business and
technology infrastructure or buy additional complementary products from us. Thus, a key component
of our growth will be our ability to successfully maintain and further develop the relationships
with our existing customers.
Development and Introduction of New Products. We believe it is important that we continue to
develop or acquire new products and services that will help us capitalize on opportunities in the
security and compliance management market. Examples of new product introductions in fiscal 2009
included our Compliance Insight Package for the North American
Electric Reliability Corporation, or NERC, CIP standards
002-009 and our ArcSight Express
product. We continue the enhancement of our ESM products and solutions, such as the introduction of
ESM appliances in June 2008, the integration with the Cisco Mobility Services Engine announced in
May 2009, and the introduction of an all-in-one PCI log management appliance in July 2008. We also
released a new version of our ArcSight Logger product, ArcSight Logger 4.0, in November 2009. In
addition, we continue to develop and release appliance versions of our software products and
updates to complementary solution packages for our ArcSight Logger product.
Development of Our Channel Network. Historically, we have sold our products primarily through
our direct sales force, with sales to government or international purchasers through resellers and
systems integrators. We recently expanded our sales channel to assist us in penetrating the
mid-market, particularly as we expanded our appliance-based offerings. We believe that our current
and any new appliance-based products that we develop will be sold more effectively through
resellers and, if we are successful in introducing these new products, we will become more
dependent on the development of an effective channel network. Further training, certification and
development of our existing channel partners will be a key factor in the success of this strategy.
Sources of Revenues, Cost of Revenues and Operating Expenses
Our sales transactions typically include the following elements: a software license fee paid
for the use of our products in perpetuity or, in limited circumstances, for a specified term; an
arrangement for first-year support and maintenance, which includes unspecified software updates and
upgrades; and professional services for installation, implementation and training. The majority of
our revenues are derived from sales of our security and compliance management products, primarily
ArcSight ESM and Logger, and we expect this to continue for the foreseeable future. We sell our
products and services primarily through our direct sales force. Additionally, we utilize resellers
and systems integrators, particularly in sales to government agencies and international customers.
ArcSight ESM is primarily sold as software and Logger is sold in an appliance form factor.
Logger and our other appliance products generally have lower gross margins than our software
products.
We recognize revenues pursuant to generally accepted accounting principles or GAAP, in
accordance with Accounting Standards Codification, or ASC, Topic 985-605, Software Revenue
Recognition, or ASC 985-605 as amended, which, if revenues are to be recognized upon product
delivery, requires among other things vendor-specific objective evidence of fair value, or VSOE,
for each undelivered element of multiple element customer contracts.
Revenues in fiscal 2007 and prior years were impacted by multiple element sales transactions
consummated for which the revenues were deferred because we did not have VSOE, for some product
elements that were not delivered in the fiscal year of the transaction. Following identification in
mid-fiscal 2007 of transactions with such undelivered elements, with respect to some of these
transactions, we and our customers amended the contractual terms to remove the undelivered product
elements and in other instances we have since delivered such product elements. The net impact of
these transactions increased revenues in the nine months ended January 31, 2010 and 2009, by $0.9
million and $0.7 million, respectively. As of January 31, 2010 and April 30, 2009, deferred
revenues included $0.6 million and $1.6 million, respectively, related to transactions such as
these.
In addition, if we determine that collectibility is not reasonably assured, we defer the
revenues until collectibility becomes reasonably assured, generally upon receipt of cash. Deferred
revenue and accounts receivable are reported net of adjustments for sales
26
transactions invoiced during the period that are recognized as revenue in a future period once
cash is received and all other revenue recognition criteria have been met, which are sometimes
referred to as net-down adjustments. Accordingly, we believe that in order to understand the change
in both deferred revenue and accounts receivable from one period to another the impact of these
net-down adjustments should be considered.
Historically
sales to U.S. commercial and governmental entities have represented
a majority of our
revenues, while international sales, including sales to agencies of
foreign governments, have represented a smaller portion of our revenues. While the
vertical make-up of our revenues will vary from period to period, over the long term we expect
revenues from sales to U.S. commercial and governmental entities to
each continue to grow in absolute dollars,
and we expect that sales to customers outside of the United
States will continue to grow both in absolute dollars and as a percentage of revenues over the long
term.
Product Revenues
Product revenues consist of license fees for our software products and sales of our appliance
products. License fees are based on a number of factors, including the type and number of devices
that a customer intends to monitor using our software as well as the number of users and locations.
In addition to our core solution, some of our customers purchase additional licenses for optional
extension modules that provide enhanced discovery and analytics capabilities. Sales of our
appliance products consist of sales of the appliance hardware and associated perpetual licenses to
the embedded software. We introduced our first appliance products in June 2006 and our first
ArcSight Logger product, our most widely adopted appliance product to date, in December 2006.
Appliance fees are based on the number of appliances purchased and, in some cases, on the number of
network devices with which our customer intends to use the appliances. We generally recognize
product revenues at the time of product delivery, provided all other revenue recognition criteria
have been met.
Historically, we have engaged in long sales cycles with our customers, typically three to six
months and more than a year for some sales, and many customers make their purchase decisions in the
last month of a fiscal quarter, following procurement trends in the industry. Further, average deal
size can vary considerably depending on our customers configuration requirements, implementation
plan and budget availability. As a result, it is difficult to predict timing or size of product
sales on a quarterly basis. In addition, we may fail to forecast sufficient production of our
appliance products due to our limited experience with them, or we may be unable to physically
deliver appliances within the quarter, depending on the proximity of the order to the end of the
quarter. These situations may lead to delay of revenues until we can deliver products. The loss or
delay of one or more large sales transactions in a quarter could impact our operating results for
that quarter and any future quarters into which revenues from that transaction are delayed.
In addition, we believe that our product revenue has been somewhat seasonal historically,
increasing in each quarter through the fiscal year, but with the first quarter of our fiscal year
typically having relatively lower product revenue compared to the prior fourth fiscal quarter.
However, we believe that there are significant seasonal factors that may cause the second and
fourth quarters of our fiscal year to have relatively higher product revenue (with the first and
third fiscal quarters each potentially having lower revenue than the immediately preceding fiscal
quarter). We believe that this seasonality results from a number of factors, including:
|
|
|
the timing of our annual sales club for top performers and annual training for our
entire sales force in our first fiscal quarter; |
|
|
|
the fiscal year end procurement cycle of our government customers; |
|
|
|
the budgeting, procurement and work cycles of our customers, including customers in the
public sector; |
|
|
|
seasonal reductions in business activity during the summer months in the United States,
Europe and certain other regions; and |
|
|
|
the structure of our direct sales incentive and compensation program, which may reinforce
the tendency of our direct sales team to book the largest volume of deals toward the end of
our fiscal year. |
We believe that our rapid historical growth and the required timing of new compliance mandates
may have overshadowed the nature or magnitude of seasonal or cyclical factors that might have
influenced our business to date. In addition, the timing of one or more large transactions may
overshadow seasonal factors in any particular quarterly period. In the future, we may experience
growth from additional compliance and cybersecurity mandates that could continue to mask underlying
seasonal purchasing decisions by our
customers. Seasonal or cyclical variations in our operations may become more pronounced over
time and may materially affect our results of operations in the future.
27
For example, as noted above, the timing of our fiscal quarters and the U.S. federal
governments September 30 fiscal year end may impact product sales to governmental agencies in the
second quarter of our fiscal year, offsetting the otherwise seasonal downturn in later summer
months. Increased government spending on cybersecurity and new compliance mandates may drive
customer demand at different times throughout our fiscal year, the timing of which we may not be
able to anticipate and may cause fluctuations in our operating results. In addition, sales to
customers with a standard December 31 fiscal year end may have a positive impact on our license
revenue in the third quarter of our fiscal year, potentially offsetting the impact of the major
holidays during the period. We expect seasonality to continue to impact our business in the future.
As of January 31, 2010 and April 30, 2009, deferred product revenues were $13.1 million and
$9.8 million, respectively. Included in deferred product revenues as of January 31, 2010 and April
30, 2009 was $0.5 million and $1.3 million, respectively, related to multiple element arrangements
where one or more product elements for which we did not have VSOE remained undelivered. The
remainder of deferred product revenues as of January 31, 2010 and April 30, 2009 was $12.6 million
and $8.5 million, respectively, and primarily related to product revenues to be recognized ratably
over the term of the maintenance arrangements, prepayments in advance of delivery and other
delivery deferrals. Deferred revenue and accounts receivable are reported net of adjustments for
sales transactions invoiced during the period that are recognized as revenue in a future period
once cash is received and all other revenue recognition criteria have been met. These net-down
adjustments decrease both accounts receivable and deferred revenue. Accordingly, we believe that in
order to understand the change in both deferred revenue and accounts receivable from one period to
another the impact of these net-down adjustments should be considered. As of January 31, 2010 and
April 30, 2009, deferred product revenues of $13.1 million and $9.8 million, respectively, were
reduced by net-down adjustments of $6.8 million and $5.4 million, respectively. Our operating
results in any particular quarterly period in fiscal 2010 may be similarly impacted by the
recognition of previously deferred revenue, where the associated costs were recorded in prior
periods. See Critical Accounting Policies, Significant Judgments and EstimatesRevenue
Recognition and Note 2 to our Condensed Consolidated Financial Statements (Significant Accounting
PoliciesRevenue Recognition) elsewhere in this report.
Maintenance Revenues
Maintenance includes rights to unspecified software product updates and upgrades, maintenance
releases and patches released during the term of the support period, and internet and telephone
access to maintenance personnel and content. Maintenance revenues are generated both from
maintenance that we agree to provide in connection with initial sales of software and hardware
products and from maintenance renewals. We generally sell maintenance on an annual basis. We offer
two levels of maintenancestandard and premium. The premium level is for customers that require
24-hour coverage seven days a week. In most cases, we provide maintenance for sales made through
channel partners. In addition, we sell an enhanced maintenance offering that provides frequent
security content updates for our software. Maintenance fees are treated as deferred revenue at the
time the maintenance agreement is initiated and recognized ratably over the term of the maintenance
agreement. As our customer base expands, we expect maintenance revenues to continue to grow, as
maintenance is sold to new customers and existing customers renew.
As of January 31, 2010, deferred maintenance revenues were $37.9 million, of which $31.9
million represented current deferred maintenance revenues. As of April 30, 2009, deferred
maintenance revenues were $32.4 million, of which $26.7 million represented current deferred
maintenance revenues. Deferred maintenance revenues relate to advanced payments for support
contracts that are recognized ratably. As of January 31, 2010 and April 30, 2009, the deferred
maintenance revenues of $37.9 million and $32.4 million, respectively, were reduced by net-down
adjustments of $4.8 million and $2.6 million, respectively. Net-down adjustments decrease both
accounts receivable and deferred revenue and typically relate to billed but unpaid customer
transactions for maintenance renewal support terms where services have not yet been provided, or
where revenue from the customer is only recognized when cash has been paid and all other revenue
recognition criteria have been met. See Critical Accounting Policies, Significant Judgments and
EstimatesRevenue Recognition and Note 2 to our Condensed Consolidated Financial Statements
(Significant Accounting PoliciesRevenue Recognition) elsewhere in this report.
Services Revenues
Services revenues are generated from sales of services to our customers, including
installation and implementation of our software, consulting and training. Professional services are
not essential to the functionality of the associated software products. During fiscal
28
2009, and continuing during the first three quarters of fiscal 2010, we entered into an
increasing number of service engagements to staff and manage the security operation centers, SOCs,
of certain large customers. SOC engagements are typically longer in duration than other services
engagements and support the day-to-day monitoring of customer SOC
environments. We generally sell our services on a
time-and-materials basis and recognize revenues as the services are performed. Services revenues
have generally increased over time as we have sold and delivered installation and training services
to our new customers and continued to sell training and consulting services to our existing
customers, including our new SOC services.
As of January 31, 2010 and April 30, 2009, deferred service revenues were $3.1 million and
$2.9 million, respectively, in each case all of which represented current deferred services
revenues. Deferred services revenues relate to customer payments in advance of services being
performed. As of January 31, 2010 and April 30, 2009, the deferred service revenues of $3.1 million
and $2.9 million, respectively, were reduced by net-down adjustments of $1.3 million and $1.0
million, respectively. Net-down adjustments decrease both accounts receivable and deferred revenue
and typically relate to billed but unpaid customer transactions for service engagements where
services have not yet been provided, or where revenue from the customer is only recognized when
cash has been paid and all other revenue recognition criteria have been met. See Critical
Accounting Policies, Significant Judgments and EstimatesRevenue Recognition and Note 2 to our
Condensed Consolidated Financial Statements (Significant Accounting PoliciesRevenue
Recognition) elsewhere in this report.
Cost of Revenues
Cost of revenues for our software products consists of third-party royalties and license fees
for licensed technology incorporated into our software product offerings. Cost of revenues for
appliance products consists of the hardware costs of the appliances and third-party royalties for
licensed technology. The cost of product revenues is primarily impacted by the mix of software and
appliance products as well as the relative ratio of third-party royalty bearing products included
in software sales transactions. Sales of our appliance products are generally at a lower gross
margin than sales of our software products.
Cost of maintenance revenues consists primarily of salaries and benefits related to
maintenance personnel, royalties and other out-of-pocket expenses, and facilities and other related
overhead.
Cost of services revenues consists primarily of the salaries and benefits of personnel, travel
and other out-of-pocket expenses, facilities and other related overhead that are allocated based on
the portion of the efforts of such personnel that are related to performance of professional
services, and cost of services provided by subcontractors for professional services. Services gross
margin may fluctuate as a result of periodic changes in our use of third party service providers,
resulting in lower or higher gross margins for these services.
We intend to increase sales to the mid-market, a goal that we believe will be aided by our
recent introduction of additional appliance products. We expect the percentage of our mid-market
sales made through our distribution channel will be greater than it has been to date. We also
expect a high percentage of our international sales to continue to be made through our distribution
channel. Sales through the channel tend to be at a lower gross margin than direct sales. As a
result, we may report lower gross margins in future periods than has been the case for prior
periods.
Operating and Non-Operating Expenses
Research and Development Expenses. Research and development expenses consist primarily of
salaries and benefits of personnel engaged in the development of new products, the enhancement of
existing products, quality assurance activities and, to a lesser extent, facilities costs and other
related overhead. We expense all of our research and development costs as they are incurred. We
expect research and development expenses to increase in absolute dollars for the foreseeable future
as we continue to invest in the development of our products.
Sales and Marketing Expenses. Sales and marketing expenses consist primarily of salaries,
commissions and benefits related to sales and marketing personnel and consultants; travel and other
out-of-pocket expenses; expenses for marketing programs, such as for trade shows and our annual
users conference, marketing materials and corporate communications; and facilities costs and other
related overhead. Commissions on sales of products and maintenance are typically accrued and
expensed when the respective revenue elements are ordered. Commissions on sales of services are
typically accrued and expensed when the service orders are generated. We
29
also pay commissions for channel sales not only to our channel sales force but also to our
direct sales force in an effort to minimize channel conflicts as we develop our channel network. We
intend to hire additional sales personnel, initiate additional marketing programs and build
additional relationships with resellers and systems integrators on a global basis. Accordingly, we
expect that our sales and marketing expenses will continue to increase for the foreseeable future
in absolute dollars.
General and Administrative Expenses. General and administrative expenses consist primarily of
salaries and benefits related to general and administrative personnel and consultants; accounting
and legal fees; insurance costs and facilities costs and other related overhead. We expect that, in
the future, general and administrative expenses will increase in absolute dollars as we add
personnel and incur additional costs related to the growth of our business and additional legal,
accounting and other expenses in connection with our reporting and compliance obligations as a
public company.
Other Income (Expense), Net. Other income (expense), net consists of interest earned on our
cash investments and foreign currency-related gains and losses. Our interest income will vary each
reporting period depending on our average cash balances during the period and the current level of
interest rates. Our foreign currency-related gains and losses will also vary depending upon
movements in underlying exchange rates.
Accounting for Income Taxes. Our provision for income taxes is calculated in compliance with
ASC Topic 740, Accounting for Income Taxes, or ASC 740, and other related guidance, and generally
consists of tax expense related to current period earnings. We estimate income taxes in each of the
jurisdictions in which we operate. This process involves determining income tax expense together
with calculating the deferred income tax expense related to temporary differences resulting from
the differing treatment of items for tax and accounting purposes. Deferred tax assets and
liabilities are measured using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. These temporary differences result in deferred
tax assets and liabilities, which are included within the consolidated balance sheets. Deferred tax
assets are recognized for deductible temporary differences, along with net operating loss and
credit carry-forwards, if it is more likely than not that the tax benefits will be realized.
To the extent a deferred tax asset cannot be recognized a valuation allowance is established
to reduce our deferred tax assets to the amount that is more likely than not to be realized. A
valuation allowance is maintained until sufficient evidence exists to support the reversal of all
or some portion of these allowances. Should the actual amounts differ from our estimates, the
amount of our valuation allowance could be materially impacted. In the event that we were to
determine that we would be able to realize deferred tax assets in the future in excess of the net
recorded deferred tax asset, a non-cash adjustment to the net deferred tax asset would result. Such
non-cash adjustment could materially increase net income as reported in accordance with GAAP in the
period such determination was made.
We have previously experienced a greater than 50% shift in our stock ownership, which creates
annual limitations on our ability to use a portion of our net operating loss carry-forwards. As a
result, our provision for income taxes and our resulting effective tax rate may be greater than if
our net operating loss carry-forwards were available without limitation.
Critical Accounting Policies, Significant Judgments and Estimates
Our condensed consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States, which requires us to make estimates
and judgments that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements as well as the reported
amounts of revenues and expenses during the reporting period. We base our estimates and judgments
on our historical experience, knowledge of current conditions and our beliefs regarding likely
occurrences in the future, given available information. Estimates are used for, but are not limited
to, revenue recognition, determination of fair value of stock and stock-based awards, valuation of
goodwill and intangible assets acquired in business combinations, impairment of goodwill and other
intangible assets, amortization of intangible assets, accounting for income taxes, accounting for
uncertainties in income taxes, contingencies and litigation, allowances for doubtful accounts, and
accrued liabilities. Actual results may differ from those estimates, and any differences may be
material to our financial statements. Further, if we apply different factors, or change the method
by which we apply the various factors that are used, in making our critical estimates and
judgments, our reported operating results and financial condition could be materially affected.
30
Revenue Recognition
We recognize revenues in accordance with ASC 985-605, Software-Revenue Recognition.
Accordingly, we exercise judgment and use estimates in connection with the determination of the
amount of product, maintenance and services revenues to be recognized in each accounting period.
We derive revenues primarily from three sources: (i) sales of our software and hardware
products, (ii) fees for maintenance to provide unspecified upgrades and customer technical support,
and (iii) fees for services, including professional services for product installation,
implementation, staffing and management services for SOCs and training. Our appliance products
contain software that is more than incidental to the functionality of the product. In accordance
with the guidance, we recognize revenues when the following conditions have been met:
|
|
|
persuasive evidence of an arrangement exists; |
|
|
|
|
the fee is fixed or determinable; |
|
|
|
|
product delivery has occurred or services have been rendered; and |
|
|
|
|
collection is considered probable. |
We typically use a binding purchase order in conjunction with either a signed contract or
reference on the purchase order to the terms and conditions of our shrinkwrap or end-user license
agreement as evidence of an arrangement. We assess whether the fee is fixed or determinable based
on the payment terms associated with the transaction and whether the sales price is subject to
refund or forfeiture, concession or other adjustment. We do not generally grant rights of return or
price protection to our distribution partners or end-users, other than limited rights of return
during the warranty period in some cases. We use shipping documents, contractual terms and
conditions and customer acceptance, when applicable, to verify product delivery to the customer.
For perpetual software license fees in arrangements that do not include customization, or services
that are not considered essential to the functionality of the licenses, delivery is deemed to occur
when the product is delivered to the customer. Services and consulting arrangements that are not
essential to the functionality of the licensed product are recognized as revenues as these services
are provided. Delivery of maintenance is considered to occur on a straight-line basis ratably over
the life of the contract. We consider probability of collection based on a number of factors, such
as creditworthiness of the customer as determined by credit checks and analysis, past transaction
history, the geographic location and financial viability. We do not require, nor do we request,
collateral from customers. If we determine that collectibility is not reasonably assured, we defer
the revenues until collectibility becomes reasonably assured, generally upon receipt of cash. A
net-down adjustment may be recorded in cases where sales transactions have been invoiced but are
recognized on cash receipt, for invoiced but unpaid sales transactions related to post-contract
customer support obligations for which the term has not commenced, or for invoiced but unpaid
service engagements where services have not yet been provided. Net-down adjustments decrease both
accounts receivable and deferred revenue. Any such transactions included in accounts receivable and
deferred revenue at period end are reflected on the balance sheet on a net basis.
Our sales of software products to date have typically been multiple element arrangements,
which have included software licenses and corresponding maintenance, and have also generally
included some amount of professional services. Our sales of appliance products to date have been
multiple element arrangements as well, which included hardware, software licenses and corresponding
maintenance, and have also generally included some amount of professional services. We allocate the
total arrangement fee among these multiple elements based upon their respective fair values as
determined by VSOE or, if applicable, by the residual method under the guidance. VSOE for
maintenance and support services is based on separate sales and/or renewals to other customers or
upon renewal rates quoted in contracts when the quoted renewal rates are deemed substantive in both
rate and term. VSOE for professional services is established based on prices charged to customers
when those services are sold separately. If we cannot objectively determine the fair value of any
undelivered element in a multiple element arrangement, we defer revenues for each element until all
elements have been delivered, or until VSOE can objectively be determined for any remaining
undelivered element. If VSOE for maintenance does not exist, and this represents the only
undelivered element, then revenues for the entire arrangement are recognized ratably over the
performance period. When VSOE of a delivered element has not been determined, but the fair value
for all undelivered elements has, we use the residual method to record revenues for the delivered
element. Under the residual method, the fair value of the undelivered elements is deferred and the
remaining portion of the arrangement fee is allocated to the delivered element
and recognized immediately as revenues. Revenues from time-based (term) license sales that
include ongoing delivery obligations throughout the term of the arrangement are recognized ratably
over the term.
31
Our agreements generally do not include acceptance provisions. However, if acceptance
provisions exist, we deem delivery to have occurred upon customer acceptance.
For sales to direct end-users and channel partners, we recognize product revenue once either
we or our channel partner has a contractual agreement in place and upon transfer of title and risk
of loss, which is generally upon shipment, provided all other criteria for revenue recognition have
been met. Where sales are made through resellers, revenue is generally recorded upon shipment to
the end-users, when all other criteria for revenue recognition have been met. In a limited number
of instances, when delivery is to be made to a reseller upon the request of either the end-user or
the reseller, and when all other criteria for revenue recognition have been met, it is our practice
to recognize revenue on shipment to a reseller but only where an end-user has been identified prior
to shipment. For end-users, resellers and systems integrators, we generally have no significant
obligations for future performance such as rights of return or pricing credits.
We assess whether fees are collectible and fixed or determinable at the time of the sale, and
recognize revenues if all other revenue recognition criteria have been met. Our standard payment
terms are net 30 days and are considered normal up to net three months, while payment terms beyond
three months are considered to be extended terms. Payments that are due within three months are
generally deemed to be fixed or determinable based on our successful collection history on these
agreements.
Stock-Based Compensation
Effective May 1, 2006, we adopted ASC Topic 718, Compensation-Stock Compensation, or ASC 718,
which requires companies to expense the fair value of employee stock options and other forms of
stock-based compensation. This guidance requires nonpublic companies that used the minimum value
method, for either recognition or pro forma disclosures to apply the guidance using the
prospective-transition method. As such, we continued to apply the minimum value method in future
periods to unvested equity awards outstanding at the date of adoption of ASC 718 that were measured
using the minimum value method. In addition, we continued to amortize those awards granted prior to
May 1, 2006 utilizing an accelerated amortization schedule. As of April 30, 2009, amortization
under the minimum value method was complete. In accordance with this guidance, we will recognize
the compensation cost of employee stock-based awards granted subsequent to April 30, 2006 in the
consolidated statements of income using the straight-line method over the vesting period of the
award.
To determine the fair value of stock options granted after May 1, 2006, we have elected to use
the Black-Scholes option pricing model, which requires, among other inputs, an estimate of the fair
value of the underlying common stock on the date of grant and assumptions as to volatility of our
stock over the expected term of the related options, the expected term of the options, the
risk-free interest rate and the option forfeiture rate. As there had been no public market for our
common stock prior to our IPO in February 2008, we determined the volatility for options granted
for fiscal 2008 and fiscal 2007 based on an analysis of reported data for a peer group of companies
that issued options with substantially similar terms. The expected volatility of options granted
has been determined using weighted-average measures of the peer group of companies of the implied
volatility and the historical volatility for a period equal to the expected life of the option, and
our historical volatility. The weighted-average expected volatility for options granted for the
three months ended January 31, 2010 and 2009 was 57.1% and 52.6%, respectively. The
weighted-average expected volatility for options granted for the nine months ended January 31, 2010
and 2009 was 57.5% and 51.7%, respectively. The expected life of options has been determined
considering the expected life of options granted by a group of peer companies and the average
vesting and contractual terms of options granted to our employees. The weighted-average expected
life of options granted for the three months ended January 31, 2010 and 2009 was 5.66 years and
5.74 years, respectively. The weighted-average expected life of options granted for the nine months
ended January 31, 2010 and 2009 was 5.64 years and 5.75 years, respectively. For the three months
ended January 31, 2010 and 2009, the weighted-average risk-free interest rate used was 2.55% and
2.90%, respectively. For the nine months ended January 31, 2010 and 2009, the weighted-average
risk-free interest rate used was 2.40% and 3.19%, respectively. The risk-free interest rate is
based on a zero coupon United States treasury instrument whose term is consistent with the expected
life of the stock options. We have not paid and do not anticipate paying cash dividends on our
shares of common stock; therefore, the expected dividend yield is assumed to be zero. In addition,
ASC 718 requires companies to utilize an estimated forfeiture rate when calculating the expense for
the period, whereas the former SFAS 123 guidance permitted companies to record forfeitures based on
actual forfeitures, which was our historical policy prior to the adoption of ASC 718. As a result,
we applied an estimated annual forfeiture
rate of 5% for the three and nine months ended January 31, 2010 and 2009, in determining the
expense recorded in our consolidated statements of income.
32
We recorded expense of $2.5 million and $1.4 million for the three months ended January 31,
2010 and 2009, and $6.3 million and $3.8 million for the nine months ended January 31, 2010 and
2009, respectively, in connection with stock-based awards. As of January 31, 2010, unrecognized
stock-based compensation expense of non-vested stock options was $22.8 million, which is expected
to be recognized using the straight line method over the required service period of the options. We
expect stock-based compensation expense to increase in absolute dollars as a result of the adoption
of ASC 718. The actual amount of stock-based compensation expense we record in any fiscal period
will depend on a number of factors, including the number of stock options issued and the volatility
of our stock price over time. In future periods, stock-based compensation expense may increase as
we issue additional equity-based awards to continue to attract and retain key employees.
Additionally, the guidance requires that we recognize compensation expense only for the portion of
stock options that are expected to vest. If the actual number of forfeitures differs from that
estimated by management, we will be required to record adjustments to stock-based compensation
expense in future periods.
Our 2007 Employee Stock Purchase Plan, or ESPP, became effective upon the effectiveness of our
IPO on February 14, 2008. The ESPP provides for consecutive six-month offering periods, except for
the first offering period, which commenced on February 14, 2008 and ended on September 15, 2008.
The ESPP is compensatory and results in compensation cost accounted for under ASC 718. We use the
Black-Scholes option pricing model to estimate the fair value of rights to acquire stock granted
under the ESPP. For the three months ended January 31, 2010 and 2009, we recorded stock-based
compensation expense associated with the ESPP of $0.4 million and $0.2 million, respectively. For
the nine months ended January 31, 2010 and 2009, we recorded stock-based compensation expense
associated with the ESPP of $0.9 million and $0.7 million, respectively. As of January 31, 2010,
unrecognized stock-based compensation expense associated with rights to acquire shares of common
stock under the ESPP was $0.2 million.
Goodwill and Intangible Assets
We do not amortize goodwill or other intangible assets with indefinite lives but rather test
them for impairment. The guidance requires us to perform an impairment review of our goodwill
balance at least annually, which we intend to perform on November 1 of each fiscal year, and also
whenever events or changes in circumstances indicate that the carrying amount of these assets may
not be recoverable. The allocation of the acquisition cost to intangible assets and goodwill
requires the extensive use of estimates and assumptions, including estimates of future cash flows
expected to be generated by the acquired assets and amortization of intangible assets, other than
goodwill. Further, when impairment indicators are identified with respect to previously recorded
intangible assets, the values of the assets are determined using discounted future cash flow
techniques. Significant management judgment is required in the forecasting of future operating
results that are used in the preparation of the projected discounted cash flows, and should
different conditions prevail, material write-downs of net intangible assets could occur. We review
periodically the estimated remaining useful lives of our acquired intangible assets. A reduction in
our estimate of remaining useful lives, if any, could result in increased amortization expense in
future periods. Future goodwill impairment tests could result in a charge to earnings.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts based on a periodic review of customer
accounts, payment patterns and specific collection issues. Where account-specific collection issues
are identified, we record a specific allowance based on the amount that we believe will not be
collected. For accounts where specific collection issues are not identified, we record a reserve
based on the age of the receivables. As of January 31, 2010, we had an allowance for doubtful
accounts balance of $0.3 million. As of January 31, 2010, we had one reseller that accounted for
11%, of our net accounts receivable.
Accounting for Income Taxes
Management judgment is required in determining our provision for income taxes, our deferred
tax assets and liabilities and any valuation allowance recorded against our net deferred tax
assets.
Provision for income taxes is calculated in accordance with ASC 740, Accounting for Income
Taxes, Interim Financial Reporting, and Accounting for Income Taxes in the Interim Period, as
amended, or ASC 740. Significant components affecting the tax rate for fiscal year ending April 30,
2010 include the utilization of net operating losses, research and development credits, foreign tax
credits, the composite state tax rate, and non-deductible stock-based compensation expense.
33
For the quarter ended January 31, 2010 and in accordance with ASC 740, we have evaluated our
need for a valuation allowance based on historical evidence, trends in profitability and
expectations of future taxable income. We maintained a valuation allowance against our net deferred
tax assets because we expect that it is more likely than not that all deferred tax assets will not
be realized in the foreseeable future. We continuously monitor the circumstances impacting the
expected realization of our deferred tax assets for each jurisdiction. We consider all available
evidence, both positive and negative, including historical levels of income in each jurisdiction,
expectations and risks associated with estimates of future taxable income and ongoing prudent and
feasible tax planning strategies in assessing the need for the valuation allowance. If we determine
it is more likely than not that some or all of our deferred tax assets will be realized in the
foreseeable future, we will adjust our valuation allowance accordingly. A change in our assessment
regarding the realization of our deferred tax assets will impact our effective tax rate in the
period we revise our assessment and in subsequent periods. In the event that we were to determine
that we would be able to realize deferred tax assets in the future in excess of the net recorded
deferred tax asset, a non-cash adjustment to the net deferred tax asset would result. Such non-cash
adjustment could materially increase net income as reported in accordance with GAAP in the period
such determination was made. We will continue to monitor available positive and negative evidence
in future periods to determine if any or all of the remaining valuation allowance should be
released.
We have previously experienced a greater than 50% shift in our stock ownership, which creates
annual limitations on our ability to use a portion of our net operating loss carry-forwards.
We adopted ASC 740, Accounting for Uncertainty in Income Taxes, an interpretation of the
guidance under ASC 740-10, on May 1, 2007. ASC 740 prescribes a recognition threshold and
measurement attributes for the financial statement recognition and measurement of uncertain tax
positions taken or expected to be taken in a companys income tax return. ASC 740 also provides
guidance on derecognition, classification, interest and penalties, accounting in interim periods,
disclosure and transition with respect to income tax uncertainty. Management judgment is required
to determine if the weight of available evidence indicates that a tax position is more likely than
not to be sustained, as well as the largest amount of benefit from each sustained position that is
more likely than not to be realized.
We file income tax returns in the U.S. federal jurisdiction, California and various state and
foreign tax jurisdictions in which we have a subsidiary or branch operation. The tax years 2002 to
2009 remain open to examination by the U.S. federal and state tax authorities, and the tax years
2005 to 2009 remain open to examination by the foreign tax authorities.
34
Results of Operations
The following table presents our results of operations as a percentage of total revenues for
the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
January 31, |
|
|
January 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
|
57.6 |
% |
|
|
59.8 |
% |
|
|
57.7 |
% |
|
|
58.6 |
% |
Maintenance |
|
|
31.9 |
|
|
|
27.5 |
|
|
|
31.1 |
|
|
|
29.0 |
|
Services |
|
|
10.5 |
|
|
|
12.7 |
|
|
|
11.2 |
|
|
|
12.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
Cost of revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
|
8.3 |
|
|
|
7.3 |
|
|
|
7.1 |
|
|
|
6.3 |
|
Maintenance |
|
|
5.4 |
|
|
|
4.5 |
|
|
|
5.4 |
|
|
|
5.1 |
|
Services |
|
|
7.1 |
|
|
|
7.1 |
|
|
|
7.2 |
|
|
|
7.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues |
|
|
20.8 |
|
|
|
18.9 |
|
|
|
19.7 |
|
|
|
18.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
79.2 |
|
|
|
81.1 |
|
|
|
80.3 |
|
|
|
81.3 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
13.9 |
|
|
|
14.3 |
|
|
|
14.7 |
|
|
|
16.4 |
|
Sales and marketing |
|
|
40.3 |
|
|
|
33.8 |
|
|
|
41.2 |
|
|
|
42.9 |
|
General and administrative |
|
|
14.7 |
|
|
|
13.5 |
|
|
|
15.2 |
|
|
|
14.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
68.9 |
|
|
|
61.6 |
|
|
|
71.1 |
|
|
|
73.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
10.3 |
% |
|
|
19.5 |
% |
|
|
9.2 |
% |
|
|
7.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison of the Three Months Ended January 31, 2010 and 2009
Revenues
Revenues for the three-months ended January 31, 2010 and 2009 was as follows (in thousands,
except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
January 31, |
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
Change in Dollars |
|
|
Change in Percent |
|
Products |
|
$ |
26,555 |
|
|
$ |
21,775 |
|
|
$ |
4,780 |
|
|
|
22.0 |
% |
Percentage of total revenues |
|
|
57.6 |
% |
|
|
59.8 |
% |
|
|
|
|
|
|
|
|
Maintenance |
|
|
14,702 |
|
|
|
10,004 |
|
|
|
4,698 |
|
|
|
47.0 |
% |
Percentage of total revenues |
|
|
31.9 |
% |
|
|
27.5 |
% |
|
|
|
|
|
|
|
|
Services |
|
|
4,853 |
|
|
|
4,613 |
|
|
|
240 |
|
|
|
5.2 |
% |
Percentage of total revenues |
|
|
10.5 |
% |
|
|
12.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
46,110 |
|
|
$ |
36,392 |
|
|
$ |
9,718 |
|
|
|
26.7 |
% |
|
|
|
|
|
|
|
Product Revenues. Product revenues for the three months ended January 31, 2010 included
revenues of $10.9 million from 133 new customers and revenues of $15.7 million from existing
customers. New customer revenues from 133 customers for the three months ended January 31, 2010
increased by $4.0 million compared to new customer revenues from 59 customers for the three months
ended January 31, 2009. The increase in the number of new customers from the third quarter of
fiscal 2009 to the third quarter of fiscal 2010 was primarily driven by a significant increase in
the number of new customers in EMEA. Many of these new customers purchased our logger products to
meet data privacy compliance requirements. These transactions are typically sold through our
channel partners and are smaller in transaction size. The significant increase in new customer
revenue from the third quarter of fiscal 2009 to the third quarter of fiscal 2010 was primarily due
to the increased success of our channel business in EMEA along with the improved economic
conditions in that region. We also experienced an increase in new customer revenue from the
Americas with average transaction sizes remaining relatively consistent from period to period.
Existing customer revenues from 126 customers for the three months ended January 31, 2010 increased
slightly by $0.8 million compared to existing customer revenues from 99 customers for the three
months ended January 31, 2009. This marginal increase was driven by a larger number of transactions
from
35
our growing installed base at average transaction sizes that declined year over year as a
result of product mix. We anticipate that the mix of product revenues from new and existing
customers could fluctuate from period to period as a result of the transaction size, product mix,
impact of the recovering economic environment and related geography of each revenue transaction.
There was a net recognition of $0.3 million of product revenues for the three months ended January
31, 2009, and none for the three months ended January 31, 2010 related to historical sales
transactions that initially included an undelivered product element for which we did not have VSOE.
As of January 31, 2010, deferred product revenues included $0.5 million related to similar
transactions. See the related discussion in Sources of Revenues, Cost of Revenues and Operating
Expenses.
Maintenance Revenues. Maintenance revenues increased $4.7 million for the three months ended
January 31, 2010 compared to January 31, 2009, as a result of providing support services to a
larger installed base as well as the incremental maintenance revenues from increased product sales.
Services Revenues. Services revenues increased by $0.2 million for the three months ended
January 31, 2010 compared to January 31, 2009, primarily due to continued growth in our SOC
staffing and management engagements.
Geographic Regions. We sell our product in three geographic regions: Americas; EMEA; and Asia
Pacific, or APAC. Revenues, which include product, maintenance and service revenues in absolute
amounts and as a percentage of total revenues for each region are summarized in the following table
(in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
January 31, |
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
Change in Dollars |
|
|
Change in Percent |
|
Americas |
|
$ |
32,981 |
|
|
$ |
28,459 |
|
|
$ |
4,522 |
|
|
|
15.9 |
% |
Percentage of total revenue |
|
|
71.5 |
% |
|
|
78.2 |
% |
|
|
|
|
|
|
|
|
EMEA |
|
|
10,651 |
|
|
|
5,837 |
|
|
|
4,814 |
|
|
|
82.5 |
% |
Percentage of total revenue |
|
|
23.1 |
% |
|
|
16.0 |
% |
|
|
|
|
|
|
|
|
APAC |
|
|
2,478 |
|
|
|
2,096 |
|
|
|
382 |
|
|
|
18.2 |
% |
Percentage of total revenue |
|
|
5.4 |
% |
|
|
5.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
46,110 |
|
|
$ |
36,392 |
|
|
$ |
9,718 |
|
|
|
26.7 |
% |
|
|
|
|
|
|
|
Revenues from the EMEA region increased in both absolute dollars and as a percentage of total
revenues, during the three months ended January 31, 2010 as a result of the improved economic
conditions in that region, compliance with newly effective regulatory mandates, and the larger
number of transactions sold through our channel partners. We experienced an increase in revenues in
the Americas region in absolute dollars, but a decrease in percentage of total revenues year over
year, primarily due to the significantly higher growth in the EMEA region. APAC has remained
relatively consistent as a percentage of revenue.
Cost of Revenues and Gross Margin
The following table is a summary of cost of product, maintenance, and services revenues in
absolute amounts (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
January 31, |
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
Change in Dollars |
|
|
Change in Percent |
|
Products |
|
$ |
3,824 |
|
|
$ |
2,637 |
|
|
$ |
1,187 |
|
|
|
45.0 |
% |
Maintenance |
|
|
2,497 |
|
|
|
1,637 |
|
|
|
860 |
|
|
|
52.5 |
% |
Services |
|
|
3,283 |
|
|
|
2,587 |
|
|
|
696 |
|
|
|
26.9 |
% |
|
|
|
|
|
|
|
Total cost of revenues |
|
$ |
9,604 |
|
|
$ |
6,861 |
|
|
$ |
2,743 |
|
|
|
40.0 |
% |
|
|
|
|
|
|
|
36
The following table is a summary of gross profit for products, maintenance, and services and
their respective gross margins (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
January 31, |
|
|
|
2010 |
|
|
2009 |
|
Gross margin |
|
|
|
|
|
|
|
|
Products |
|
$ |
22,731 |
|
|
$ |
19,138 |
|
Percentage of product revenues |
|
|
85.6 |
% |
|
|
87.9 |
% |
Maintenance |
|
|
12,205 |
|
|
|
8,367 |
|
Percentage of maintenance revenues |
|
|
83.0 |
% |
|
|
83.6 |
% |
Services |
|
|
1,570 |
|
|
|
2,026 |
|
Percentage of services revenues |
|
|
32.4 |
% |
|
|
43.9 |
% |
|
|
|
Total gross margin |
|
$ |
36,506 |
|
|
$ |
29,531 |
|
Percentage of total revenues |
|
|
79.2 |
% |
|
|
81.1 |
% |
|
|
|
Cost of Product Revenues and Gross Margin. Cost of product revenues increased by $1.2 million
for the three months ended January 31, 2010, primarily due to increased ArcSight Logger product
cost of goods of $0.8 million related to increased ArcSight Logger product sales, as well as an
increase of $0.3 million related to royalty obligations associated with product cost of goods sold.
Product gross margin as a percentage of product revenues decreased by 2.3% as a percentage of
product revenues for the three months ended January 31, 2010 compared to the three months ended
January 31, 2009, due to lower margin appliance revenue contributing a higher percentage of product
revenues than the prior year. While appliance revenues historically
have represented less than half of product revenues, appliance
revenues exceeded software revenues for the three months ended
January 31, 2010. While we expect appliance revenues to generally represent less than half
of product revenues going forward, the mix of software and appliance
product revenues will likely
fluctuate from quarter to quarter, potentially negatively impacting
product gross margins in the quarter.
Cost of Maintenance Revenues and Gross Margin. Cost of maintenance revenues increased by $0.9
million for the three months ended January 31, 2010 compared to January 31, 2009, due to increased
compensation-related expenses of $0.4 million related to increased head count and cost per
employee. In addition, third-party royalty support and maintenance expenses increased by $0.2
million. Maintenance gross margin as a percentage of maintenance revenues remained relatively
consistent decreasing slightly by 0.6% for the three months ended January 31, 2010 compared to
January 31, 2009.
Cost of Services Revenues and Gross Margin. Cost of services revenues increased by $0.7
million for the three months ended January 31, 2010 compared to January 31, 2009 due primarily to
increased compensation-related expenses of $0.4 million related to increased head count and cost
per employee. Additionally, consultant travel and entertainment and use of external consultants
increased by $0.2 million. Services gross margin as a percentage of services revenues decreased by
11.5% to 32.4% for the three months ended January 31, 2010 from 43.9% for the three months ended
January 31, 2009, due primarily to the use of higher cost external consultants to staff such
engagements, while we continue to hire internally to staff our growing services business.
Operating Expenses
The following table is a summary of research and development, sales and marketing, and general
and administrative expenses in absolute amounts and as a percentage of total revenues (in
thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
January 31, |
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
Change in Dollars |
|
|
Change in Percent |
|
Research and development |
|
$ |
6,429 |
|
|
$ |
5,201 |
|
|
$ |
1,228 |
|
|
|
23.6 |
% |
Percentage of total revenues |
|
|
13.9 |
% |
|
|
14.3 |
% |
|
|
|
|
|
|
|
|
Sales and Marketing |
|
|
18,563 |
|
|
|
12,298 |
|
|
|
6,265 |
|
|
|
50.9 |
% |
Percentage of total revenues |
|
|
40.3 |
% |
|
|
33.8 |
% |
|
|
|
|
|
|
|
|
General and administrative |
|
|
6,767 |
|
|
|
4,943 |
|
|
|
1,824 |
|
|
|
36.9 |
% |
Percentage of total revenues |
|
|
14.7 |
% |
|
|
13.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
$ |
31,759 |
|
|
$ |
22,442 |
|
|
$ |
9,317 |
|
|
|
41.5 |
% |
Percentage of total revenues |
|
|
68.9 |
% |
|
|
61.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
Research and Development Expenses. The increase in research and development expenses for the
three months ended January 31, 2010 of $1.2 million compared to the three months ended January 31,
2009 was primarily attributable to an increase of $0.7 million in compensation and an increase of
$0.3 million in stock-based compensation expense, associated with an increase in research and
development personnel from 109 to 120 at the respective period ends. We plan to continue hiring to
extend our product platform. We expect research and development expenses to continue
to increase in absolute dollars.
Sales and Marketing Expenses. The increase in sales and marketing expenses for the three
months ended January 31, 2010 of $6.3 million compared to the three months ended January 31, 2009,
was primarily attributable to an increase of $4.7 million in compensation-related expense of which
$1.7 million related to commission plan expenses associated with increased sales orders generated.
Of this compensation, an expense increase of $3.0 million was due to an increase in sales and
marketing personnel from 132 to 163 at the respective period ends, associated with significant
growth across our sales organization. We plan to continue hiring in line with our growth
opportunities. The increase also includes an increase in marketing program expenses of $0.5
million, an increase of $0.4 million in external consultants, temporary help and recruiting and an
increase in travel and entertainment expenses of $0.3 million. As a result, we expect sales and
marketing expenses to continue to increase in absolute dollars.
General and Administrative Expenses. The increase in general and administrative expenses of
$1.8 million for the three months ended January 31, 2010, compared to the three months ended
January 31, 2009, was associated with an increase of $1.0 million in compensation-related expenses
attributed to an increase in general administrative personnel from 50 to 59 at the respective
period ends, due primarily to hiring in our Information Technology and Finance and Accounting areas
in support of infrastructure growth. The increase also includes an increase in external consultants
and temporary help of $0.3 million related to IT infrastructure projects, an increase of $0.2
million in third-party software support and maintenance expenses, and an increase of $0.1 million
in legal, audit and tax advisory service fees.
Non-Operating Expenses
The following table is a summary of interest income and other expenses, net (in thousands,
except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
January 31, |
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
Change in Dollars |
|
|
Change in Percent |
|
Interest income |
|
$ |
34 |
|
|
$ |
154 |
|
|
$ |
(120 |
) |
|
|
(77.9 |
)% |
Percentage of total revenues |
|
|
0.1 |
% |
|
|
0.4 |
% |
|
|
|
|
|
|
|
|
Other income (expense), net |
|
|
(115 |
) |
|
|
3 |
|
|
|
(118 |
) |
|
|
(3933.3 |
)% |
Percentage of total revenues |
|
|
(0.3 |
)% |
|
|
(0.0 |
)% |
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
2,438 |
|
|
|
2,183 |
|
|
|
255 |
|
|
|
11.7 |
% |
Percentage of total revenues |
|
|
5.3 |
% |
|
|
6.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-operating expense |
|
$ |
(2,519 |
) |
|
$ |
(2,026 |
) |
|
$ |
(493 |
) |
|
|
24.3 |
% |
Percentage of total revenues |
|
|
(5.5 |
)% |
|
|
(5.6 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income. The decrease in interest income of $0.1 million for the three months ended
January 31, 2010 compared to January 31, 2009 was primarily attributable to lower interest rates
during the first three quarters of fiscal 2010.
Other Income (Expense), Net. Other income (expense), net, for the three months ended January
31, 2010 compared to January 31, 2009 increased as a result of increases in interest expense
associated with entering into new capitalized software license arrangements, as well as increases
in foreign currency losses.
Provision for Income Taxes. For the three months ended January 31, 2010, we recorded a
provision for income taxes of $2.4 million, based on our estimated taxable income for the year,
plus certain discrete items recorded during the quarter, namely the tax benefit of stock option
transactions and income tax uncertainties, resulting in effective tax rates for the three and nine
months ended January 31, 2010 of 52.24% and 49.08%, respectively. The difference between the
provision for income taxes that would be derived by applying the statutory rate to our income
before tax and the income tax provision actually recorded is primarily due to the impact of
non-deductible stock-based compensation expenses and other currently non-deductible items, movement
in our valuation allowance and various discrete items, offset by the use of net operating loss
carry-forwards and tax credits. For the three months ended January
38
31, 2009, we recorded a provision for income taxes of $2.2 million. The effective tax rate for
the three months ended January 31, 2009 is 30.1%, and is based on our estimated taxable income for
the year, plus certain discrete items recorded during the quarter. The difference between the
provision for income taxes that would be derived by applying the statutory rate to our income
before tax and the income tax provision actually recorded is primarily due to the impact of
nondeductible ASC 718 stock-based compensation expenses, offset by the use of net operating loss
carry-forwards and tax credits.
Comparison of the Nine Months Ended January 31, 2010 and 2009
Revenues
Revenues for the nine months ended January 31, 2010 and 2009 was as follows (in thousands,
except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
|
|
|
|
|
January 31, |
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
Change in Dollars |
|
|
Change in Percent |
|
Products |
|
$ |
72,838 |
|
|
$ |
56,746 |
|
|
$ |
16,092 |
|
|
|
28.4 |
% |
Percentage of total revenues |
|
|
57.7 |
% |
|
|
58.6 |
% |
|
|
|
|
|
|
|
|
Maintenance |
|
|
39,238 |
|
|
|
28,102 |
|
|
|
11,136 |
|
|
|
39.6 |
% |
Percentage of total revenues |
|
|
31.1 |
% |
|
|
29.0 |
% |
|
|
|
|
|
|
|
|
Services |
|
|
14,092 |
|
|
|
12,042 |
|
|
|
2,050 |
|
|
|
17.0 |
% |
Percentage of total revenues |
|
|
11.2 |
% |
|
|
12.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
126,168 |
|
|
$ |
96,890 |
|
|
$ |
29,278 |
|
|
|
30.2 |
% |
|
|
|
|
|
|
|
Product Revenues. Product revenues for the nine months ended January 31, 2010 included
revenues of $29.0 million from 235 new customers and revenues of $43.8 million from existing
customers. New customer revenues from 235 customers for the nine months ended January 31, 2010
increased by $4.4 million compared to new customer revenues from 159 customers for the nine months
ended January 31, 2009. In aggregate, product revenue per new customer dropped slightly on a year
over year basis, driven by the increase in channel driven sales of our Logger products at lower
transaction sizes. Existing customer revenues for the nine months ended January 31, 2010 increased
by $11.7 million compared to existing customer revenues for the nine months ended January 31, 2009.
The increase was primarily attributable to an increase in number and average transaction size for
sales to our existing customers in both the EMEA and Americas region, driven by additional
purchases of our ESM product together with our ArcSight Logger product as well as the expansion of
the deployment of our products more broadly across their IT infrastructure. We anticipate that the
mix of product revenues from new and existing customers could fluctuate from period to period as a
result of the transaction size, product mix, impact of the recovering economic environment and
related geography of each revenue transaction. There was a net recognition of $0.8 million and $0.7
million of product revenues in the nine months ended January 31, 2010 and 2009, respectively,
related to sales transactions that initially included an undelivered product element for which we
did not have VSOE. As of January 31, 2010, deferred product revenues included $0.5 million related
to similar transactions. See the related discussion in Sources of Revenues, Cost of Revenues and
Operating Expenses.
Maintenance Revenues. Maintenance revenues increased $11.1 million for the nine months ended
January 31, 2010 compared to January 31, 2009, as a result of providing support services to a
larger installed base as well as the incremental maintenance revenues from increased product sales.
Services Revenues. Services revenues increased by $2.1 million for the nine months ended
January 31, 2010 compared to January 31, 2009, primarily due to continued growth in our SOC
staffing and management engagements.
39
Geographic Regions. We sell our product in three geographic regions: Americas; EMEA; and APAC.
Net sales, which include product, maintenance and service revenue, for each region are summarized
in the following table (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
|
|
|
|
|
January 31, |
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
Change in Dollars |
|
|
Change in Percent |
|
Americas |
|
$ |
96,967 |
|
|
$ |
76,527 |
|
|
$ |
20,440 |
|
|
|
26.7 |
% |
Percentage of total revenue |
|
|
76.8 |
% |
|
|
79.0 |
% |
|
|
|
|
|
|
|
|
EMEA |
|
|
23,680 |
|
|
|
15,035 |
|
|
|
8,645 |
|
|
|
57.5 |
% |
Percentage of total revenue |
|
|
18.8 |
% |
|
|
15.5 |
% |
|
|
|
|
|
|
|
|
APAC |
|
|
5,521 |
|
|
|
5,328 |
|
|
|
193 |
|
|
|
3.6 |
% |
Percentage of total revenue |
|
|
4.4 |
% |
|
|
5.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
126,168 |
|
|
$ |
96,890 |
|
|
$ |
29,278 |
|
|
|
30.2 |
% |
|
|
|
|
|
|
|
Total revenues for nine months ended January 31, 2010 as compared to January 31, 2009
increased due to the strength of the Americas and EMEA regions. The EMEA region during the nine
months ended January 31, 2010 increased in both absolute dollars and as a percentage of revenues,
as signs of economic recovery and stabilization were evidenced in this region. We experienced an
increase in revenues in the Americas region in absolute dollars, but the percentage of total
revenues year over year remained relatively constant, primarily due to the growth in the EMEA
region.
Cost of Revenues and Gross Margin
The following table is a summary of cost of product, maintenance, and services revenues in
absolute amounts and as a percentage of total revenues (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
|
|
|
|
|
January 31, |
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
Change in Dollars |
|
|
Change in Percent |
|
Products |
|
$ |
8,918 |
|
|
$ |
6,136 |
|
|
$ |
2,782 |
|
|
|
45.3 |
% |
Maintenance |
|
|
6,856 |
|
|
|
4,931 |
|
|
|
1,925 |
|
|
|
39.0 |
% |
Services |
|
|
9,117 |
|
|
|
7,017 |
|
|
|
2,100 |
|
|
|
29.9 |
% |
|
|
|
|
|
|
|
Total cost of revenues |
|
$ |
24,891 |
|
|
$ |
18,084 |
|
|
$ |
6,807 |
|
|
|
37.6 |
% |
|
|
|
|
|
|
|
The following table is a summary of gross profit for products, maintenance, and services and
their respective gross margins (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
January 31, |
|
|
|
2010 |
|
|
2009 |
|
Gross margin |
|
|
|
|
|
|
|
|
Products |
|
$ |
63,920 |
|
|
$ |
50,610 |
|
Percentage of product revenues |
|
|
87.8 |
% |
|
|
89.2 |
% |
Maintenance |
|
|
32,382 |
|
|
|
23,171 |
|
Percentage of maintenance revenues |
|
|
82.5 |
% |
|
|
82.5 |
% |
Services |
|
|
4,975 |
|
|
|
5,025 |
|
Percentage of services revenues |
|
|
35.3 |
% |
|
|
41.7 |
% |
|
|
|
Total gross margin |
|
$ |
101,277 |
|
|
$ |
78,806 |
|
Percentage of total revenues |
|
|
80.3 |
% |
|
|
81.3 |
% |
|
|
|
Cost of Product Revenues and Gross Margin. Cost of product revenues increased by $2.8 million
for the nine months ended January 31, 2010, primarily due to increased ArcSight Logger product cost
of goods of $2.1 million related to increased ArcSight Logger product sales, as well as an increase
of $0.6 million related to royalty obligations associated with product cost of goods sold. Product
gross margin as a percentage of product revenues decreased by 1.4% as a percentage of product
revenues for the nine months ended January 31, 2010 compared to the nine months ended January 31,
2009, due to appliance revenues contributing a higher
40
percentage
of product revenue than the prior year. While we expect appliance
revenues to
generally represent less than half of product revenues going forward, the mix of software and
appliance product revenues will likely fluctuate from period to
period, potentially negatively impacting product gross margins during
the period.
Cost of Maintenance Revenues and Gross Margin. Cost of maintenance revenues increased by $1.9
million for the nine months ended January 31, 2010 compared to January 31, 2009, due primarily to
increased compensation-related expenses of $1.0 million related to an increase in head count and
cost per employee. In addition, third-party royalty support and maintenance expenses increased by
$0.6 million. Maintenance gross margin as a percentage of maintenance revenues remained constant
for the nine months ended January 31, 2010 compared to January 31, 2009, due primarily to growth in
our support organization and associated costs.
Cost of Services Revenues and Gross Margin. Cost of services revenues increased by $2.1
million for the nine months ended January 31, 2010 compared to January 31, 2009 due to increased
compensation-related expenses of $0.9 million related to increased head count and cost per
employee. Additionally, use of third party contractors and external consultants increased by $0.9
million. Services gross margin as a percentage of services revenues decreased by 6.4% to 35.3% for
the nine months ended January 31, 2010 from 41.7% for the nine months ended January 31, 2009, due
primarily to the use of higher cost external consultants to staff such engagements, while we
continue to hire internally to staff our growing services business.
Operating Expenses
The following table is a summary of research and development, sales and marketing, and general
and administrative expenses in absolute amounts and as a percentage of total revenues (in
thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
|
|
|
|
|
January 31, |
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2009 |
|
|
Change in Dollars |
|
|
Change in Percent |
|
Research and development |
|
$ |
18,603 |
|
|
$ |
15,939 |
|
|
$ |
2,664 |
|
|
|
16.7 |
% |
Percentage of total revenues |
|
|
14.7 |
% |
|
|
16.5 |
% |
|
|
|
|
|
|
|
|
Sales and Marketing |
|
|
51,930 |
|
|
|
41,521 |
|
|
|
10,409 |
|
|
|
25.1 |
% |
Percentage of total revenues |
|
|
41.2 |
% |
|
|
42.8 |
% |
|
|
|
|
|
|
|
|
General and administrative |
|
|
19,121 |
|
|
|
14,155 |
|
|
|
4,966 |
|
|
|
35.1 |
% |
Percentage of total revenues |
|
|
15.2 |
% |
|
|
14.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
$ |
89,654 |
|
|
$ |
71,615 |
|
|
$ |
18,039 |
|
|
|
25.2 |
% |
Percentage of total revenues |
|
|
71.1 |
% |
|
|
73.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and Development Expenses. The increase in research and development expenses for the
nine months ended January 31, 2010 of $2.7 million compared to the nine months ended January 31,
2009 was primarily attributable to an increase of $2.3 million in compensation-related expense,
associated with an increase in research and development personnel from 109 to 120 at the respective
period ends. We plan to continue hiring to extend our product platform. As a result, we expect
research and development expenses to continue to increase in absolute dollars.
Sales and Marketing Expenses. The increase in sales and marketing expenses for the nine months
ended January 31, 2010 of $10.4 million compared to the nine months ended January 31, 2009, was
primarily attributable to a increase of $7.6 million in compensation expense of which $2.8 million
related to commission plan expenses associated with a change in commission plan structures. Of this
compensation expense increase $4.8 million was due to an increase in sales and marketing personnel
from 132 to 163 at the respective period ends, across our sales organization. We plan to continue
hiring in line with our growth opportunities. In addition, the increase also includes an increase
of $0.9 million in external consultants and temporary help, an increase in marketing program
expenses of $0.7 million, an increase in travel and entertainment expenses of $0.6 million and an
increase in marketing communications of $0.3 million. We expect sales and marketing expenses to
continue to increase in absolute dollars.
General and Administrative Expenses. The increase in general and administrative expenses of
$5.0 million for the nine months ended January 31, 2010, compared to the nine months ended January
31, 2009, was primarily associated with an increase of $3.8 million in compensation
related-expenses attributed to an increase in general administrative personnel from 50 to 59 at the
respective period ends. In addition, third-party software support and maintenance expense increased
$0.4 million attributable to ERP system
41
hosting expenses related to the implementation project, temporary help increased $0.4 million,
and rent expense increased $0.1 million. This increase was offset by a decrease of $0.1 million in
legal, audit and tax advisory service fees.
Non-Operating Expenses
The following table is a summary of interest income and other expenses, net (in thousands,
except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
|
|
|
|
|
January 31, |
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
Change in Dollars |
|
|
Change in Percent |
|
Interest income |
|
$ |
97 |
|
|
$ |
909 |
|
|
$ |
(812 |
) |
|
|
(89.3 |
)% |
Percentage of total revenues |
|
|
0.1 |
% |
|
|
0.9 |
% |
|
|
|
|
|
|
|
|
Other expense, net |
|
|
(446 |
) |
|
|
(107 |
) |
|
|
(339 |
) |
|
|
(316.8 |
)% |
Percentage of total revenues |
|
|
(0.4 |
)% |
|
|
(0.1 |
)% |
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
5,533 |
|
|
|
2,415 |
|
|
|
3,118 |
|
|
|
129.1 |
% |
Percentage of total revenues |
|
|
4.4 |
% |
|
|
2.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-operating income (expense) |
|
$ |
(5,882 |
) |
|
$ |
(1,613 |
) |
|
$ |
(4,269 |
) |
|
|
(264.7 |
)% |
Percentage of total revenues |
|
|
(4.7 |
)% |
|
|
(1.7 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income. The decrease in interest income of $0.8 million for the nine months ended
January 31, 2010 compared to January 31, 2009 was primarily attributable to lower interest rates
during the first three quarters of fiscal 2010.
Other Expense, Net. Other expense, net, for the nine months ended January 31, 2010 compared to
January 31, 2009 increased as a result of increases in interest expense associated with entering
into new capitalized software license arrangements, as well as increases in foreign currency
losses.
Provision for Income Taxes. For the nine months ended January 31, 2010, we recorded a
provision for income taxes of $5.5 million. The effective tax rate for the nine months ended
January 31, 2010 is 49.08%, and is based on our estimated taxable income for the year, plus certain
discrete items recorded during the quarter, namely the tax benefit of stock option transactions and
income tax uncertainties. The difference between the provision for income taxes that would be
derived by applying the statutory rate to our income before tax and the income tax provision
actually recorded is primarily due to the impact of nondeductible stock-based compensation expenses
and other currently non-deductible items, movement in our valuation allowance and various discrete
items, offset by the use of net operating loss carry-forwards and tax credits. For the nine months
ended January 31, 2009, we recorded a provision for income taxes of $2.4 million. The effective
tax rate for the nine months ended January 31, 2009 is 30.2%, and is based on our estimated taxable
income for the year, plus certain discrete items recorded during the quarter. The difference
between the provision for income taxes that would be derived by applying the statutory rate to our
income before tax and the income tax provision actually recorded is primarily due to the impact of
nondeductible ASC 718 stock-based compensation expenses, offset by the use of net operating loss
carry-forwards and tax credits.
Liquidity and Capital Resources
From our inception in May 2000 through October 2002, we funded our operations primarily
through convertible preferred stock financings that raised a total of $26.8 million. We achieved
positive cash flows from operations in fiscal 2004 through 2009, and generated $33.8 million of
cash from our operating activities during the nine months ended January 31, 2010 compared to $12.3
million of cash from our operating activities for the nine months ended January 31, 2009. We
generally expect to continue generating positive operating cash flows on an annual basis. There may
be individual quarters in which we use cash as a result of the timing of receipts or payments such
as receipt of a large receivable from a customer whose revenue is recognized on a cash basis or
payment of annual bonuses in the first quarter of a fiscal year. As we have continued to generate
cash, we have invested $20.0 million into marketable security investments. These marketable
securities consist of certificates of deposit invested with financial institutions that we believe
to be financially sound, in order to minimize our credit risk. Additionally in February 2008, we
completed our IPO in which we sold 6,000,000 shares of common stock at an issue price of $9.00 per
share. We raised a total of $54.0 million in gross proceeds from our IPO, or $45.9 million in net
proceeds after deducting underwriting discounts and offering expenses.
42
At January 31, 2010, we had cash, cash equivalents and marketable securities totaling $131.8
million and net accounts receivable of $24.0 million, compared to $90.5 million of cash and cash
equivalents and $34.2 million of net accounts receivable at April 30, 2009.
Historically our principal uses of cash have consisted of payroll and other operating expenses
and purchases of property and equipment to support our growth. In fiscal 2007, we used $7.2 million
in cash to purchase the assets of Enira Technologies, LLC and pay acquisition costs.
The following table shows our cash flows from operating activities, investing activities and
financing activities for the stated periods:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
January 31, |
|
|
|
2010 |
|
|
2009 |
|
Net cash provided by operating activities |
|
$ |
33,819 |
|
|
$ |
12,322 |
|
Net cash used in investing activities |
|
|
(23,112 |
) |
|
|
(1,809 |
) |
Net cash provided by financing activities |
|
|
10,573 |
|
|
|
728 |
|
Operating Activities
We have reported net income for both the three months ended January 31, 2010 and three months
ended January 31, 2009. Our operating activities have provided positive cash flows, primarily due
to cash received from collections from customers. Our cash flows from operating activities in any
period will continue to be significantly influenced by our results of operations, changes in
deferred revenues, as well as changes in other components of our working capital.
While we may report negative cash flows from operating activities from time to time in
particular quarterly periods, we generally expect to continue to generate positive cash flows from
operating activities on an annual basis. Future cash from operations will depend on many factors,
including:
|
|
|
the growth in our sales transactions and associated cash collections or growth in
receivables; |
|
|
|
|
the level of our sales and marketing activities, including expansion into new
territories; |
|
|
|
|
the timing and extent of spending to support product development efforts; and |
|
|
|
|
the timing of the growth in general and administrative expenses as we further develop our
administrative infrastructure to support the business as a public company. |
We generated $33.8 million of cash from operating activities during the nine months ended
January 31, 2010, primarily as a result of a decrease of $10.0 million in accounts receivable due
to strong collections efforts, an increase in other accrued liabilities of $5.2 million due
primarily to an increase in accrued royalties due to increased sales, an increase in deferred
revenue of $9.0 million, and an increase in accounts payable of $0.9 million. The balance was
offset by a decrease in accrued compensation and benefits of $2.2 million, and an increase of $0.6
million in prepaid expenses and other assets. The balance was also offset by an increase of $4.1
million in excess tax benefits associated with stock based compensation plans. In addition, we had
a net income of $5.7 million for this period, which included non-cash charges of $7.3 million for
stock-based compensation expense and $2.5 million of depreciation and amortization.
We generated $12.3 million of cash from operating activities during the nine months ended
January 31, 2009, primarily as a result of a $4.3 million decrease in accounts receivable due to
strong collections efforts partially attributable to our relatively high accounts receivable
balance as of April 30, 2008, a $2.7 million decrease in prepaid expenses, an increase of $2.3
million in other accrued liabilities offset by a decrease in accounts payable of $1.9 million, a
decrease in accrued compensation and benefits of $4.1 million related to payments of sales
commissions and performance bonuses earned in fiscal 2008, and reduction in deferred revenue of
$3.8 million. In addition, we had a net income of $5.6 million for this period, which included
non-cash charges of $4.6 million for stock-based compensation expense and $2.5 million of
depreciation and amortization.
43
Investing Activities
During the nine months ended January 31, 2010, we used $23.1 million in cash for investing
activities, comprised primarily of $20.0 million in short-term held to maturity investments and
$4.0 million in capital expenditures primarily associated with software acquired in support of our ERP
software implementation. In addition, $0.8 million of previously restricted cash reserved under
operating lease terms and conditions became unrestricted after satisfying certain requirements of
the operating lease. During the nine months ended January 31, 2009, we used $1.8 million in cash
for investing activities, all of which was related to capital expenditures associated with computer
equipment and furniture and fixtures in support of the expansion of our infrastructure and work
force.
Financing Activities
During the nine months ended January 31, 2010, $10.6 million of cash was provided by financing
activities, comprised primarily of $8.3 million of net proceeds from the exercise of stock options,
and $4.1 million from tax benefits related to disqualifying dispositions associated with
stock-based compensation, offset by $1.8 million in payments for prepaid software licenses used as
a component in our product sales. During the nine months ended January 31, 2009, we generated
$0.7 million of cash from financing activities, comprised primarily of $2.4 million from net
proceeds from the exercise of stock options, offset by $1.7 million in payments for prepaid
software licenses used as a component in our product sales.
Other Factors Affecting Liquidity and Capital Resources
We believe that our cash and cash equivalents and any cash flow from operations will be
sufficient to meet our anticipated cash needs, including for working capital purposes, capital
expenditures and various contractual obligations, for at least the next 12 months. We may, however,
require additional cash resources due to changed business conditions or other future developments,
including any investments or acquisitions we may decide to pursue. If these sources are
insufficient to satisfy our cash requirements, we may seek to sell debt securities or additional
equity securities or to obtain a credit facility. The sale of additional equity securities could
result in additional dilution to our stockholders. The incurrence of indebtedness would result in
debt service obligations and could result in operating and financial covenants that would restrict
our operations. In addition, there can be no assurance that any additional financing will be
available on acceptable terms, if at all. We anticipate that, from time to time, we may evaluate
acquisitions of complementary businesses, technologies or assets. However, there are no current
understandings, commitments or agreements with respect to any acquisitions.
Off-Balance Sheet Arrangements
As of January 31, 2010, we had no off-balance sheet arrangements as defined in Item 303(a)(4)
of the SECs Regulation S-K.
Contractual Obligations and Commitments
We lease facilities for our corporate headquarters, subsidiaries and regional sales offices.
As of January 31, 2010, we leased our principal facility in Cupertino, California under a
non-cancelable operating lease agreement that will expire in June 2017. In November 2009, we
modified and extended our operating lease which originally would have expired in October 2013. Over
the term of the amendment we have agreed to make payments totaling $22.1 million.
We also have leases for our regional sales offices that are for 13 months or less.
44
The following table is a summary of our contractual obligations as of January 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
|
Remainder |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
of FY 2010 |
|
|
FY 2011 |
|
|
FY 2012 |
|
|
FY 2013 |
|
|
Thereafter |
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
Operating lease obligations |
|
$ |
23,507 |
|
|
$ |
524 |
|
|
$ |
3,261 |
|
|
$ |
3,020 |
|
|
$ |
3,038 |
|
|
$ |
13,664 |
|
Accrued contractual obligations |
|
|
3,446 |
|
|
|
623 |
|
|
|
2,538 |
|
|
|
214 |
|
|
|
71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
26,953 |
|
|
$ |
1,147 |
|
|
$ |
5,799 |
|
|
$ |
3,234 |
|
|
$ |
3,109 |
|
|
$ |
13,664 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On May 20, 2009, we entered into a software license agreement with Oracle USA, Inc that
authorizes us to integrate Oracle database software with our ArcSight ESM products and distribute
ArcSight ESM products with the embedded database software. Under the agreement, which has a two
year term that commenced on May 31, 2009 when our prior agreement with Oracle expired, we have
agreed to make royalty and technical support payments totaling $4.8 million over the license term.
Under the prior agreement with Oracle, we made payments totaling $1.9 million through fiscal 2009.
Recent Accounting Pronouncements
Refer to the discussion of recent accounting pronouncements in Note 2 Summary of Significant
Accounting Policies in the Notes to the Condensed Consolidated Financial Statements in this
Quarterly Report, which information is incorporated herein by reference.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk. Market risk represents the risk of loss that may impact our financial position
due to adverse changes in financial market prices and rates. Our market risk exposure is primarily
a result of fluctuations in foreign exchange rates and interest rates. We do not hold or issue
financial instruments for trading purposes.
Foreign Currency Exchange Risk. To date, substantially all of our international sales have
been denominated in U.S. dollars, and therefore the majority of our net revenues are not subject to
foreign currency risk. Our operating expenses and cash flows are subject to fluctuations due to
changes in foreign currency exchange rates, but historically have had relatively little impact on
our operating results and cash flows. We utilize foreign currency forward and option contracts to
manage our currency exposures as part of our ongoing business operations. We do not expect to enter
into foreign currency exchange contracts for trading or speculative purposes.
Interest Rate Risk. Our investment policy is intended to preserve principal, provide
liquidity and maximize income by limiting default risk, market risk and reinvestment risk. To
minimize these risks, we primarily invest in money market funds. We had cash, cash equivalents and
marketable securities totaling $131.8 million as of January 31, 2010, including the $45.9 million
net proceeds from our IPO, which are primarily held for working capital and general corporate
purposes. The fair value of our investment portfolio would not be significantly impacted by either
a 100 basis point increase or decrease in market interest rates due mainly to the short-term nature
of the majority of our investment portfolio. As a result, we do not believe that we have any
material exposure to changes in the fair value of our investment portfolio as a result of changes
in interest rates. Declines in interest rates, however, will reduce future interest income. We do
not enter into investments for trading or speculative purposes.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation and supervision of our Chief Executive Officer and
Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures
pursuant to Rule 13a-15 under the Exchange Act. In designing and evaluating the disclosure controls
and procedures, management recognizes that any controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving the desired control objectives. In
addition, the design of disclosure controls and procedures must reflect the fact that there are
resource constraints and that management is required to apply its judgment in evaluating the
potential benefits of possible controls and procedures relative to their costs.
45
Based on the aforementioned evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that as of January 31, 2010, our disclosure controls and procedures are
designed at a reasonable assurance level and are effective to provide reasonable assurance that
information we are required to disclose in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified in SEC rules and
forms, and that such information is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.
Changes in Internal Control over Financial Reporting
Regulations under the Exchange Act require public companies, including our company, to
evaluate any change in our internal control over financial reporting as such term is defined in
Rule 13a-15(f) and Rule 15d-15(f) of the Exchange Act. In connection with their evaluation of our
disclosure controls and procedures as of the end of the period covered by this Quarterly Report,
our Chief Executive Officer and Chief Financial Officer did not identify any changes in our
internal control over financial reporting during the fiscal quarter covered by this Quarterly
Report that materially affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we are subject to various claims, complaints and legal actions in the
normal course of business. We do not believe we are party to any currently pending litigation, the
outcome of which will have a material adverse effect on our operations or financial position.
ITEM 1A. RISK FACTORS
Risk Related to Our Business and Industry
Our future operating results may fluctuate significantly and our current operating results may
not be a good indication of our future performance.
Our revenues and operating results could vary significantly from period to period as a result
of a variety of factors, many of which are outside of our control. As a result, comparing our
revenues and operating results on a period-to-period basis may not be meaningful, and you should
not rely on our past results as an indication of our future performance. For example, revenues in
fiscal 2006 and prior years excluded revenues related to multiple element sales transactions
consummated in that year that were deferred because we did not have vendor-specific objective
evidence of fair value, or VSOE, for some product elements that were not delivered in the fiscal
year of the transaction. We recognize this deferred revenue in the period in which we either
deliver these product elements or we and our customers amend the contractual terms of these sales
transactions to remove the undelivered product elements. Our operating results were impacted by
this treatment in fiscal 2009, 2008 and 2007 and may be similarly impacted in any particular
quarterly period in fiscal 2010 as we recognize this previously deferred revenue. For example,
earnings for the nine months ended January 31, 2010 were favorably impacted by $0.9 million of
revenues from such transactions where the associated expenses were recorded in fiscal 2006 or
prior years. We may not be able to accurately predict our future revenues or results of operations.
We base our current and future expense levels on our operating plans and sales forecasts, and our
operating costs are relatively fixed in the short-term. As a result, we may not be able to reduce
our costs sufficiently to compensate for an unexpected shortfall in revenues, and even a small
shortfall in revenues could disproportionately and adversely affect financial results for that
quarter. In addition, we recognize revenues from sales to some customers or resellers when cash is
received, which may be delayed because of changes or issues with those customers or resellers. If
our revenues or operating results fall below the expectations of investors or any securities
analysts that cover our stock, the price of our common stock could decline substantially.
In addition to other risk factors listed in this section, factors that may affect our
operating results include:
|
|
|
the timing of our sales during the quarter, particularly since a large portion of our
sales occurs in the last few weeks of the quarter and loss or delay of a few large contracts
may have a significant adverse impact on our operating results; |
46
|
|
|
changes in the mix of revenues attributable to higher-margin revenues from ESM products
as opposed to lower-margin revenues from sales of our appliance products; |
|
|
|
|
the timing of satisfying revenue recognition criteria, including, for example,
establishing (1) VSOE for new products and maintaining VSOE for maintenance and services,
particularly where we accrue the associated commission expense in a different period, and
(2) sufficient history with respect to our newly introduced appliance licensing model such
that revenue recognition criteria would be met on shipment of our appliances, rather than
delaying revenue recognition until payment for these transactions in which we will be
required to do until such history is established; |
|
|
|
|
changes in the renewal rate of maintenance agreements; |
|
|
|
|
our ability to estimate warranty claims accurately; |
|
|
|
|
general economic conditions, both domestically and in our foreign markets, and economic
conditions specifically affecting industries in which our customers participate, such as the
impact of the continuing instability in global and U.S. economic and financial market
conditions, in particular on the financial services and retail industries; and |
|
|
|
|
the impact of ASC 740, which requires us to establish reserves for uncertain tax
positions and accrue potential tax penalties and interest. |
Our sales cycle is long and unpredictable, and our sales efforts require considerable time and
expense. As a result, our revenues are difficult to predict and may vary substantially from quarter
to quarter, which may cause our operating results to fluctuate.
Our operating results may fluctuate, in part, because of the intensive nature of our sales
efforts, the length and variability of the sales cycle of our ESM products and the short-term
difficulty in adjusting our operating expenses. Because decisions to purchase products such as our
ESM products involve significant capital commitments by customers, potential customers generally
have our products evaluated at multiple levels within an organization, each often having specific
and conflicting requirements. Enterprise customers make product purchasing decisions based in part
on factors not directly related to the features of the products, including but not limited to the
customers projections of business growth, uncertainty regarding economic conditions, capital
budgets and anticipated cost savings from implementation of the software. As a result of these
factors, selling our products often requires an extensive effort throughout a customers
organization. The continuing instability in global and U.S. economic and financial market
conditions has increased the duration and intensity of our sales efforts as customers enhance their
review of spending decisions. In addition, we have less experience with sales of ArcSight Express
and some of our other appliance products. As a result, the sales cycle for these products may be
lengthy or may vary significantly. Our sales efforts involve educating our customers, who are often
relatively unfamiliar with our products and their technical capabilities, as well as the value of
our products, including the potential cost savings to the organization that our products may
generate. We spend substantial time, effort and money in our sales efforts without any assurance
that our efforts will produce any sales.
The length of our sales cycle, from initial evaluation to delivery of products, tends to be
long and varies substantially from customer to customer. Our sales cycle is typically three to six
months but can extend to more than a year for some sales. We typically recognize a large portion of
our product revenues in the last few weeks of a quarter. It is difficult to predict exactly when,
or even if, we will actually make a sale with a potential customer. As a result, large individual
sales have, in some cases, occurred in quarters subsequent to those we anticipated, or have not
occurred at all. The loss or delay of one or more large product transactions in a quarter could
impact our operating results for that quarter and any future quarters for which revenues from that
transaction are delayed. As a result of these factors, it is difficult for us to accurately
forecast product revenues in any quarter. Because a substantial portion of our expenses are
relatively fixed in the short-term, our operating results will suffer if revenues fall below our
expectations in a particular quarter, which could cause the price of our common stock to decline
significantly.
If we fail to enhance and manage our distribution channels, our revenues could decline and our
growth prospects could suffer.
We derive a portion of our revenues from sales of our products and related services through
channel partners, such as resellers and systems integrators. In particular, systems integrators are
an important source of sales leads for us in the U.S. public sector, as government agencies often
rely on them to meet information technology, or IT, needs. We also use resellers to augment our
internal
47
resources in international markets and domestically. We may be required by our U.S. government
customers to utilize particular resellers that may not meet our criteria for creditworthiness, and
revenues from those resellers may not be recognizable until receipt of payment. We have derived,
and anticipate that in the future we will continue to derive, a substantial portion of the sales of
ArcSight Logger and other appliance products through channel partners, including parties with which
we have not yet developed relationships. We expect that channel sales will represent a substantial
portion of our revenues for the foreseeable future. In order to scale our channel program to
support growth in our business, it is important that we continue to help our partners enhance their
ability to independently sell and deploy our products. We may be unable to successfully expand and
improve the effectiveness of our channel sales program. If we do not successfully execute our
strategy to increase channel sales, particularly to further develop relationships with systems
integrators to facilitate sales to large enterprises and agencies of
the U.S. government, penetrate the mid-market and sell our appliance products, our growth prospects may be
materially and adversely affected.
Our agreements with our channel partners are generally non-exclusive and many of our channel
partners have more established relationships with our competitors. If our channel partners do not
effectively market and sell our products, if they choose to place greater emphasis on products of
their own or those offered by our competitors, or if they fail to meet the needs of our customers,
our ability to grow our business and sell our products may be adversely affected. Similarly, the
loss of a substantial number of our channel partners, who may cease marketing our products and
services with limited or no notice and with little or no penalty, and our possible inability to
replace them, the failure to recruit additional channel partners, or any reduction or delay in
their sales of our products and services or conflicts between channel sales and our direct sales
and marketing activities could materially and adversely affect our results of operations. In
addition, changes in the proportion of our revenues attributable to sales by channel partners,
which are more likely than direct sales to involve collectability concerns at the time of contract
execution and product delivery, may cause our operating results to fluctuate from period to period.
We operate in an emerging and evolving market and have a history of losses, and we are unable
to predict the extent of any future losses.
We launched our ESM products in January 2002 and our first ArcSight Logger product in December
2006. Because the market for our products is relatively new and rapidly evolving, it is difficult
for us to predict our operating results and the ultimate size of the market for our products.
Although we recorded net income of $5.7 million and $9.9 million for the nine months ended January
31, 2010 and the fiscal year ended April 30, 2009, respectively, we have a history of losses from
operations, incurring losses from operations of $1.4 million, $0.3 million and $16.8 million for
the fiscal years ended April 30, 2008, 2007 and 2006, respectively. As of January 31, 2010, our
accumulated deficit was $31.1 million. We expect our operating expenses to increase over the next
several years as we hire additional sales and marketing personnel, expand and improve the
effectiveness of our distribution channel program and develop our technology and new products. In
addition, we have incurred, and anticipate that we will continue to incur, significant legal,
accounting and other expenses relating to being a public company. If our revenues do not increase
to offset these expected increases in operating expenses, we may not continue to be profitable in
future periods. Our historical revenue growth has been inconsistent, reflects fluctuations not
related to performance and should not be considered indicative of our future performance. See the
section entitled Managements Discussion and Analysis of Financial Condition and Results of
OperationsSources of Revenue, Cost of Revenues and Operating Expenses. Further, in future
periods, our revenues could decline and, accordingly, we may not be able to sustain or increase
profitability on a consistent basis, which may result in a decline in our common stock price.
If we are unable to successfully develop and market new products, make enhancements to our
existing products or expand our offerings into new markets, our business may not grow and our
operating results may suffer.
We introduced our most recent ArcSight Logger product in November 2009 and are currently
developing new versions of this product, ESM and the other products in our SIEM platform, as well
as new complementary products. Our growth strategy and future financial performance will depend, in
part, on our ability to market and sell these products and to diversify our offerings by
successfully developing, timely introducing and gaining customer acceptance of new products.
The software in our products, particularly our ArcSight ESM and ArcSight Express products, is
especially complex because it must recognize, effectively interact with and manage a wide variety
of devices and applications, and effectively identify and respond to new and increasingly
sophisticated security threats and other risks, while not impeding the high network performance
demanded by our customers. The typical development cycle for a patch to our ESM software is one to
three months, a service pack is four to six months and a new version or major sub-version is 12 to
18 months, if and when available. Customers and industry analysts expect speedy introduction of
software to respond to new threats and risks and to add new functionality, and we may be unable to
meet these expectations. Since developing new products or new versions of, or add-ons to, existing
products is complex, the timetable for their
48
commercial release is difficult to predict and may vary from our historical experience, which
could result in delays in their introduction from anticipated or announced release dates. We may
not offer updates as rapidly as new threats affect our customers. If we do not quickly respond to
the rapidly changing and rigorous needs of our customers by developing and introducing on a timely
basis new and effective products, upgrades and services that can respond adequately to new security
threats, our competitive position, business and growth prospects will be harmed.
Diversifying our product offerings and expanding into new markets will require significant
investment and planning, will bring us more directly into competition with software providers that
may be better established or have greater resources than we do, will require additional investment
of time and resources in the development and training of our channel and strategic partners and
will entail significant risk of failure. Sales of our ArcSight Logger and ArcSight Express products
and other products that we may develop and market may reduce revenues of our flagship ESM product
and our overall margin by offering a subset of features or capabilities of our flagship ESM
products at a reduced price with a lower gross margin. If the average selling price for orders of
such alternate products is lower, we may need to sell to a larger number of customers to achieve
equivalent revenues, potentially incurring increased sales, marketing and general and
administrative expenses in support of those sales. Moreover, increased emphasis on the sale of our
appliance products, add-on products or new product lines could distract us from sales of our core
ArcSight ESM offering, negatively affecting our overall sales. If we fail or delay in diversifying
our existing offerings or expanding into new markets, or we are unsuccessful competing in these new
markets, our business, operating results and prospects may suffer.
If we are not able to maintain and enhance our brand, our business and operating results may
be harmed.
We believe that maintaining and enhancing our brand identity is critical to our relationships
with, and to our ability to attract, new customers and partners. The successful promotion of our
brand will depend largely upon our marketing and public relations efforts, our ability to continue
to offer high-quality products and services, and our ability to successfully differentiate our
products and services from those of our competitors, especially to the extent that our competitors
integrate or bundle competitive offerings with a broader array of products and services that they
may offer. Our brand promotion activities may not be successful or yield increased revenues. In
addition, extension of our brand to products and uses different from our traditional products and
services may dilute our brand, particularly if we fail to maintain the quality of our products and
services in these new areas. Moreover, it may be difficult to maintain and enhance our brand in
connection with sales through channel or strategic partners. The promotion of our brand requires us
to make substantial expenditures, and we anticipate that the expenditures will increase as our
market becomes more competitive and as we expand into new markets. To the extent that these
activities yield increased revenues, these revenues may not offset the expenses we incur. If we do
not successfully maintain and enhance our brand, our business may not grow, we may have reduced
pricing power relative to competitors with stronger brands, and we could lose customers and channel
partners, all of which would harm our business, operating results and financial condition.
In addition, independent industry analysts often provide reviews of our products and services,
as well as those of our competitors, and perception of our products in the marketplace may be
significantly influenced by these reviews. We have no control over what these industry analysts
report, and because industry analysts may influence current and potential customers, our brand
could be harmed if they do not provide a positive review of our products and services or view us as
a market leader.
We face intense competition in our market, especially from larger, better-known companies, and
we may lack sufficient financial or other resources to maintain or improve our competitive
position.
The market for enterprise security and compliance management and log collection and storage
products is intensely competitive, and we expect competition to increase in the future. A
significant number of companies have developed, or are developing, products that currently, or in
the future are likely to, compete with some or all of our products. We may not compete successfully
against our current or potential competitors, especially those with significantly greater financial
resources or brand name recognition. Companies competing with us may introduce products that have
greater performance or functionality or incorporate technological advances that we have not yet
developed or implemented. In addition, companies competing with us may price their products more
competitively than ours, or have an entirely different pricing or distribution model, such as
making introductory versions with limited functionality available as freeware products.
Our competitors include large software companies, software or hardware network infrastructure
companies, smaller software companies offering more narrowly focused enterprise security and
compliance management and log collection and storage products, and small and large companies
offering point solutions that compete with components of our platform or individual products.
Existing
49
competitors for a security and compliance management software platform solution such as our
ESM products primarily are specialized, privately-held companies, such as Intellitactics and
netForensics, as well as larger companies such as CA, Cisco, EMC, IBM, Novell and Symantec. Current
competitors for sales of our ArcSight Logger products include specialized, privately-held
companies, such as LogLogic and SenSage. In addition to these current competitors, we expect to
face competition for our appliance products from existing large, diversified software and hardware
companies, from specialized, smaller companies and from new companies that may seek to enter this
market.
Another source of competition is represented by the custom internal efforts undertaken by
potential customers to analyze and manage the information produced from their existing devices and
applications to identify and remediate threats. Many companies, in particular large corporate
enterprises, have developed software internally that is an alternative to our enterprise security
and compliance management and log collection and storage products. Wide adoption of our Common
Event Format, which we are promoting as a standard for event logs generated by security and other
products, may facilitate this internal development.
Wide adoption of our Common Event Format may also allow our competitors to offer products with
a degree of compatibility similar to ours or may facilitate new entrants into our business. New
competitors may emerge and rapidly acquire significant market share due to factors such as greater
brand name recognition, larger installed customer bases and significantly greater financial,
technical, marketing and other resources and experience. If these new competitors are successful,
we would lose market share and our revenues would likely decline.
Mergers or consolidations among our competitors, or acquisitions of our competitors by large
companies, present heightened competitive challenges to our business. For example, in the last five
years IBM has acquired Internet Security Systems, Inc., Micromuse and Consul, Novell acquired
e-Security and EMC acquired Network Intelligence and recently announced an agreement to acquire
Archer Technologies. Acquisitions such as these will make the combined entities potentially more
formidable competitors to us if their products and offerings are effectively integrated. Continued
industry consolidation may impact customers perceptions of the viability of smaller or even
medium-sized software firms and, consequently, customers willingness to purchase from those firms.
Many of our existing and potential competitors enjoy substantial competitive advantages, such
as:
|
|
|
greater name recognition and longer operating histories; |
|
|
|
|
larger sales and marketing budgets and resources; |
|
|
|
|
the capacity to leverage their sales efforts and marketing expenditures across a broader
portfolio of products; |
|
|
|
|
broader distribution and established relationships with distribution partners; |
|
|
|
|
access to larger customer bases; |
|
|
|
|
greater customer support; |
|
|
|
|
greater resources to make acquisitions; |
|
|
|
|
lower labor and development costs; and |
|
|
|
|
substantially greater financial, technical and other resources. |
As a result, they may be able to adapt more quickly and effectively to new or emerging technologies
and changing opportunities, standards or customer requirements. In addition, these companies have
reduced, and could continue to reduce, the price of their enterprise security and compliance
management, log collection and storage products and managed security services, resulting in
intensified pricing pressures within our market.
Increased competition could result in fewer customer orders, price reductions, reduced
operating margins and loss of market share. Our larger competitors also may be able to provide
customers with different or greater capabilities or benefits than we can provide in areas such as
technical qualifications, geographic presence, or provide customers a broader range of services and
products and price. In addition, large competitors may have more extensive relationships within
large enterprises, the federal government or foreign
50
governments, which relationships may provide them with an advantage in competing for business
with those potential customers. Our ability to compete will depend upon our ability to provide
better performance than our competitors at a competitive price. We may be required to make
substantial additional investments in research, development, marketing and sales in order to
respond to competition, and we cannot assure you that we will be able to compete successfully in
the future.
We may not be able to compete effectively with companies that integrate or bundle products
similar to ours with their other product offerings.
Many large, integrated software companies offer suites of products that include software
applications for security and compliance management. In addition, hardware vendors, including
diversified, global concerns, offer products that address the security and compliance needs of the
enterprises and government agencies that comprise our target market. Further, several companies
currently sell software products that our customers and potential customers have broadly adopted,
providing them a substantial advantage when they sell products that perform functions substantially
similar to some of our products. Competitors that offer a large array of security or software
products may be able to offer products or functionality similar to ours at a more attractive price
than we can by integrating or bundling them with their other product offerings. The consolidation
in our industry increases the likelihood of competition based on integration or bundling. Customers
may also increasingly seek to consolidate their enterprise-level software purchases with a small
number of larger companies that can purport to satisfy a broad range of their requirements. If we
are unable to sufficiently differentiate our products from the integrated or bundled products of
our competitors, such as by offering enhanced functionality, performance or value, we may see a
decrease in demand for our products, which would adversely affect our business, operating results
and financial condition. Similarly, if customers seek to concentrate their software purchases with
a few large providers, we may be at a competitive disadvantage.
We may have difficulty forecasting demand for our appliance products and, because we primarily
rely on a single contract manufacturer for manufacture and fulfillment of our appliance products,
we may be unable to fulfill orders for these appliance products.
Fulfillment of sales of our appliance products involves hardware manufacturing, inventory,
import certification and return merchandise authorization processes. If we fail to accurately
predict demand and as a result our manufacturers maintain insufficient hardware inventory or excess
inventory, we may be unable to timely deliver ordered products or may have substantial inventory
expense. Because our channel partners do not purchase our products in advance of customer orders,
we may face additional difficulty in accurately forecasting demand for our hardware products. This
difficulty in forecasting could increase as the number of sales transactions that do not directly
involve our sales force increases (which is one of the goals of our channel program), since we have
limited historical experience upon which to base forecasts for these types of sales transactions.
Further, as the size of individual orders increases, we may be unable to cause delivery of
unforecasted orders, particularly near the end of quarterly periods. In addition, we primarily use
one source for the manufacture and fulfillment of our appliance products and if this equipment
vendor fails to manufacture our appliance products or fulfill orders in required volumes, in a
timely manner, at a sufficient level of quality, or at all, if it is no longer financially viable
or for other reasons, we may be unable to fulfill customer orders and our operating results may
fluctuate from period to period, particularly if a disruption occurs near the end of a fiscal
period. Disruptions in the manufacture and fulfillment of our products could damage our reputation
and relationships with our customers and result in revenue declines and a negative effect on our
growth prospects. In addition, if we change our hardware configuration or manufacturer, some
countries may require us to reinitiate their import certification process. If we are unable to
successfully perform these functions or maintain a relationship with a fulfillment partner that
does so for us, our sales, operating results and financial condition may be harmed. In addition,
the process of obtaining additional or alternative capacity with a different contract manufacturer
would likely result in an increase of cost of goods sold, which could negatively impact our
financial performance if we are unable to offset such increases with increases in the prices we
charge our customers.
We face risks related to customer outsourcing to managed security service providers.
Some of our customers have outsourced the management of their IT departments or the network
security operations function to large systems integrators or managed security service providers, or
MSSPs. If this trend continues, our established customer relationships could be disrupted and our
products could be displaced by alternative system and network protection solutions offered by
systems integrators or MSSPs. Significant product displacements could impact our revenues and have
a negative effect on our business. While to date we have developed a number of successful
relationships with MSSPs, they may develop or acquire their own technologies rather than purchasing
our products for use in provision of managed security services.
51
Seasonality may cause fluctuations in our operating results.
We believe that our product revenue has been seasonal historically, increasing in each quarter
through the fiscal year, but with the first quarter of our fiscal year having relatively lower
product revenue compared to the prior fourth fiscal quarter. However, we believe that there are
significant seasonal factors that may cause the second and fourth quarters of our fiscal year to
have relatively higher product revenue (with the first and third fiscal quarters each potentially
having lower revenue than the immediately preceding fiscal quarter). We believe that this
seasonality results from a number of factors, including:
|
|
|
the timing of our annual sales club for top performers and annual training for our
entire sales force in our first fiscal quarter; |
|
|
|
|
the fiscal year end procurement cycle of our government customers; |
|
|
|
|
the budgeting, procurement and work cycles of our customers, including customers in the
public sector; |
|
|
|
|
seasonal reductions in business activity during the summer months in the United States,
Europe and certain other regions; and |
|
|
|
|
the structure of our direct sales incentive and compensation program, which may reinforce
the tendency of our direct sales team to book the largest volume of deals toward the end of
our fiscal year. |
We believe that our rapid historical growth and the required timing of new compliance mandates
may have overshadowed the nature or magnitude of seasonal or cyclical factors that might have
influenced our business to date. In addition, the timing of one or more large transactions may
overshadow seasonal factors in any particular quarterly period. In the future, we may experience
growth from additional compliance and cybersecurity mandates that could continue to mask underlying
seasonal purchasing decisions by our customers. Seasonal or cyclical variations in our operations
may become more pronounced over time and may materially affect our results of operations in the
future.
For example, as noted above, the timing of our fiscal quarters and the U.S. federal
governments September 30 fiscal year end may impact product sales to governmental agencies in the
second quarter of our fiscal year, offsetting the otherwise seasonal downturn in later summer
months. Increased government spending on cybersecurity and new compliance mandates may drive
customer demand at different times throughout our fiscal year, the timing of which we may not be
able to anticipate and may cause fluctuations in our operating results. In addition, sales to
customers with a standard December 31 fiscal year end may have a positive impact on our license
revenue in the third quarter of our fiscal year, potentially offsetting the impact of the major
holidays during the period. We expect seasonality to continue to impact our business in the future.
Our business depends, in part, on sales to the public sector, and significant changes in the
contracting or fiscal policies of the public sector could have a material adverse effect on our
business.
We derive a portion of our revenues from contracts with federal, state, local and foreign
governments and government agencies, and we believe that the success and growth of our business
will continue to depend on our successful procurement of government contracts. For example, we have
historically derived, and expect to continue to derive, a significant portion of our revenues from
sales to agencies of the U.S. federal government, either directly by us or through systems
integrators and other resellers. In the nine months ended January 31, 2010 and the fiscal years
ended April 30, 2009, 2008 and 2007, we derived 31%, 22%, 20% and 32% of our revenues,
respectively, from contracts with agencies of the U.S. federal government. Accordingly:
|
|
|
changes in fiscal or contracting policies or decreases in available government funding,
such as the recent announcement by the Obama administration regarding a temporary freeze on
non-defense discretionary spending; |
|
|
|
|
changes in government programs or applicable requirements; |
|
|
|
|
the adoption of new laws or regulations or changes to existing laws or regulations; |
|
|
|
|
changes in political or social attitudes with respect to security issues; and |
|
|
|
|
potential delays or changes in the government appropriations process, including actions
such as spending freezes implemented to address political or fiscal policy concerns |
52
could cause governments and governmental agencies to delay or refrain from purchasing the products
and services that we offer in the future or otherwise have an adverse effect on our business,
financial condition and results of operations.
Failure to comply with laws or regulations applicable to our business could cause us to lose
U.S. government customers or our ability to contract with the U.S. government.
We must comply with laws and regulations relating to the formation, administration and
performance of U.S. government contracts, which affect how we and our channel partners do business
with U.S. government agencies. These laws and regulations may impose added costs on our business,
and failure to comply with these or other applicable regulations and requirements, including
non-compliance in the past, could lead to claims for damages from our channel partners, and
penalties, termination of contracts and suspension or debarment from government contracting for a
period of time with U.S. government agencies. Any such damages, penalties, disruption or limitation
in our ability to do business with the U.S. government could have a material adverse effect on our
business, operating results and financial condition.
Our government contracts may limit our ability to move development activities overseas and to
source components from some countries, which may impair our ability to optimize our product
development costs and compete for non-government contracts.
Increasingly, product development and component sourcing are being shifted to lower-cost
countries, such as India and China. However, some contracts with U.S. government agencies require
that at least 50% of the components of each of our products be of U.S. origin or that each product
be substantially transformed in the U.S. or in a country on the U.S. governments list of
designated countries. Consequently, our ability to optimize our product development by conducting
it overseas and to lower our costs of goods sold by sourcing from lower cost regions may be
hampered. Some of our competitors do not rely on contracts with the U.S. government to the same
degree as we do and may develop product or source components offshore, or may have the scale to
permit them to separately source versions of their competing products for sale to customers other
than U.S. government agencies. If we are unable to develop product or source components as
cost-effectively as our competitors, our ability to compete for our non-government customers may be
reduced and our customer sales may decline, resulting in decreased revenues.
Real or perceived errors, failures or bugs in our products could adversely affect our
operating results and growth prospects.
Because we offer very complex products, undetected errors, failures or bugs may occur,
especially when products are first introduced or when new versions are released. Our products are
often installed and used in large-scale computing environments with different operating systems,
system management software and equipment and networking configurations, which may cause errors or
failures in our products or may expose undetected errors, failures or bugs in our products. Despite
testing by us, errors, failures or bugs may not be found in new products or releases until after
commencement of commercial shipments. In the past, we have discovered software errors, failures and
bugs in some of our product offerings after their introduction.
In addition, our products could be perceived to be ineffective for a variety of reasons
outside of our control. Hackers could circumvent our customers security measures, and customers
may misuse our products resulting in a security breach or perceived product failure. We provide a
top-level enterprise security and compliance management solution that integrates a wide variety of
other elements in a customers IT and security infrastructure, and we may receive blame for a
security breach that was the result of the failure of one of the other elements.
Real or perceived errors, failures or bugs in our products could result in negative publicity,
loss of or delay in market acceptance of our products, loss of competitive position or claims by
customers for losses sustained by them. In such an event, we may be required, or may choose, for
customer relations or other reasons, to expend additional resources in order to help correct the
problem. Our product liability insurance may not be adequate. Further, provisions in our license
agreements with end users that limit our exposure to liabilities arising from such claims may not
be enforceable in some circumstances or may not fully protect us against such claims and related
liabilities and costs. Defending a lawsuit, regardless of its merit, could be costly and could
limit the amount of time that management has available for day-to-day execution and strategic
planning or other matters.
Many of our end-user customers use our products in applications that are critical to their
businesses and may have a greater sensitivity to defects in our products than to defects in other,
less critical, software products. In addition, if an actual or perceived
53
breach of information integrity or availability occurs in one of our end-user customers
systems, regardless of whether the breach is attributable to our products, the market perception of
the effectiveness of our products could be harmed. Alleviating any of these problems could require
significant expenditures of our capital and other resources and could cause interruptions, delays
or cessation of our product licensing, which could cause us to lose existing or potential customers
and could adversely affect our operating results and growth prospects.
In addition, because we are a leading provider of enterprise security products and services,
hackers and others may try to access our data or compromise our systems. If we are the subject of
a successful attack, then our reputation in the industry and with current and potential customers
may be compromised and our sales and operating results could be adversely affected.
Incorrect or improper use of our complex products, our failure to properly train customers on
how to utilize our products or our failure to properly provide consulting and implementation
services could result in customer dissatisfaction and negatively affect our results of operations
and growth prospects.
Our ESM products are complex and are deployed in a wide variety of network environments. The
proper use of our products, particularly our ESM products, requires training of the end user. If
our products are not used correctly or as intended, inadequate performance may result. For example,
among other things, deployment of our ESM products requires categorization of IT assets and
assignment of business or criticality values for each, selection or configuration of one of our
pre-packaged rule sets, user interfaces and network utilization parameters, and deployment of
connectors for the various devices and applications from which event data are to be collected. Our
customers or our professional services personnel may incorrectly implement or use our products. Our
products may also be intentionally misused or abused by customers or their employees or third
parties who obtain access and use of our products. Similarly, our
ArcSight Express and Logger products, while less complex than our ESM products, are often
distributed through channel partners and sold to customers with smaller or less sophisticated IT
departments, potentially resulting in sub-optimal installation. This
may result in performance that
is less than the level anticipated by the end user. Because our customers rely on our product,
service and maintenance offerings to manage a wide range of sensitive security, network and
compliance functions, the incorrect or improper use of our products, our failure to properly train
customers on how to efficiently and effectively use our products, our failure to properly provide
consulting and implementation services and maintenance to our customers or our failure to properly
provide services for customer security operation centers, or SOCs, may result in negative publicity
or legal claims against us. For example, as we continue to expand our provision of SOC services,
any failure by us to properly provide these high profile services will likely result in lost
opportunities for follow-on sales of our software and appliance products in addition to loss of any
opportunity to renew the SOC services arrangement.
In addition, if customer personnel are not well trained in the use of our products, customers
may defer the deployment of our products, may deploy them in a more limited manner than originally
anticipated or may not deploy them at all. If there is substantial turnover of the customer
personnel responsible for implementation and use of our products, our product may go unused and our
ability to make additional sales may be substantially limited.
If we are unable to maintain effective relationships with our technology partners, we may not
be able to support the interoperability of our software with a wide variety of security and other
products and our business may be harmed.
A key feature of ArcSight ESM is that it provides out-of-the-box support for many third-party
devices and applications that the customer may use in its business and technology infrastructure.
To provide effective interoperability, we work with individual product vendors to develop our
SmartConnectors, which allow our ESM, ArcSight Logger and ArcSight Express products to interface
with third party products. In addition, we are promoting the adoption of our Common Event Format as
a standard way to format system log events. Some of these technology partners are current or
potential competitors of ours. If we are unable to develop and maintain effective relationships
with a wide variety of technology partners, if companies adopt more restrictive policies with
respect to, or impose unfavorable terms and conditions on, access to their products, or if our
Common Event Format is not widely adopted, we may not be able to continue to provide our customers
with a high degree of interoperability with their existing IT and business infrastructure, which
could reduce our sales and adversely affect our business, operating results and financial
condition.
Our international sales and operations subject us to additional risks that can adversely
affect our operating results.
In the nine months ended January 31, 2010 and the fiscal years ended April 30, 2009, 2008 and
2007, we derived 29%, 27%, 33% and 23% of our revenues, respectively, from customers outside the
United States, and we are continuing to expand our international
54
operations as part of our growth strategy. We currently have sales personnel and sales and
support operations in Australia, Austria, Brazil, Canada, China, France, Germany, Hong Kong, India,
Italy, Japan, the Netherlands, Singapore, Spain and the United Kingdom. Our international
operations subject us to a variety of risks, including:
|
|
|
increased management, travel, infrastructure and legal compliance costs associated with
having multiple international operations; |
|
|
|
|
longer payment cycles and difficulties in collecting accounts receivable, especially in
emerging markets, and the likelihood that revenues from international resellers and
customers may need to be recognized when cash is received, at least until satisfactory
payment history has been established; |
|
|
|
|
the need to localize our products and licensing programs for international customers; |
|
|
|
|
differing regulatory and legal requirements and possible enactment of additional
regulations or restrictions on the use, import or export of encryption technologies and our
appliance-based products, which could delay or prevent the sale or use of our products in
some jurisdictions; |
|
|
|
|
weaker protection of intellectual property rights in some countries; and |
|
|
|
|
overlapping of different tax regimes. |
Any of these risks could harm our international operations and reduce our international sales,
adversely affecting our business, operating results and financial condition and growth prospects.
Our business in countries with a history of corruption and transactions with foreign
governments increase the risks associated with our international activities.
As we operate and sell internationally, we are subject to the U.S. Foreign Corrupt Practices
Act, or the FCPA, and other laws that prohibit improper payments or offers of payments to foreign
governments and their officials and political parties by U.S. and other business entities for the
purpose of obtaining or retaining business. We have operations, deal with and make sales to
governmental or quasi-governmental customers in countries known to experience corruption,
particularly certain emerging countries in East Asia, Eastern Europe, the Middle East, Russia and
South America. Our activities in these countries create the risk of unauthorized payments or offers
of payments by one of our employees, consultants, sales agents or channel partners that could be in
violation of various laws including the FCPA, even though these parties are not always subject to
our control. We have implemented safeguards to discourage these practices by our employees,
consultants, sales agents and channel partners. However, our existing safeguards and any future
improvements may prove to be less than effective, and our employees, consultants, sales agents or
channel partners may engage in conduct for which we might be held responsible. Violations of the
FCPA may result in severe criminal or civil sanctions, including suspension or debarment from U.S.
government contracting, and we may be subject to other liabilities, which could negatively affect
our business, operating results and financial condition.
Failure to protect our intellectual property rights could adversely affect our business.
Our success depends, in part, on our ability to protect proprietary methods and technologies
that we develop under patent and other intellectual property laws of the United States, so that we
can prevent others from using our inventions and proprietary information. If we fail to protect our
intellectual property rights adequately, our competitors might gain access to our technology, and
our business might be harmed. In addition, defending our intellectual property rights might entail
significant expenses. Any of our patents, copyrights, trademarks or other intellectual property
rights may be challenged by others or invalidated through administrative process or litigation. We
have twelve issued patents and a number of patent applications pending in the United States,
internationally and in specific foreign countries. Our issued patents may not provide us with any
competitive advantages or may be challenged by third parties, and our patent applications may never
be granted at all. Additionally, the process of obtaining patent protection is expensive and
time-consuming, and we may not be able to prosecute all necessary or desirable patent applications
at a reasonable cost or in a timely manner. Even if issued, there can be no assurance that these
patents will adequately protect our intellectual property, as the legal standards relating to the
validity, enforceability and scope of protection of patent and other intellectual property rights
are uncertain.
55
Any patents that are issued may subsequently be invalidated or otherwise limited, enabling
other companies to better develop products that compete with ours, which could adversely affect our
competitive business position, business prospects and financial condition. In addition, issuance of
a patent does not guarantee that we have a right to practice the patented invention. Patent
applications in the U.S. are typically not published until 18 months after filing, or in some cases
not at all, and publications of discoveries in industry-related literature lag behind actual
discoveries. We cannot be certain that we were the first to make the inventions claimed in our
issued patents or pending patent applications or otherwise used in our products, that we were the
first to file for protection in our patent applications, or that third parties do not have blocking
patents that could be used to prevent us from marketing or practicing our patented products or
technology. Effective patent, trademark, copyright and trade secret protection may not be available
to us in every country in which our products and services are available. The laws of some foreign
countries may not be as protective of intellectual property rights as those in the United States,
and mechanisms for enforcement of intellectual property rights may be inadequate. Accordingly,
despite our efforts, we may be unable to prevent third parties from infringing upon or
misappropriating our intellectual property.
We might be required to spend significant resources to monitor and protect our intellectual
property rights. We may initiate claims or litigation against third parties for infringement of our
proprietary rights or to establish the validity of our proprietary rights. Any litigation, whether
or not it is resolved in our favor, could result in significant expense to us and divert the
efforts of our technical and management personnel, which may adversely affect our business,
operating results and financial condition.
Confidentiality agreements with employees and others may not adequately prevent disclosure of
trade secrets and other proprietary information.
In order to protect our proprietary technology, processes and methods, we rely in part on
confidentiality agreements with our corporate partners, employees, consultants, advisors and
others. These agreements may not effectively prevent disclosure of confidential information and may
not provide an adequate remedy in the event of unauthorized disclosure of confidential information.
In addition, others may independently discover trade secrets and proprietary information, and in
these cases we would not be able to assert any trade secret rights against those parties. Costly
and time-consuming litigation could be necessary to enforce and determine the scope of our
proprietary rights, and failure to obtain or maintain trade secret protection could adversely
affect our competitive business position.
We may in the future be subject to intellectual property rights claims, which are extremely
costly to defend, could require us to pay significant damages and could limit our ability to use
certain technologies.
Companies in the software, networking and technology industries, including some of our current
and potential competitors, own large numbers of patents, copyrights, trademarks and trade secrets
and frequently enter into litigation based on allegations of infringement or other violations of
intellectual property rights. In addition, many of these companies have the capability to dedicate
substantially greater resources to enforce their intellectual property rights and to defend claims
that may be brought against them. The litigation may involve patent holding companies or other
adverse patent owners who have no relevant product revenues and against whom our potential patents
may provide little or no deterrence. We have received, and may in the future receive, notices that
claim we have misappropriated or misused other parties intellectual property rights, and, to the
extent we gain greater visibility, we face a higher risk of being the subject of intellectual
property infringement claims, which is not uncommon with respect to software technologies in
general and network security technology in particular. There may be third-party intellectual
property rights, including issued or pending patents, that cover significant aspects of our
technologies or business methods. Any intellectual property claims, with or without merit, could be
very time-consuming, could be expensive to settle or litigate and could divert our managements
attention and other resources. These claims could also subject us to significant liability for
damages, potentially including treble damages if we are found to have willfully infringed patents
or copyrights. These claims could also result in our having to stop using technology found to be in
violation of a third partys rights. We might be required to seek a license for the intellectual
property, which may not be available on reasonable terms or at all. Even if a license were
available, we could be required to pay significant royalties, which would increase our operating
expenses. As a result, we may be required to develop alternative non-infringing technology, which
could require significant effort and expense. If we cannot license or develop technology for any
infringing aspect of our business, we would be forced to limit or stop sales of one or more of our
products or product features and may be unable to compete effectively. Any of these results would
harm our business, operating results and financial condition.
56
We rely on software licensed from other parties, the loss of which could increase our costs
and delay software shipments.
We utilize various types of software licensed from unaffiliated third parties in order to
provide certain elements of our product offering. For example, we license database software from
Oracle that we integrate with our ESM product. Our agreement with Oracle permits us to distribute
Oracle software in our products to our customers and partners worldwide through May 2011. See the
section entitled Item 1. BusinessIntellectual PropertyOracle License Agreement in Part I of
our Annual Report on Form 10-K for the fiscal year ended April 30, 2009. Any errors or defects in
this third-party software could result in errors that could harm our business. In addition,
licensed software may not continue to be available on commercially reasonable terms, or at all.
While we believe that there are currently adequate replacements for third-party software, any loss
of the right to use any of this software could result in delays in producing or delivering our
software until equivalent technology is identified and integrated, which delays could harm our
business. Our business would be disrupted if any of the software we license from others or
functional equivalents of this software were either no longer available to us or no longer offered
to us on commercially reasonable terms. In either case, we would be required to either redesign our
products to function with software available from other parties or to develop these components
ourselves, which would result in increased costs and could result in delays in our product
shipments and the release of new product offerings. Furthermore, we might be forced to limit the
features available in our current or future products. If we fail to maintain or renegotiate any of
these software licenses, we could face significant delays and diversion of resources in attempting
to license and integrate a functional equivalent of the software.
Some of our products contain open source software, and any failure to comply with the terms
of one or more of these open source licenses could negatively affect our business.
Certain of our products are distributed with software licensed by its authors or other third
parties under open source licenses. Some of these licenses contain requirements that we make
available source code for modifications or derivative works we create based upon the open source
software, and that we license these modifications or derivative works under the terms of a
particular open source license or other license granting third parties certain rights of further
use. If we combine our proprietary software with open source software in a certain manner, we
could, under certain provisions of the open source licenses, be required to release the source code
of our proprietary software. In addition to risks related to license requirements, usage of open
source software can lead to greater risks than use of third-party commercial software, as open
source licensors generally do not provide warranties or controls on origin of the software. We have
established processes to help alleviate these risks, including a review process for screening
requests from our development organization for the use of open source software, but we cannot be
sure that all open source software is submitted for approval prior to use in our products or that
such software tools will be effective. In addition, open source license terms may be ambiguous and
many of the risks associated with usage of open source software cannot be eliminated, and could, if
not properly addressed, negatively affect our business. If we were found to have inappropriately
used open source software, we may be required to re-engineer our products, to release proprietary
source code, to discontinue the sale of our products in the event re-engineering could not be
accomplished on a timely basis or to take other remedial action that may divert resources away from
our development efforts, any of which could adversely affect our business, operating results and
financial condition.
Indemnity provisions in various agreements potentially expose us to substantial liability for
intellectual property infringement and other losses.
Our agreements with customers and channel partners include indemnification provisions, under
which we agree to indemnify them for losses suffered or incurred as a result of claims of
intellectual property infringement and, in some cases, for damages caused by us to property or
persons. The term of these indemnity provisions is generally perpetual after execution of the
corresponding product sale agreement. Large indemnity payments could harm our business, operating
results and financial condition.
Changes or reforms in the law or regulatory landscape could diminish the demand for our
solutions, and could have a negative impact on our business.
One factor that drives demand for our products and services is the legal and regulatory
framework in which our customers operate. Laws and regulations are subject to drastic changes, and
these could either help or hurt the demand for our products. Thus, some changes in the law and
regulatory landscape, such as legislative reforms that limit corporate compliance obligations,
could significantly harm our business.
57
If we are unable to attract and retain personnel, our business would be harmed.
We depend on the continued contributions of our senior management and other key personnel, in
particular Tom Reilly and Hugh Njemanze, the loss of whom could harm our business. All of our
executive officers and key employees are at-will employees, which means they may terminate their
employment relationship with us at any time. We do not maintain a key-person life insurance policy
on any of our officers or other employees.
Our future success also depends on our ability to identify, attract and retain highly skilled
technical, managerial, finance and other personnel, particularly in our sales and marketing,
research and development and professional service departments. We face intense competition for
qualified individuals from numerous security, software and other technology companies. In addition,
competition for qualified personnel is particularly intense in the San Francisco Bay Area, where
our headquarters are located. Often, significant amounts of time and resources are required to
train technical, sales and other personnel. Qualified individuals are in high demand. We may incur
significant costs to attract and retain them, and we may lose new employees to our competitors or
other technology companies before we realize the benefit of our investment in recruiting and
training them. We may be unable to attract and retain suitably qualified individuals who are
capable of meeting our growing technical, operational and managerial requirements, on a timely
basis or at all, and we may be required to pay increased compensation in order to do so. If we are
unable to attract and retain the qualified personnel we need to succeed, our business would suffer.
Volatility or lack of performance in our stock price may also affect our ability to attract
and retain our key employees. Many of our senior management personnel and other key employees have
become, or will soon become, vested in a substantial amount of stock or stock options. Employees
may be more likely to leave us if the shares they own or the shares underlying their vested options
have significantly appreciated in value relative to the original purchase prices of the shares or
the exercise prices of the options, or if the exercise prices of the options that they hold are
significantly above the market price of our common stock. If we are unable to retain our employees,
our business, operating results and financial condition would be harmed.
If we fail to manage future growth effectively, our business would be harmed.
We operate in an emerging market and have experienced, and may continue to experience,
significant expansion of our operations. In particular, we grew from 335 employees as of April 30,
2008 to 400 employees as of April 30, 2009, and then to 469 employees as of January 31, 2010. This
growth has placed, and will continue to place, a strain on our employees, management systems and
other resources. Managing our growth will require significant expenditures and allocation of
valuable management resources. If we fail to achieve the necessary level of efficiency in our
organization as it grows, our business, operating results and financial condition would be harmed.
Future acquisitions could disrupt our business and harm our financial condition and results of
operations.
We have expanded by acquisition in the past, and we may pursue additional acquisitions in the
future, any of which could be material to our business, operating results and financial condition.
Our ability as an organization to successfully acquire and integrate technologies or businesses on
a larger scale is unproven. Acquisitions involve many risks, including the following:
|
|
|
an acquisition may negatively impact our results of operations because it may require us
to incur charges and substantial debt or liabilities, may cause adverse tax consequences,
substantial depreciation or deferred compensation charges, may result in acquired in-process
research and development expenses or in the future may require the amortization, write-down
or impairment of amounts related to deferred compensation, goodwill and other intangible
assets, or may not generate sufficient financial return to offset acquisition costs; |
|
|
|
|
we may encounter difficulties or unforeseen expenditures in integrating the business,
technologies, products, personnel or operations of any company that we acquire, particularly
if key personnel of the acquired company decide not to work for us; |
|
|
|
|
an acquisition may disrupt our ongoing business, divert resources, increase our expenses
and distract our management; |
|
|
|
|
an acquisition may result in a delay or reduction of customer purchases for both us and
the company acquired due to customer uncertainty about continuity and effectiveness of
service from either company;
|
58
|
|
|
we may encounter difficulties in, or may be unable to, successfully sell any acquired
products; and |
|
|
|
|
an acquisition may involve the entry into geographic or business markets in which we have
little or no prior experience. |
If we fail to maintain an effective system of internal controls, our ability to produce
accurate financial statements or comply with applicable regulations could be impaired.
As a public company, we are subject to the reporting requirements of the Exchange Act, the
Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and the rules and regulations of The NASDAQ
Stock Market. We expect that the requirements of these rules and regulations will continue to
increase our legal, accounting and financial compliance costs, make some activities more difficult,
time-consuming and costly and place undue strain on our personnel, systems and resources.
The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure
controls and procedures and internal control over financial reporting. We are continuing to develop
and refine our disclosure controls and other procedures that are designed to ensure that
information required to be disclosed by us in the reports that we file with the SEC is recorded,
processed, summarized and reported within the time periods specified in SECs rules and forms. Our
current controls and any new controls that we develop may become inadequate because of changes in
conditions, and the degree of compliance with the policies or procedures may deteriorate. Further,
weaknesses in our internal controls may be discovered in the future. Any failure to develop or
maintain effective controls, or any difficulties encountered in their implementation or
improvement, could harm our operating results or cause us to fail to meet our reporting obligations
and may result in a restatement of our prior period financial statements. Any failure to implement
and maintain effective internal controls also could adversely affect the results of periodic
management evaluations and annual auditor attestation reports regarding the effectiveness of our
internal control over financial reporting that we are required to include in our periodic reports
filed with the SEC under Section 404 of the Sarbanes-Oxley Act. 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.
In order to maintain and improve the effectiveness of our disclosure controls and procedures
and internal control over financial reporting, we have expended, and anticipate that we will
continue to expend, significant resources and provide significant management oversight, which
involve substantial accounting-related costs. Any failure to maintain the adequacy of our internal
controls, or consequent inability to produce accurate financial statements on a timely basis, could
increase our operating costs and could materially impair our ability to operate our business. In
the event that we are not able to continue to demonstrate compliance with Section 404 of the
Sarbanes-Oxley Act in a timely manner, that our internal controls are perceived as inadequate or
that we are unable to produce timely or accurate financial statements, investors may lose
confidence in our operating results and our stock price could decline. In addition, if we are
unable to continue to meet these requirements, we may not be able to remain listed on The NASDAQ
Global Market.
We have not yet implemented a complete disaster recovery plan or business continuity plan for
our accounting and related information technology systems. Any disaster could therefore materially
impair our ability to maintain timely accounting and reporting.
We may not be able to utilize a significant portion of our net operating loss carry-forwards,
which could adversely affect our operating results.
Due to prior period losses, we have generated significant federal and state net operating loss
carry-forwards, which expire beginning in fiscal 2020 and fiscal 2015, respectively. U.S. federal
and state income tax laws limit the amount of these carry-forwards we can utilize upon a greater
than 50% cumulative shift of stock ownership over a three-year period, including shifts due to the
issuance of additional shares of our common stock, or securities convertible into our common stock.
We have previously experienced a greater than 50% shift in our stock ownership, which has limited
our ability to use a portion of our net operating loss carry-forwards, and we may experience
subsequent shifts in our stock ownership. Accordingly, there is a risk that our ability to use our
existing carry-forwards in the future could be further limited and that existing carry-forwards
would be unavailable to offset future income tax liabilities, adversely affecting our operating
results.
Governmental export or import controls could subject us to liability or limit our ability to
compete in foreign markets.
Our products incorporate encryption technology and may be exported outside the U.S. only if we
obtain an export license or qualify for an export license exception. Compliance with applicable
regulatory requirements regarding the export of our products, including new releases of our
products, may create delays in the introduction of our products in international markets, prevent
our customers
59
with international operations from deploying our products throughout their global systems or,
in some cases, prevent the export of our products to some countries altogether. In addition,
various countries regulate the import of our appliance-based products and have enacted laws that
could limit our ability to distribute products or could limit our customers ability to implement
our products in those countries. Any new export or import restrictions, new legislation or shifting
approaches in the enforcement or scope of existing regulations, or in the countries, persons or
technologies targeted by such regulations, could result in decreased use of our products by
existing customers with international operations, declining adoption of our products by new
customers with international operations and decreased revenues. If we fail to comply with export
and import regulations, we may be denied export privileges, be subjected to fines or other
penalties and our products may be denied entry into other countries.
Risks Related to Ownership of Our Common Stock
Our stock price may be volatile or may decline regardless of our operating performance.
The trading prices of the securities of technology companies have been highly volatile. The
market price of our common stock may fluctuate significantly in response to numerous factors, many
of which are beyond our control, including:
|
|
|
actual or anticipated fluctuations in our operating results; |
|
|
|
|
the financial projections we may provide to the public, any changes in these projections
or our failure to meet these projections; |
|
|
|
|
failure of securities analysts to maintain coverage of us, changes in financial estimates
by any securities analysts who follow our company, or our failure to meet these estimates or
the expectations of investors; |
|
|
|
|
ratings or other changes by any securities analysts who follow our company or our
industry; |
|
|
|
|
announcements by us or our competitors of significant technical innovations,
acquisitions, strategic partnerships, joint ventures or capital commitments; |
|
|
|
|
changes in operating performance and stock market valuations of other technology
companies generally, or those in our industry in particular; |
|
|
|
|
price and volume fluctuations in the overall stock market, including as a result of
trends in the economy as a whole, such as the continuing volatility in the financial
markets; |
|
|
|
|
lawsuits threatened or filed against us; and |
|
|
|
|
other events or factors, including those resulting from war, incidents of terrorism or
responses to these events. |
In addition, the stock markets, and in particular The NASDAQ Global Market on which our common
stock is listed, have experienced extreme price and volume fluctuations that have affected and
continue to affect the market prices of equity securities of many companies, particularly
technology companies. Broad market fluctuations such as these may have and could continue to
adversely affect the market price of our common stock. Even prior to the continuing volatility in
the financial markets, stock prices of many technology companies had 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 and financial condition.
If securities or industry analysts cease publishing research or publish inaccurate or
unfavorable research about our business, our stock price and trading volume could decline.
The trading market for our common stock depends in part on the research and reports that
securities or industry analysts publish about us or our business. Securities analysts and industry
analysts that currently cover us may cease to do so, negatively impacting the trading price for our
stock. If one or more of the analysts who cover us or our industry downgrade our stock or the stock
of other companies in our industry, or publish inaccurate or unfavorable research about our
business or industry, our stock price would likely
60
decline. If one or more of these analysts fail to publish reports on us regularly, demand for
our stock could decrease, which might cause our stock price and trading volume to decline.
Delaware law, provisions in our restated certificate of incorporation and amended and restated
bylaws and the concentration of our ownership could make a merger, tender offer or proxy contest
difficult, thereby depressing the trading price of our common stock.
We are a Delaware corporation and the anti-takeover provisions of the Delaware General
Corporation Law may discourage, delay or prevent a change in control by prohibiting us from
engaging in a business combination with an interested stockholder for a period of three years after
the person becomes an interested stockholder, even if a change of control would be beneficial to
our existing stockholders. In addition, our restated certificate of incorporation and amended and
restated bylaws contain provisions that may make the acquisition of our company more difficult
without the approval of our board of directors, including the following:
|
|
|
our board of directors is classified into three classes of directors with staggered
three-year terms; |
|
|
|
|
currently only our chief executive officer, our president, our lead independent director
or a majority of our board of directors is authorized to call a special meeting of
stockholders; |
|
|
|
|
our stockholders are only able to take action at a meeting of stockholders and not by
written consent; |
|
|
|
|
vacancies on our board of directors are able to be filled only by our board of directors
and not by stockholders; |
|
|
|
|
directors may be removed from office only for cause; |
|
|
|
|
our restated certificate of incorporation authorizes undesignated preferred stock, the
terms of which may be established, and shares of which may be issued, without stockholder
approval; and |
|
|
|
|
advance notice procedures will apply for stockholders to nominate candidates for election
as directors or to bring matters before an annual meeting of stockholders. |
In addition, as of March 1, 2010 (including options exercisable by those holders within 60
days of that date), our directors and executive officers, together with their affiliates,
beneficially own in the aggregate 22.8% of our outstanding common stock. Further, holders that
together with their affiliates hold 5% or more of our common stock, but who are not affiliated with
our directors and executive officers, beneficially own in the aggregate an additional 20.5% of our
outstanding common stock as of March 1, 2010. As a result, our directors and officers and their
affiliates, collectively, or our largest stockholders, acting together, may be able to impede a
merger, consolidation or sale of all or substantially all of our assets.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Use of Proceeds from Public Offering of Common Stock
The Form S-1 Registration Statement (Registration No. 333-145974) relating to our IPO was
declared effective by the SEC on February 14, 2008, and the offering commenced that day. Morgan
Stanley & Co. Incorporated acted as the sole book-running manager for the offering, and Lehman
Brothers Inc., Wachovia Capital Markets, LLC and RBC Capital Markets Corporation acted as
co-managers of the offering.
The net proceeds to us of our IPO after deducting underwriters discounts and offering
expenses were $45.9 million. Through January 31, 2010, we did not use any of the net proceeds. We
expect to use the net proceeds for general corporate purposes, including working capital and
potential capital expenditures and acquisitions. Although we may also use a portion of the net
proceeds for the acquisition of, or investment in, companies, technologies, products or assets that
complement our business, we have no present understandings, commitments or agreements to enter into
any acquisitions or make any investments.
Our management will retain broad discretion in the allocation and use of the net proceeds of
our IPO, and investors will be relying on the judgment of our management regarding the application
of the net proceeds. Pending specific utilization of the net proceeds as
61
described above, we have invested the net proceeds of the offering in short-term,
interest-bearing obligations. The goal with respect to the investment of the net proceeds will be
capital preservation and liquidity so that such funds are readily available to fund our operations.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. RESERVED
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
|
|
|
Exhibit |
|
|
Number |
|
Exhibit Description |
31.01
|
|
Certification of Principal Executive Officer Pursuant to Securities Exchange Act Rule 13a-14(a). |
|
|
|
31.02
|
|
Certification of Principal Financial Officer Pursuant to Securities Exchange Act Rule 13a-14(a). |
|
|
|
32.01
|
|
Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350 and Securities
Exchange Act Rule 13a-14(b).* |
|
|
|
32.02
|
|
Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 and Securities
Exchange Act Rule 13a-14(b).* |
|
|
|
* |
|
This certification is not deemed filed for purposes of Section 18 of the Securities
Exchange Act, or otherwise subject to the liability of that section. Such certification will
not be deemed to be incorporated by reference into any filing under the Securities Act of 1933
or the Securities Exchange Act of 1934, except to the extent that ArcSight Inc. specifically
incorporates it by reference. |
62
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
|
|
ARCSIGHT, INC.
|
|
Date: March 9, 2010 |
By: |
/s/ Thomas J. Reilly
|
|
|
|
Thomas J. Reilly |
|
|
|
President and Chief Executive Officer
(Principal Executive Officer) |
|
|
|
|
|
Date: March 9, 2010 |
By: |
/s/ Stewart Grierson
|
|
|
|
Stewart Grierson |
|
|
|
Chief Financial Officer
(Principal Financial Officer) |
|
|
63
EXHIBIT INDEX
|
|
|
Exhibit |
|
|
Number |
|
Exhibit Description |
31.01
|
|
Certification of Principal Executive Officer Pursuant to Securities Exchange Act Rule 13a-14(a). |
|
|
|
31.02
|
|
Certification of Principal Financial Officer Pursuant to Securities Exchange Act Rule 13a-14(a). |
|
|
|
32.01
|
|
Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350 and Securities
Exchange Act Rule 13a-14(b).* |
|
|
|
32.02
|
|
Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 and Securities
Exchange Act Rule 13a-14(b).* |
|
|
|
* |
|
This certification is not deemed filed for purposes of Section 18 of the Securities
Exchange Act, or otherwise subject to the liability of that section. Such certification will
not be deemed to be incorporated by reference into any filing under the Securities Act of 1933
or the Securities Exchange Act of 1934, except to the extent that ArcSight Inc. specifically
incorporates it by reference. |
64