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EX-31.1 - EX-31.1 - IXIA | v55384exv31w1.htm |
EX-21.1 - EX-21.1 - IXIA | v55384exv21w1.htm |
EX-32.1 - EX-32.1 - IXIA | v55384exv32w1.htm |
EX-31.2 - EX-31.2 - IXIA | v55384exv31w2.htm |
EX-23.1 - EX-23.1 - IXIA | v55384exv23w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended December 31, 2009
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 000-31523
IXIA
(Exact name of Registrant as specified in its charter)
California | 95-4635982 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
26601 West Agoura Road, Calabasas, CA 91302
(Address of principal executive offices, including zip code)
(Address of principal executive offices, including zip code)
Registrants telephone number, including area code: (818) 871-1800
The Nasdaq Stock Market LLC
(Name of Exchange on which Registered)
(Name of Exchange on which Registered)
Securities registered pursuant to Section 12(b) of the Act: Common Stock, without par value
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes o No þ
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Exchange Act. Yes o No þ
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of Registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ
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 definition of large accelerated
filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No þ
The aggregate market value of the shares of the Registrants Common Stock held by nonaffiliates of
the Registrant as of June 30, 2009, computed by reference to the closing sales price on the Nasdaq
Global Select Market on that date, was approximately $210,970,681.
As of March 2, 2010, the number of shares of the Registrants Common Stock outstanding was
63,630,343.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrants Proxy Statement delivered to shareholders in connection with the
Annual Meeting of Shareholders to be held on May 27, 2010 are incorporated by reference into Part
III of this Annual Report.
IXIA
FORM 10-K
TABLE OF CONTENTS
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Item 15. | 55 | |||||||
SIGNATURES | 58 | |||||||
EX-21.1 | ||||||||
EX-23.1 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 |
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Table of Contents
PART I
Item 1. | Business |
Overview
We are a leading provider of converged test systems and services for wireless and wired
infrastructures and services. Our hardware and software allow our customers to test and measure the
performance, functionality, service quality and conformance of wireless and wired Internet Protocol
(IP) equipment and networks, and the applications that run over them. Our solutions generate,
capture, characterize and analyze high volumes of realistic network and application traffic,
identifying problems, assessing performance, ensuring functionality and interoperability, and
verifying conformance to industry specifications. We offer hardware platforms with interchangeable
media interfaces, utilizing a common set of applications, Application Programming Interfaces (APIs)
and automation tools that allow our customers to create integrated, easy-to-use automated test
environments. The networks that our systems analyze primarily include Ethernet networks operating
at speeds of up to 100 gigabits per second and wireless networks that carry data traffic over
optical fiber, electrical cable and airwaves. We also offer hardware platforms and equipment that
test wireless equipment, especially those associated with 3G (third generation), 4G (fourth
generation) and Long-Term Evolution (LTE) networks. Customers also use our suite of software
applications to test and verify web, Internet, security and business applications.
During the year ended December 31, 2009, we received orders from approximately 825 new and
existing customers. Based on product shipments for the year ended December 31, 2009, our
significant customers by category included:
| Leading network equipment manufacturers such as Cisco Systems, Juniper Networks, and Alcatel-Lucent; | ||
| Semiconductor manufacturers such as Broadcom, LSI Corporation, and Intel; | ||
| Telecommunications equipment manufacturers such as Motorola, Ericsson, and ZTE Corporation; | ||
| Voice, broadband and/or wireless service providers such as AT&T, NTT, and Bell Canada; | ||
| Cable operators such as Comcast Cable, Time Warner, and Charter Communications; | ||
| Enterprises such as the New York Stock Exchange, JP Morgan, and Wells Fargo; and | ||
| Government contractors, departments and agencies such as the U.S. Navy, General Dynamics and Northrop Grumman. |
Communications and entertainment delivery is rapidly moving to an all IP infrastructure. To
achieve utility grade quality, this infrastructure must be thoroughly tested under realistic
conditions prior to deployment. Our vision is to accelerate the convergence of all networks to IP
by providing the most comprehensive, easy-to-use and automated test systems in the industry. Key
growth drivers include the development and deployment of 10 to 100 Gigabit Ethernet network
equipment, video over IP, voice over IP, security devices and applications, converged wireline and
wireless networks, Metro, Carrier and Data Center Ethernet, and converged IP services such as
voice, video and data (multiplay) to the home and wireless devices. We intend to maintain our
focus on technology leadership, expand and further penetrate our customer base, leverage our
strengths into adjacent areas, acquire key technology, businesses and assets, and expand our
international presence.
On June 23, 2009, we acquired Catapult Communications Corporation (Catapult) and have
integrated its products into Ixias product line. These products add in-depth testing of wireless
network components. In particular, these products include test hardware and software that address
next-generation LTE network edge and core components.
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On October 30, 2009, we completed our acquisition from Agilent Technologies, Inc. (Agilent)
of its N2X Data Network Testing Product Line business (N2X Business). In addition to broadband
and carrier access protocol expertise, the IxN2X product line is known in the industry for its
intuitive and powerful user interface and excellent quality. Existing IxN2X customers will be able
to take immediate advantage of Ixias scalability, higher speed Ethernet support, and layer 4-7
application testing through the Companys Fusion initiative.
The Increasing Need for Network and Application Testing and Measurement
The measurement and analysis of performance, functionality, service quality and conformance of
networks, applications, and communication devices is important to the following groups:
| Communications Chip Manufacturers. At the early stages of development of new components, communications chip manufacturers use our test systems to evaluate and analyze the conformance, interoperability, and performance of their components. This occurs during the design and development phase typically prior to integration by network equipment manufacturers. | ||
| Network/Telecommunications Equipment Manufacturers (NEMs/TEMs). NEMs and TEMs provide voice, video, and data service infrastructure equipment to customer network operators, service providers, and network users, who specify high standards of functionality, performance and reliability. To meet these higher standards, NEMs and TEMs must ensure the quality of their products during development and manufacturing and prior to shipping. Failure to ensure the consistent functionality and performance of their products may result in the loss of customers, increased research and development costs, increased support costs and losses resulting from the return of products. NEMs use our test systems to run large-scale subscriber and service emulations, generating extreme traffic loads to verify the performance and capacity of their wired and wireless devices prior to deployment in production networks. Our systems are also used by NEMs and TEMs in the sales and acceptance process to demonstrate to their customers (e.g., service providers and enterprises) how their products will operate under real-world conditions. Our conformance test suites are used by NEMs and TEMs to ensure that their devices conform to published standards ensuring that they will be interoperable with other equipment. | ||
| Network Operators and Service Providers (Service Providers). Service Providers seek to provide their customers with a growing variety of high quality, advanced network services. Failure to provide satisfactory service can be costly and may result in high subscriber churn rates and reduced Average Revenue per User (ARPU). To ensure desired service levels and overall quality of experience are acceptable, Service Provider R&D and network engineering groups must verify the performance and functionality of staged networks during the equipment selection and network design process prior to deployment. Service Providers use our test systems to emulate millions of subscribers to realistically predict end user quality of experience delivered by their wired and wireless infrastructure and services. Increasingly, Service Provider operations groups use Ixias products to diagnose issues in their production networks by executing in-service tests similar to those conducted prior to deployment. | ||
| Enterprises and Government. These large Service Provider customers spend significant amounts on networks and network services. They deploy LANs and WANs that rival some Service Provider networks in size and complexity. These customers use Ixias solutions in much the same way as Service Providers, verifying the performance and functionality of network equipment and making sure that new networks, services and applications will perform as expected. They also use our products to test the performance and scalability of their internal applications, often based on proprietary protocols. |
Characteristics Demanded of Network and Application Test and Measurement Equipment
As networks and network devices become more intelligent and service-aware, performance,
functionality, interoperability, and conformance testing solutions must reproduce subscriber
traffic with increasing fidelity. Network testing solutions must also be highly scalable and
capable of generating and analyzing large amounts of
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data at high speeds over increasingly complex configurations. Comprehensive, integrated
testing must occur throughout network design, development, production, deployment, and operation
stages. Because this testing and verification must take place across multiple layers of the
network infrastructure and for all network protocols, network testing solutions are also required
to be highly flexible, extensible and modular. This rapid evolution of complex network
technologies and protocols, including leading-edge technologies such as 40 and 100 Gigabit
Ethernet, Metro Ethernet, Carrier Ethernet, and Data Center Ethernet, voice over IP, video over IP,
and LTE wireless networks, has resulted in the need for an integrated platform solution that is
easy to use with minimal training and set-up.
The Ixia Solution
We are a leading provider of converged test systems and services for wireless and wired
infrastructures and services. Our hardware and software allow our customers to test and measure the
performance, functionality, service quality and conformance of wireless and wired Internet Protocol
(IP) equipment and networks, and the applications that run over them. Our solutions generate,
capture, characterize and analyze high volumes of realistic network and application traffic,
identifying problems, assessing performance, ensuring functionality and interoperability, and
verifying conformance to industry specifications. We offer hardware platforms with interchangeable
media interfaces, utilizing a common set of applications, Application Programming Interfaces (APIs)
and automation tools that allow our customers to create integrated, easy-to-use automated test
environments. The networks that our systems analyze primarily include Ethernet networks operating
at speeds of up to 100 gigabits per second and wireless networks that carry data traffic over
optical fiber, electrical cable and airwaves. We also offer hardware platforms and equipment that
test wireless equipment, especially those associated with 3G (third generation), 4G (fourth
generation) and Long-Term Evolution (LTE) networks. Customers also use our suite of software
applications to test and verify web, Internet, security and business applications.
Our test systems provide the following key benefits to our customers:
Versatile High Performance. Our test systems generate and receive data traffic at full line
rate, which is the maximum rate that data traffic can be transmitted over a network medium. Our
systems provide accurate analysis across multiple layers of the overall network and of individual
network components in real time. Our systems can be configured to either generate programmed
packets of data or conduct complete sessions.
Our systems analyze each discrete packet of information, thereby allowing our customers to
precisely measure the performance of their networks and individual network components. This
precision allows customers to accurately measure critical quality of service parameters such as
throughput, latency, loss, and jitter and to check data integrity, packet sequencing throughout the
network, and quality of service (QoS) as well as to locate various network problems.
When used for meaningful application sessions, or conversations between network endpoints, our
systems emulate highly complex and specialized applications such as those used to transfer
electronic mail, browse the Internet, convey voice and video information, manage databases, and
establish wireless calls. This emulation allows our customers to accurately measure critical
characteristics of their networks such as session setup rate, session tear down rate, and session
capacity. By analyzing the content of these sessions, our customers can also accurately measure
QoS and media quality.
Highly Scalable. Each of our interface cards provides one or more ports through which our
systems generate and receive data traffic. Each physical port contains its own dedicated logic
circuits, with no shared resources. Our customers can easily scale the size of their test bed or
the amount of data traffic generated by inserting additional interface cards. By connecting
multiple chassis and synchronizing hundred of ports to operate simultaneously, our customers can
simulate extremely large-scale networks. Our GPS-based components even allow our chassis to be
distributed throughout the world, while maintaining the close time synchronization necessary for
precision tests. We believe that our systems can offer our customers one of the highest port
density and scalable space efficient systems available. In addition, our client-server
architecture allows multiple users in the same or different geographic locations to simultaneously
access and operate different ports contained in the same chassis to run independent tests.
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Hardware Platform. We offer hardware platforms with interchangeable interfaces, utilizing a
common set of applications and Application Programming Interfaces (APIs). Our architectures enable
the emulation of millions of network users on scalable platforms, with a mixture of both network
and application layer traffic. These architectures offer our customers an integrated test
environment that might otherwise require multiple products to cover the same test scenarios. We
believe that our hardware platform solutions decrease the overall cost while increasing
productivity and scalability, and reducing training requirements for our customers.
Highly Modular. Our hardware products consist of stackable and portable chassis, which,
depending on the chassis model, can be configured with any mix of interface cards. This modular
design allows our customers to quickly and easily create realistic, customized test configurations.
Our open architecture accelerates integration of additional network technologies into existing
systems through the addition of new interface cards and distributed software.
Flexible. Our customers can easily expand the use of our systems to address changing
technologies, protocols and applications without changing system hardware or replacing interface
cards. This protects and optimizes the customers investment by eliminating the need for forklift
upgrades or the purchase of additional niche products.
Open Architecture. Our open architecture allows our customers to quickly customize, automate
and extend our platform. Our customers use our APIs and applications to centrally manage, protect,
automate, and extend their ever-expanding testing environments.
Ease of Automation. Our systems make it easy to create automated tests that can run
unattended. We offer our customers a growing library of automated tests that simplify and
streamline the test process. These tests are repeatable and the results are presented in a
structured format for easy analysis. Ixias Tool Command Language (Tcl) Application Programming
Interface (API) is a comprehensive programming interface to our hardware, as well as to our
software applications. The Tcl API enables libraries of automated tests to be quickly built with
specificity to a customers environment. We also offer a utility that exports configurations
created in our graphical user interface (GUI) as Tcl scripts.
Ease of Use. We have designed our systems so that users can install and operate them with
minimal training and setup. Our systems are easy to use and offer our customers a wide range of
readily accessible pre-designed test configurations. These tests include industry standard and use
case-specific tests. Users can easily configure and operate our systems to generate and analyze
data traffic over any combination of interface cards or ports through our graphical user interface
that features a familiar Microsoft Windows point-and-click environment. Once tests are designed
in our GUIs, they can be saved for reuse or in Tcl script form for customization and even greater
levels of automation.
Strategy
Our objective is to be the industry leader in providing performance, functionality, service
quality, interoperability, and conformance testing solutions for wireless and wired IP networks and
IP-based services. This includes being at the forefront of emerging and next generation
technologies such as 40/100 Gigabit Ethernet and LTE, growing our portfolio of products and
addressable markets through acquisitions of technologies, businesses and assets, expanding our
international presence and customer base, and continuing to deliver high quality products and
support to our customers. Key elements of our strategy to achieve this objective include the
following:
Continue to Expand our Addressable Markets. We plan to further expand our addressable markets
into areas of growth for wireless and wired IP-based products and services, such as content-aware
routing and switching, networks that carry voice, video and data over IP (commonly referred to in
the aggregate as multiplay), wireless devices, application security, and next-generation networking
technologies. We also plan to continue to apply our knowledge of these advanced communication
technologies to develop tools for monitoring traffic in live networks. We believe that we can
leverage our core competencies in high-speed transmission protocols into leadership
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positions, in both our historic pre-deployment market as well as the market for monitoring IP
services in converged networks, as more networks and delivery of services migrate to IP.
Maintain Focus on Technology Leadership. We intend to continue to focus on research and
development in order to maintain our technology leadership position and to offer test systems that
address new and evolving network technologies. We intend to maintain an active role in industry
standards committees such as IEEE and the Internet Engineering Task Force, and to continue our
active involvement in industry forums and alliances, such as the Metro Ethernet Forum, TesLA
Alliance (Test Lab Automation), Multi Service Forum, IMS Forum, WiFi Alliance, WiMAX Forum and
3GPP. We also plan to continue to work closely with our customers who are developing emerging
network technologies, including Cisco Systems, Hewlett Packard, NTT, and Alcatel-Lucent, as well as
leading edge start-up companies, to enhance the performance and functionality of our existing
systems and to design future products that specifically address our customers needs as they
evolve.
Expand and Further Penetrate Customer Base. We plan to strengthen and further penetrate our
existing customer relationships, particularly those with network/telecommunications equipment
manufacturers, network operators and service providers, and to pursue sales to new customers. We
plan to strengthen our customer relationships and to expand our customer base by:
| Continuing to develop and offer new and innovative systems that meet our existing and potential customers needs, | ||
| Expanding our sales and marketing efforts to increase penetration in under-represented vertical and geographic market segments, and | ||
| Building upon and further strengthening our reputation and brand name recognition. |
We also plan to continue our focus on customer support by maintaining and expanding the
capabilities of our highly qualified and specialized internal personnel.
License and Acquire Key Technologies. We plan to continue our strategy of acquiring key
technologies that expand our product offerings, address customer needs, and enhance the breadth of
our evolving product portfolio. Any such acquisitions may be made in the form of partnering with
industry leaders, acquiring or licensing technology assets associated with product lines, or
acquiring other companies.
Expand International Market Presence. We plan to further pursue sales in key international
markets, including the Europe, Middle East and Africa regions (EMEA), and the Asia Pacific region.
In order to pursue sales in these markets, we intend to develop and expand our relationships with
key customers and distributors, as well as expand our direct sales and marketing presence within
these markets.
Products
Our test systems consist of hardware and software products that allow our customers to test
and measure the performance, functionality, interoperability, service quality, and conformance of
their wireless and wired IP equipment and networks, and the applications that run over them. Our
hardware platform consists largely of interchangeable interface cards which fit into multi-slot
chassis. Our chassis are metal cases that incorporate a computer, a power supply, and a backplane
which connects the interface cards to the chassis. The interface cards generate, receive and
analyze a wide variety of traffic types at multiple network layers. Our software applications and
APIs allow our customers to create and manage integrated, easy-to-use automated test environments.
Our customers can utilize our systems either in test labs or within networks. Our systems are
operated through standard computer peripheral devices, including a monitor, keyboard, and mouse.
The operator of our systems establishes test parameters for the performance analysis by inputting
data using the keyboard and mouse. The operator observes the results of the performance analysis
using the monitor and may log results to files for post-analysis or archival. All operations that
can be done interactively may also be automated through a variety of scripting interfaces and
automation tools.
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Our customers configure our systems based on the specific interfaces of the equipment being
tested. For example, if our customer wants to analyze the performance of a router with Ethernet
interfaces, the customer would insert Ethernet interface cards into our system.
Chassis
Our primary chassis, the 12-slot XM12, provides a high density, highly flexible test platform.
Operating in conjunction with our test applications, the XM12 provides the foundation for a
complete, high performance test environment. A wide array of interface modules are available for
the XM12. The chassis supports up to 192 Gigabit Ethernet ports, 96 10 Gigabit Ethernet ports, 12
40 Gigabit Ethernet ports and 6 100 Gigabit Ethernet ports, and 24 Packet over SONET (POS) or
Asynchronous Transfer Mode (ATM) ports. These modules provide the network interfaces and
distributed processing resources needed for executing a broad range of data, signaling, voice,
video, and application testing from layers 2-7 of the network stack. Each chassis supports an
integrated test controller that manages all system and testing resources. Resource ownership down
to a per-port level, coupled with hot-swappable interface modules ensures a highly flexible,
multi-user testing environment. Backward compatibility is maintained with key existing Ixia
interface modules and test applications to provide seamless migration from and integration with
existing Ixia test installations.
The IxN2X product line offers a four-slot chassis or portable two-slot chassis. Interfaces
are available for 10 Mbps through 10 Gbps Ethernet, SONET/SDH, POS, ATM, and Frame Relay.
The IxCatapult product line utilizes three different chassis types. The m500 chassis offers 16
slots for testing 2G, 3G and LTE network components. The t600 chassis holds specialized cards used
for LTE sector testing. The optional r10 radio head can be used to generate radio frequency (RF)
signals for LTE eNode B testing.
Interface Cards
We offer a number of optical and electrical interface cards. Each one of our interface cards
contains from one to 16 independent traffic generation and analysis ports. These ports operate at
wire speed, the maximum rate that data traffic can be transmitted over a network medium. Each port
on each interface card has a unique transmit stream engine that is used to generate packets of
information and a real-time receive analysis engine capable of analyzing the packets as they are
received. The transmit stream engine generates millions of IP data packets or continuous test
sequences at wire speed that are transmitted through the network and received by the analysis
engine. When data packets have been generated, the analysis engine then measures throughput,
latency, loss and jitter, and checks data integrity and packet sequence on a packet-by-packet
basis. In addition, our systems measure the effectiveness of networks in prioritizing different
types of traffic. Each of our current generation interface cards also includes a microprocessor
per port to generate and analyze sophisticated routing protocols, such as BGP and MPLS, as well as
application traffic such as TCP/IP, HTTP and SSL.
Interface cards used with IxCatapult are specialized processors that handle wireless signaling
and user data. Small numbers of test ports are typically used for wireless node testing. The t600
chassis holds specialized cards used for LTE sector testing; six card sets are used to test each
wireless sector.
System Management Software
Our systems are managed through graphical user interfaces that allow users to configure our
chassis and interface cards to generate and analyze traffic. Each port can be independently
configured to meet specific testing requirements, and results can be viewed using both tables and
graphs. We also allow users to create custom and automated test applications tailored to meet
their specific requirements with the commonly used Tcl programming environment.
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Application Specific Test Suites
We have a comprehensive suite of software applications to address specific technologies. These
applications measure and analyze the performance, functionality, interoperability, service quality,
and conformance of networks, network equipment and applications that run on these networks. These
measurements enable network and telephony equipment manufacturers, enterprises, network operators
and service providers, and governments to evaluate the performance of their equipment and networks
during the design, manufacture, and pre-deployment stages, as well as after the equipment are
deployed in a network. Our technology-specific test suites are targeted at a wide range of popular
testing requirements:
Video Testing
Ixias IxLoad tests the performance of video servers, multicast routers, and the IP video
delivery network. This is accomplished by emulating video servers and millions of video
subscribers in video on demand and multicast video scenarios. Protocols supported include MPEG,
IGMP, RTP, and RTSP.
IxChariot tests the video transport network. This is accomplished by emulating video traffic,
and measuring end-to-end video quality. Measurements include throughput, latency, loss, jitter,
and media delivery index (MDI).
Voice Testing
IxLoad tests the functionality of VoIP and PSTN devices and services by emulating end devices
and servers. Testing areas supported include SIP, SCCP (Skinny), H.323, MGCP, H.248 (MEGACO), as
well as TDM and analog telephony services. Performance testing of SIP devices and infrastructure is
accomplished by emulating thousands of SIP callers and callees in performance testing scenarios.
IxChariot tests the voice transport network. This is accomplished by emulating voice traffic
and measuring end-to-end voice quality. Measurements include throughput, latency, loss, jitter,
and mean opinion score (MOS).
Intelligent Network Testing
IxLoad tests the performance of content-aware networks and devices including server load
balancers (SLB), firewalls, web servers, and mail servers. This is accomplished by emulating
millions of clients and a variety of servers in realistic performance testing scenarios. Protocols
supported include TCP, HTTP, SSL, FTP, SMTP, POP3, IMAP, RTP, RTSP, Telnet, DNS, LDAP, DHCP, SIP,
MPEG, and IGMP.
Conformance Testing
IxANVL provides automated network/protocol validation. Developers and manufacturers of
networking equipment and Internet devices can use IxANVL to validate protocol compliance and
interoperability. IxANVL supports all industry standard test interfaces including
10Mbps/100Mpbs/1Gbps/10Gbps Ethernet, ATM, Serial, Async, T1/E1 and POS. It provides conformance,
negative, and regression testing on a large selection of protocols including bridging, routing,
PPP, TCP/IP, IPv6, IP storage, RMON, VPN, MPLS, voice over IP, Metro Ethernet and multicast.
Security Testing
IxLoad tests the performance of stateful and deep packet inspection security devices,
including firewalls, SSL gateways, virus scanners, spam filters, and intrusion detection systems
(IDS). This is accomplished by emulating clients and servers, as well as through the use of
distributed denial of service (DDoS) attacks. Key capabilities include the ability to mix valid
user traffic with malicious traffic and to attach viruses to emails.
IxDefend tests the vulnerability, robustness, and security of network devices and systems by
exercising their underlying protocols. IxDefend suites are available for 40 standard Internet
protocols, such as TCP/IP, ICMP, HTTP
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and FTP. IxDefend looks for vulnerabilities associated with software errors that can manifest
as a device or service crashes.
Application Testing
IxLoad tests the performance of enterprise applications. This is accomplished by emulating a
large number of real users accessing applications. Technologies supported include JavaScript, XML,
Java, Document Object Model (DOM), and databases (e.g., Oracle, SQL, Access).
Router Testing
IxNetwork and IxN2X tests core/edge/customer routers and layer 3 switches. This is
accomplished by emulating entire network infrastructures and generating high traffic loads across
these emulated topologies to verify performance. Protocols supported include IGPs (OSPF, IS-IS,
RIP), BGP, MPLS (including layer 2 and 3 VPNs), and IP multicast.
IxAutomate is an automated test harness that can run turnkey tests using Ixias underlying
APIs. Multiple turnkey test suites are available to execute control and data plane performance and
functionality testing. Tests include route capacity, route convergence, session scalability,
tunnel scalability, and data plane performance.
Layer 2-3 Security Testing
IxVPN tests IPSec VPN gateways and systems. This is accomplished by establishing and
authenticating IPSec tunnels, and then generating traffic load over the tunnels to verify
performance. Site-to-site and remote access VPN testing is supported, as well as DES, 3DES, and
AES encryption.
IxNetwork, IxLoad and IxN2X test devices supporting 802.1x authentication. This is
accomplished by high scalable emulation of 802.1x clients (supplicants). Authentication modes
supported include MD5, TLS, TTLS, and PEAP.
Switch Testing
IxNetwork and IxN2X test layer 2-3 switches and forwarding devices. This is accomplished by
generating traffic load across a mesh of interfaces, and then measuring results down to a per flow
basis. Protocols supported include spanning tree, multicast, and IP routing.
IxAutomate tests layer 2-3 switches in an automated fashion. A set of predefined test suites
is used to execute performance and functionality tests. Tests include data plane performance, QoS
functionality, address cache tests, error filtering, and VLAN functionality.
IxExplorer tests layer 2-3 switches and forwarding devices. This is accomplished by
generating traffic load with very granular control of packet parameters and detailed results
analysis. Measurements include throughput, latency, inter-arrival time, data integrity, and
sequence checking.
Wireless Testing
IxCatapult tests legacy and wireless network protocols associated with 2G, 3G and LTE wireless
networks. This is accomplished through emulation of each network component. These emulations are
used in combinations to isolate and test each component or group of components. IxLoad is used in
conjunction with IxCatapult to provide scalable real-world data traffic during IxCatapult tests.
IxChariot tests the wireless transport network. This is accomplished by emulating application
traffic whether data, voice, or video and measuring end-to-end performance and quality.
Measurements include throughput, latency, jitter, mean opinion score (MOS), and media delivery
index (MDI).
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Broadband Testing
IxNetwork, IxLoad and IxN2X test broadband aggregation devices including B-RAS, DSLAMs, CMTSs,
and edge routers. This is accomplished by emulating millions of broadband clients and generating
traffic load over those connections. Protocol support includes PPPoE, PPPoA, L2TPv2, and L2TPv3.
IxChariot tests the broadband access transport network. This is accomplished by emulating
application traffic whether data, voice, or video and measuring end-to-end performance and
quality. Measurements include throughput, latency, jitter, mean opinion score (MOS), and media
delivery index (MDI).
Automated Testing
IxAutomate provides a complete automation environment for testing layer 2-3 routers, switches,
and similar devices. A set of predefined test suites is used to execute performance and
functionality tests. Multiple tests, whether predefined or custom developed, can be scheduled for
execution together with configuration of the device under test.
Test Conductor is a comprehensive, highly scalable regression harness that is compatible with
some our other key network testing tools. Test Conductor imports tests, associates them with a
named regression test sequences, and allows detailed scheduling. Tests can be scheduled in series
or in parallel based on a Windows Outlook-like calendar tool. At-a-glance logs and summary
reports display color-coded pass/fail results, as well as the progress of the tests within each
regression. Automated device under test (DUT) configuration scripts can be scheduled to run in
synchronization with the individual tests or with complete regression runs.
Our Tcl automation environment provides a comprehensive set of tools and APIs for automating
testing with our hardware and software applications. Custom test libraries covering all of a
customers layer 2-7 testing requirements can be created in a single automation environment.
Most test applications contain a ScriptGen feature that automatically generates Tcl script
code from test configurations. This accelerates the development of automation code and helps train
new users in the Ixia Tcl API.
Converged Monitoring Testing
As carriers deploy additional multiplay services over advanced Ethernet networks, their
existing support systems are less capable of diagnosing application layer problems. Ixias IxRave
(Remote Access Verification Engine) solution allows carriers and service providers to execute
active network tests using Ixias applications from a web-based control system that can be
integrated into their existing infrastructure. IxRave Voice is a specialized version of IxRave that
performs monitoring and active testing of voice over IP networks through a probeless, web-based
system and features graphical display of network status.
Products in Development
We continue to develop our IP testing capabilities, and throughout 2010 we intend to remain
focused on improving our position in performance, functional, interoperability, service quality,
and conformance testing in the following technology areas:
| 10, 40 and 100 Gigabit Ethernet | ||
| Carrier, Metro and Data Center Ethernet | ||
| MPLS | ||
| Multicast | ||
| IPv6 | ||
| Voice and Video over IP | ||
| IPSec | ||
| Data Center Ethernet |
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| Test Automation | ||
| Security | ||
| LTE | ||
| IMS | ||
| Energy efficiency |
We may delay or cancel the introduction of new products to the market as a result of a number
of factors, some of which are beyond our control. For more information regarding these factors,
see Business Research and Development on page 15 and Risk Factors If we are unable to
successfully introduce new products to keep pace with the rapid technological changes that
characterize our market, our results of operations will be significantly harmed starting on page 19.
Technology
The design of all of our systems requires a combination of sophisticated technical
competencies, including design of field programmable gate arrays, or FPGAs, which are integrated
circuits that can be repeatedly reprogrammed to perform different sets of functions as required.
The design of all of our systems also requires high-speed digital hardware design, software
engineering and optical and mechanical engineering. We have built an organization of professional
staff with skills in all of these areas. The integration of these technical competencies enables
us to design and manufacture test systems which are highly scalable to meet the needs of our
customers.
Complex Logic Design. Our systems use FPGAs that are programmed by the host computer and
therefore can be reconfigured for different applications. Our newest products have clock
frequencies, which are the timing signals that synchronize all components within our system, and
logic densities, which are the number of individual switching components, or gates, of more than
four million gates per chip. Our customers may obtain updates and enhancements from our website,
thereby allowing rapid updates of the system. Almost all of our logic chips are designed in the
VHDL hardware description language, a unique programming language tailored to the development of
logic chips. This language enables the easy migration of the hardware design to application
specific integrated circuits as volumes warrant. We develop VHDL code in a modular fashion for
reuse in logic design, which comprises a critical portion of our intellectual property. This
reusable technology allows us to reduce the time-to-market for our new and enhanced products.
Software Technology. We devote substantial engineering resources to the development of
software technology for use in our product lines. We have developed software to control our
systems, analyze data collected by our systems, and monitor, maintain and self-test our hardware
and field programmable gate array subsystems. A majority of our software technology and expertise
is focused on the use of object-oriented development techniques to design software subsystems that
can be reused across multiple product lines. These objects are client and server independent
allowing for distributed network applications. This software architecture allows all of the
software tools developed for our existing products to be utilized in all of our new products with
very little modification. Another important component of our software technology is our graphical
user interface design. Customer experience with our test products has enabled us to design a
simple yet effective method to display complex configurations in clear and concise graphical user
interfaces for intuitive use by engineers.
Customers
Since our incorporation in May 1997 through December 31, 2009, we have shipped our systems to
over 2,180 customers. No customer other than Cisco Systems accounted for more than 10% of our
total revenues in 2009, 2008 or 2007. Cisco Systems accounted for 15.6% of our total revenues in
2009, 21.0% of our total revenues in 2008 and 23.9% of our total revenues in 2007.
We do not have long-term or volume purchase contracts with our customers, and they may reduce
or discontinue their purchases from us at any time.
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Competition
The market for network performance measurement and analysis systems for use in the high-speed
data communications industry is highly competitive, and we expect this competition to continue in
the future. We currently compete with test equipment manufacturers such as Spirent Communications,
JDS Uniphase Corporation, NetHawk Oyj and Anritsu. We also compete with a number of small
companies which are focused on network performance measurement, wireless and IMS, high speed
Ethernet and converged monitoring test. Additionally, some of our significant customers have
developed, or may develop, in-house performance analysis products for their own use or for sale to
others.
We believe that the principal competitive factors in our market include:
| Breadth of product offerings and features on a single platform, | ||
| Timeliness of new product introductions, | ||
| Product quality, reliability and performance, | ||
| Price and overall cost of product ownership, | ||
| Ease of installation, integration and use, | ||
| Customer service and technical support, and | ||
| Company reputation and size. |
We believe that we compete favorably in the key competitive factors that impact our markets.
We intend to remain competitive through ongoing research and development efforts that enhance
existing systems and to develop new systems. We will also seek to expand our market presence
through marketing and sales efforts. However, our market is still evolving and we may not be able
to compete successfully against current or future competitors.
We expect competition to increase significantly from existing providers of network performance
measurement and analysis products and from companies that may enter our existing or future markets.
And, as we move into new market segments within the broader testing arena, we will be challenged
by new competitors. These companies may develop similar or substitute solutions that may be more
cost-effective or provide better performance or functionality than our systems. Also, as we
broaden our product offerings, we may move into new markets in which we will have to compete
against companies already established in those markets. Some of our existing and potential
competitors have longer operating histories, substantially greater financial, product development,
marketing, service, support, technical and other resources, significantly greater name recognition,
and a larger installed base of customers than we do. In addition, many of our competitors have
well established relationships with our current and potential customers and have extensive
knowledge of our industry. It is possible that new competitors or alliances among competitors will
emerge and rapidly acquire market share. Moreover, our competitors may consolidate with each
other, or with other companies, giving them even greater capabilities with which to compete against
us.
To be successful, we must continue to respond promptly and effectively to the challenges of
changing customer requirements, technological advances and competitors innovations. Accordingly,
we cannot predict what our relative competitive position will be as the market evolves for network
performance measurement and analysis systems.
Sales, Marketing and Technical Support
Sales. We use our global direct sales force to market and sell our systems. In addition, we
use distributors to complement our direct sales and marketing efforts in certain international
markets. Our direct sales force maintains close contact with our customers and supports our
distributors.
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Marketing. We have a number of programs to support the sale and distribution of our systems
and to inform existing and potential customers and distributors about the capabilities and benefits
of our systems. Our marketing efforts also include promoting our business in the following ways:
| Sponsoring technical seminars and webinars that highlight our solutions, | ||
| Participating in industry trade shows and technical conferences, | ||
| Writing and distribution of various forms of collateral, including brochures, white papers, and application notes, | ||
| Demonstrating the performance and scalability of our products at our iSimCity proof-of-concept labs, | ||
| Communicating through our corporate website, and | ||
| Advertising in trade journals. |
Technical Support. We maintain a technically knowledgeable and responsive customer service
and support staff that is critical to our development of long-term customer relationships. Our
staff can:
| Offer solutions for performance validation needs, | ||
| Develop custom applications, | ||
| Deploy to customer sites on short notice, and | ||
| Provide guidance to optimally utilize our systems. |
Manufacturing
Our manufacturing operations consist primarily of materials planning and procurement, quality
control, logistics, final assembly and testing, and distribution. We outsource the manufacture,
assembly and testing of printed circuit board assemblies, certain interface cards and certain
chassis to third party contract manufacturers, the most significant of which are located in
Malaysia, and assembly companies. This manufacturing process enables us to operate without
substantial space and personnel dedicated to manufacturing operations. As a result, we can
conserve a significant portion of the working capital and capital expenditures that may be required
for other operating needs.
We are dependent upon sole or limited source suppliers for key components and parts used in
our systems, including field programmable gate arrays, chips, oscillators and optical modules. We
and our contract manufacturers purchase components through purchase orders, and we have no
guaranteed or long-term supply arrangements with our respective suppliers. In addition, the
availability of many components is dependent in part on our ability and the ability of our contract
manufacturers and assembly companies to provide suppliers with accurate forecasts of future
requirements. Any extended interruption in the supply of any of the key components currently
obtained from a sole or limited source or delay in transitioning to a replacement suppliers
product or replacement component into our systems could disrupt our operations and significantly
harm our business in any given period.
Lead times for materials and components ordered by us and by our contract manufacturers vary
and depend on factors such as the specific supplier, purchase terms and demand for a component at a
given time. We and our contract manufacturers acquire materials, complete standard subassemblies and assemble
fully-configured systems based on sales forecasts and historical purchasing patterns. If orders do
not match forecasts or substantially deviate
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from historical patterns, we and our contract
manufacturers and assembly companies may have excess or inadequate inventory of materials and
components.
Research and Development
We believe that research and development is critical to our business. Our development efforts
include anticipating and addressing the performance analysis needs of network equipment
manufacturers, network operators and service providers, communications chip manufacturers and
network users, large enterprises and government customers, and focusing on emerging high growth
network technologies.
Our future success depends on our ability to continue to enhance our existing products and to
develop new products that address the test and measurement needs of our customers. We closely
monitor changing customer needs by communicating and working directly with our customers and
distributors. We also receive input from our active participation in industry groups responsible
for establishing technical standards.
Development schedules for technology products are inherently difficult to predict, and there
can be no assurance that we will introduce any proposed new products in a timely fashion. Also, we
cannot be certain that our product development efforts will result in commercially successful
products or that our products will not contain software errors or other performance problems or be
rendered obsolete by changing technology or new product announcements by other companies.
We plan to continue to make significant investments in research and development, such as our
investments in our overseas development facilities, including those in India and Romania. Our
research and development expenses were $54.0 million in 2009, $49.2 million in 2008, and $47.4
million in 2007. These costs included stock-based compensation expense of $4.5 million in 2009,
$4.2 million in 2008, and $5.2 million in 2007.
Intellectual Property and Proprietary Rights
Our success and ability to compete are dependent in part upon our ability to protect and
maintain our proprietary rights to our intellectual property. We currently rely on a combination
of patent, trademark, trade secret and copyright laws and restrictions on disclosure and use to
establish and protect our intellectual property. We have patent applications and existing patents
in the United States and in other jurisdictions. We cannot be certain that these applications will
result in the issuance of any patents, or that any such patents, if they are issued, or our
existing patents, will be upheld. We also cannot be certain that such patents, if issued, or our
existing patents, will be effective in protecting our proprietary technology. We have registered
the Ixia name, the Ixia logo and certain other trademarks in the United States, the European Union
and other jurisdictions, and have filed for registration of additional trademarks.
We generally enter into confidentiality agreements with our officers, employees, consultants,
and vendors, and in many instances, our customers. We also generally limit access to and
distribution of our source code and further limit the disclosure and use of other proprietary
information. However, these measures provide only limited protection of our intellectual property
rights. In addition, we may not have signed agreements containing adequate protective provisions
in every case, and the contractual provisions that are in place may not provide us with adequate
protection in all circumstances.
Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to
copy or otherwise obtain or use technology or information such as trade secrets that we regard as
proprietary. We cannot be certain that the steps taken by us to protect our proprietary rights
will be adequate to prevent misappropriation of our technology or that our competitors will not
independently develop technologies that are similar or superior to our technology. In addition,
the laws of some foreign countries do not protect our proprietary rights to the same extent as do
the laws of the United States. Any infringement of our proprietary rights could result in
significant litigation costs, and any failure to adequately protect our proprietary rights could result in our
competitors offering similar products, potentially resulting in loss of competitive advantage,
loss of market share and decreased revenues.
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Litigation may be necessary to enforce our
intellectual property rights or to determine the validity and scope of the proprietary rights of
others. Litigation of this type could result in substantial costs and diversion of resources and
could significantly harm our business.
The telecommunication and data communications industries are characterized by the existence of
a large number of patents and frequent litigation based on allegations of patent infringement.
From time to time, third parties may assert patent, copyright, trademark and other intellectual
property rights to technologies or proprietary rights that are important to our business. We have
not conducted a search to determine whether the technology we have in our products infringes or
misappropriates intellectual property held by third parties. Any claims asserting that our systems
infringe or may infringe proprietary rights of third parties, if determined adversely to us, could
significantly harm our business. See Part I, Item 3 of this Form 10-K for additional information.
Employees
As of December 31, 2009, we had approximately 1,073 full-time employees. We also from time to
time hire temporary and part-time employees and independent contractors. Our future performance
depends, to a significant degree, on our continued ability to attract and retain highly skilled and
qualified technical, sales and marketing, and senior management personnel. Our employees are not
represented by any labor unions. We consider our relations with our employees to be good.
Available Information
Our website address is www.ixiacom.com. We make available free of charge through a link
provided at such website our Forms 10-K, 10-Q and 8-K as well as any amendments thereto. Such
reports are available as soon as reasonably practicable after they are filed with the Securities
and Exchange Commission.
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Item 1A. | Risk Factors |
The statements that are not historical facts contained in this Form 10-K are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of 1995. These
statements reflect the current belief, expectations or intent of our management and are subject to
and involve certain risks and uncertainties. Many of these risks and uncertainties are outside of
our control and are difficult for us to forecast or mitigate. In addition to the risks described
elsewhere in this Form 10-K and in certain of our other Securities and Exchange Act Commission
filings, the following important factors, among others, could cause our actual results to differ
materially from those expressed or implied by us in any forward-looking statements contained herein
or made elsewhere by or on behalf of us.
Our business may be adversely affected by unfavorable general economic and market conditions
Our business is subject to the effects of general economic conditions in the United States and
globally and, in particular, market conditions in the communications and networking industries. In
the past, our operating results were adversely affected as a result of unfavorable economic
conditions and reduced or deferred capital spending in the United States, Europe and Asia. The
current global financial crisis has included, among other things, significant reductions in
available capital and liquidity from banks and other credit providers, substantial reductions
and/or fluctuations in equity and currency values worldwide, and concerns that the worldwide
economy may be in a prolonged recessionary period. Unfavorable changes in economic and market
conditions such as these would likely result in lower capital spending by our customers on test and
measurement solutions, and therefore demand for our products would decline, adversely impacting our
revenue. Challenging economic and market conditions may also impair the ability of our customers
to pay for the products and services they have purchased. As a result, our reserves for doubtful
accounts and write-offs of accounts receivable may increase.
In addition, prolonged unfavorable economic conditions and market turbulence may also
negatively impact our contract manufacturers and suppliers capability to timely supply and
manufacture our products, thereby impairing our ability to meet our contractual obligations to our
customers. These potential effects, as well as any other currently unforeseeable effects, of the
current global financial crisis are difficult to forecast and mitigate. As a result, we may
experience material adverse impacts on our business, operating results and financial condition.
Acquisitions undertaken and any that we may undertake could be difficult to integrate, disrupt our
business, dilute shareholder value and significantly harm our operating results
Acquisitions are inherently risky and no assurance can be given that our previous or future
acquisitions will be successful or will not materially and adversely affect our business, operating
results or financial condition. We expect to continue to review opportunities to acquire other
businesses or technologies that would add to our existing product line, complement and enhance our
current products, expand the breadth of our markets, enhance our technical capabilities or
otherwise offer growth opportunities. While we are not currently a party to any pending
acquisition agreements, we may acquire additional businesses, products or technologies in the
future. If we make any further acquisitions, we could issue stock that would dilute existing
shareholders percentage ownership, and we could incur substantial debt or assume liabilities. We
have limited experience in acquiring and integrating other businesses and technologies, and as a
result, we may not fully realize the expected benefits of an acquisition. During 2009, we
completed the acquisition of Catapult Communications Corporation (Catapult) and the acquisition
of substantially all of the assets of N2X Data Network Testing Product Line (N2X Business) from
Agilent Technologies, Inc. (See Note 2 to the Consolidated Financial Statements). Acquisitions
involve numerous risks, including the following:
| problems or delays in assimilating or transitioning (from a larger organization) the acquired operations, systems, processes, controls, technologies, products, or personnel; | ||
| loss of acquired customer accounts; |
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| unanticipated costs associated with the acquisition; | ||
| multiple and overlapping product lines as a result of our acquisitions that are offered, priced and supported differently, which could cause customer confusion and delays; | ||
| higher than anticipated costs in continuing support and development of acquired products; | ||
| diversion of managements attention from our core business and the challenges of managing larger and more widespread operations resulting from acquisitions; | ||
| adverse effects on existing business relationships with suppliers, licensors, contract manufacturers, customers and industry experts; | ||
| we may incur significant impairment, exit and/or restructuring charges if the products or technologies acquired in an acquisition do not meet our sales expectations or are unsuccessful; | ||
| insufficient revenue to offset increased expenses associated with acquisitions; | ||
| risks associated with entering markets in which we have no or limited prior experience; and | ||
| potential loss of the acquired organizations or our own key employees. |
Mergers and acquisitions are inherently risky and subject to many factors outside of our
control, and we cannot be certain that we would be successful in overcoming problems in connection
with our past or future acquisitions, and our inability to do so could significantly harm our
assets acquired in such acquisitions, revenues and results of operations.
Because we depend on a limited number of customers for a majority of our revenues, any
cancellation, reduction or delay in purchases by one of these customers could significantly harm
our revenues and results of operations
Historically, a small number of customers has accounted for a significant portion of our total
revenues. Specifically, sales to our largest customer, Cisco Systems, accounted for 15.6% of our
total revenues in 2009, 21.0% of our total revenues in 2008 and 23.9% of our total revenues in
2007. We expect that significant customer concentration will continue for the foreseeable future
and that our operating results will continue to depend to a significant extent upon revenues from a
small number of customers.
Our dependence on large orders from a limited number of customers makes our relationships with
these customers critical to the success of our business. We cannot be certain that we will be able
to retain our largest customers, that we will be able to increase our sales to our other existing
customers or that we will be able to attract additional customers. From time to time, we have
experienced delays and reductions in orders from some of our major customers. In addition, our
customers have sought price reductions or other concessions from us and will likely continue to do
so. We typically do not have long-term or volume purchase contracts with our customers, and our
customers can stop purchasing our products at any time without penalty and are free to purchase
products from our competitors. The loss of one or more of our largest customers, any reduction or delay in
sales to one of these customers, our inability to successfully develop and maintain relationships
with existing and new customers, or requirements that we make price reductions or other concessions
could significantly harm our revenues and results of operations.
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Competition in our market could significantly harm our results of operations
The market for our products is highly competitive. We face competition primarily from
wireline and wireless test equipment manufacturers such as Spirent Communications, JDS Uniphase
Corporation, NetHawk Oyj and Anritsu. We also compete with a number of other small companies which
are focused on network performance analysis and measurement, and converged monitoring test.
Additionally, some of our significant customers have developed, or may develop, in-house
performance analysis products for their own use or for sale to others. For example, Cisco Systems,
our largest customer, has used internally developed test products for a number of years. Although
Cisco Systems has in the past accounted for a significant portion of our revenues, we cannot be
certain that it will continue to do so.
As we broaden our product offerings, we may move into new markets and face additional
competition. Moreover, our competitors may have more experience operating in these new markets and
be better established with the customers in these new markets.
Some of our competitors and potential competitors have greater brand name recognition and
greater financial, technical, marketing, sales and distribution capabilities than we do. Moreover,
our competitors may consolidate with each other, or with other companies, giving them even greater
capabilities with which to compete against us.
Increased competition in the IP-based wired and wireless network performance analysis and
measurement markets could result in increased pressure on us to reduce prices and could result in a
reduction in our revenues and/or a decrease in our margins, each of which could significantly harm
our results of operations. In addition, increased competition could prevent us from increasing our
market share, or cause us to lose our existing market share, either of which would harm our
revenues and profitability.
We cannot predict whether our current or future competitors will develop or market
technologies and products that offer higher performance or more features, or that are more
cost-effective than our current or future products. To remain competitive, we must continue to
develop cost-effective products and product enhancements which offer higher performance and more
functionality. Our failure to do so will harm our revenues and results of operations.
If we are unable to successfully introduce new products to keep pace with the rapid technological
changes that characterize our market, our results of operations will be significantly harmed
The market for our products is characterized by:
| rapid technological change such as the recent advancements of IP-based networks and wireless technologies (e.g., LTE); | ||
| frequent new product introductions such as higher speed and more complex routers; | ||
| evolving industry standards such as new Internet protocols; | ||
| changing customer needs such as the increase in advanced IP services agreed to between network service providers and their customers; and | ||
| short product life cycles as a result of rapid changes in our customers products. |
Our performance will depend on our successful development, introduction and market acceptance
of new and enhanced performance analysis products that address new technologies and changes in
customer requirements. If we experience any delay in the development or introduction of new
products or enhancements to our existing products, our operating results may suffer. For instance,
undetected software or hardware errors, which frequently occur when new products are first
introduced, could result in the delay or loss of market acceptance of our products and the loss of
credibility with our customers. In addition, if we are not able to develop, or license or acquire
from
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third parties, the underlying core technologies necessary to create new products and
enhancements, our existing products are likely to become technologically obsolete over time and our
operating results will suffer. If the rate of development of new technologies and transmission
protocols by our customers is delayed, the growth of the market for our products and therefore our
sales and operating results may be harmed.
Our ability to successfully introduce new products in a timely fashion will depend on multiple
factors, including our ability to:
| anticipate technological changes and industry trends; | ||
| properly identify customer needs; | ||
| innovate and develop and license or acquire new technologies and applications; | ||
| hire and retain necessary technical personnel; | ||
| successfully commercialize new technologies in a timely manner; | ||
| timely obtain key components for the manufacture of new products; | ||
| manufacture and deliver our products in sufficient volumes and on time; | ||
| price our products competitively; and | ||
| differentiate our offerings from our competitors offerings. |
The development of new, technologically advanced products is a complex and uncertain process
requiring high levels of innovation and highly skilled engineering and development personnel, as
well as the accurate anticipation of technology and market trends. We cannot be certain that we
will be able to identify, develop, manufacture, market or support new or enhanced products
successfully, if at all, or on a timely or cost-effective basis. Further, we cannot be certain
that our new products will gain market acceptance or that we will be able to respond effectively to
technological changes, emerging industry standards or product announcements by our competitors. If
we fail to respond to technological change and the needs of our markets, we will lose revenues and
our competitive position will suffer.
We depend on sales of a narrow range of products and if customers do not purchase our products, our
revenues and results of operations would be significantly harmed
Our business and products are concentrated in the market for systems that analyze and measure
the performance of wired and wireless IP-based network equipment and systems. This market is an
evolving market and there is uncertainty regarding its size and scope. Our performance will depend
on increased sales of our existing systems and the successful development, introduction and market
acceptance of new and enhanced products. We cannot be certain that we will be successful in
increasing these sales or in developing and introducing new products. Our failure to do so would
significantly harm our revenues and results of operations.
Our large customers have substantial negotiating leverage, which may require that we agree to terms
and conditions that may have an adverse effect on our business
Large network equipment manufacturers and service providers have substantial purchasing power
and leverage in negotiating contractual arrangements with us. These customers may require us to
develop additional features, reduce our prices or grant other concessions. As we seek to sell more
products to these large network equipment
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manufacturers, we may be required to agree to such terms
and conditions. These terms may affect the amounts and timing of revenue recognition and our
margins, which may adversely affect our profitability and financial condition in the affected
periods.
If we do not diversify our customer base, we may not be able to grow our business or increase our
profitability
To date, the majority of our total revenues have been generated from sales to network
equipment manufacturers. Our growth depends, in part, on our ability to diversify our customer
base by increasing sales to enterprises, government departments and agencies, network operators and
service providers, and communications chip manufacturers. To effectively compete for the business
of these customers, we must develop new products and enhancements to existing products and expand
our sales, marketing and customer service capabilities, which will result in increases in operating
costs. If we cannot offset these increases in costs with an increase in our revenues, our
operating results may be adversely affected. Some of our existing and potential competitors have
existing relationships with many enterprises, government departments and agencies, network
operators and service providers, and communications chip manufacturers. We cannot be certain that
we will be successful in increasing our sales presence in these markets. Any failure by us to
increase sales in these markets would adversely affect our growth.
Our quarterly and annual operating results may fluctuate significantly as a result of new product
introductions and other factors, which fluctuations could cause our stock price to decline
significantly
Our quarterly and annual operating results have fluctuated and may fluctuate significantly due
to a variety of factors, most of which are outside of our control. Some of the factors that could
cause our quarterly and annual operating results to fluctuate include the other risks discussed in
this Risk Factors section.
We may experience a shortfall or delay in generating or recognizing revenues for a number of
reasons. Orders on hand at the beginning of a quarter and orders generated in a quarter do not
always result in the shipment of products and the recognition of revenues for that quarter.
Failure to ship products by the end of the quarter in which they are ordered or our inability to
recognize revenue for products shipped in a quarter may adversely affect our operating results for
that quarter. Our agreements with customers typically provide that the customer may delay
scheduled delivery dates and cancel orders prior to shipment without penalty. Because we incur
operating expenses based on anticipated revenues and a high percentage of our expenses are fixed in
the short term, any delay in generating or recognizing forecasted revenues could significantly harm
our results of operations.
Our operating results may also vary as a result of the timing of our release of new products.
The introduction of a new product in any quarter may cause an increase in revenues in that quarter
that may not be sustainable in subsequent quarters. Conversely, a delay in introducing a new
product in a quarter may result in a decrease in revenues in that quarter and lost sales.
In addition, actual events, circumstances, outcomes, and amounts differing from judgments,
assumptions, and estimates used in determining the values of certain assets (including the amounts
of related valuation allowances), liabilities, and other items reflected in our consolidated
financial statements could significantly harm our results of operations.
The factors described above are difficult to forecast and mitigate. As a consequence,
operating results for a particular period are difficult to predict, and therefore, prior results
are not necessarily indicative of results to be expected in future periods. Any of the foregoing
factors, or any other factors discussed elsewhere herein, could have a material adverse effect on
our business, results of operations, and financial condition and could adversely affect our stock
price.
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The loss of any of our key personnel could significantly harm our results of operations and
competitive position
Our success depends to a significant degree upon the continuing contributions of our key
management, technical, marketing and sales employees. There can be no assurance that we will be
successful in retaining our key employees or that we can attract or retain additional skilled
personnel as required. Competition for highly skilled employees in our industry is intense, and
the cost to recruit and train new technical personnel is significant. Moreover, companies in our
industry whose employees accept positions with competitors frequently claim that those competitors
have engaged in unfair hiring practices. We may be subject to such claims as we seek to retain or
hire qualified personnel, some of whom may currently be working for our competitors.
Some of these claims may result in material litigation. We could incur substantial costs in
defending ourselves against these claims, regardless of their merits. Such claims could also
discourage potential employees who currently work for our competitors from joining us. In
addition, volatility or lack of positive performance in our stock price may also adversely affect
our ability to attract and retain highly skilled employees who may look to stock-based awards as a
key component of their compensation. Many of the stock options held by our employees have an
exercise price that is higher (in some cases significantly higher) than the current trading price
of our common stock, and these underwater options do not serve their purpose as incentives for
our employees to remain with Ixia. The loss of the services of any of our key employees, the
inability to attract or retain qualified personnel in the future or delays in hiring required
personnel could hinder the development and introduction of new and enhanced products and harm our
ability to sell our products. As a result, failure to retain or attract key personnel could
significantly harm our results of operations and competitive position.
Continued growth will strain our operations and require us to incur costs to maintain and upgrade
our management and operational resources
We have experienced growth in our operations, including number of employees, products,
facility locations and customers. Unless we manage our growth effectively, we may have difficulty
in operating our business. As a result, we may inaccurately forecast sales and materials
requirements, fail to integrate new personnel or fail to maintain adequate internal controls or
systems, which may result in fluctuations in our operating results and cause the price of our stock
to decline. We may continue to expand our operations to enhance our product development efforts
and broaden our sales reach, which may place a significant strain on our management and operational
resources. In order to manage our growth effectively, we must implement and improve our
operational systems, procedures and controls on a timely basis. If we cannot manage growth
effectively, our profitability could be significantly harmed.
If we are unable to expand our sales and distribution channels or are unable to successfully manage
our expanded sales organization, our revenues and results of operations will be harmed
Historically, we have relied primarily on a direct sales organization, supported by
distributors, to sell our products. Our distribution strategy focuses primarily on developing and
expanding our direct sales organization and our network of distributors and other resellers. We
may not be able to successfully expand our sales and distribution channels, and the cost of any
expansion may exceed the revenues that we generate as a result of the expansion. To the extent
that we are successful in expanding our sales and distribution channels, we cannot be certain that
we will be able to compete successfully against the significantly larger and better-funded sales
and marketing operations of many of our current or potential competitors. In some cases, we have
granted exclusive rights to our distributors to market our products in their specified territories.
Our distributors may not market our products effectively or devote the resources necessary to
provide us with effective sales, marketing and technical support. Our inability to effectively
manage the expansion of our sales and support staff, or to maintain existing or establish new
relationships with successful distributors, would harm our revenues and results of operations.
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If we are unable to expand our international sales and distribution channels or manage them
effectively, our results of operations would be harmed
Historically, the majority of our sales have been made to customers in the United States. Our
sales based on product shipments and services to the United States accounted for 57.1% of our total
revenues in 2009, 64.2% of our total revenues in 2008 and 65.0% of our total revenues in 2007.
Historically, distributors have generated a significant portion of our international sales. In the
past, we have had distributors who entered bankruptcy and were therefore terminated as distributors
of our products. Moreover, if we terminate a distribution relationship for performance-related or
other reasons, we may be subject to wrongful termination claims which may result in material
litigation. We could incur substantial costs in defending ourselves against these claims,
regardless of their merits, which could adversely impact our profitability.
Losses of one or more of our international distributors or their failure to sell our products
would limit our ability to sustain and grow our revenues in international markets. We intend to
expand into additional international markets in the EMEA and Asia Pacific regions by adding
distributors and international sales and support personnel. Our failure in these efforts could
significantly harm our results of operations and decrease the value of our stock.
Changes in industry and market conditions could lead to charges related to discontinuances of
certain of our products and asset impairments
In response to changes in industry and market conditions, we may be required to strategically
realign our resources by restructuring our operations and/or our product offerings. Any decision
to limit investment in or dispose of a product offering may result in the recording of special
charges to earnings, such as inventory, fixed asset and technology-related write-offs and charges
relating to consolidation of excess facilities, which could adversely impact our business, results
of operations and financial position.
Our workforce restructurings can be disruptive
We have in the past restructured or made other adjustments to our workforce in response to the
economic environment, performance issues, recent acquisitions and other internal and external
considerations. During 2009, we substantially completed two restructurings, and in January 2010,
we announced another restructuring primarily related to the acquisition of the N2X Business (See
Note 3 to the Consolidated Financial Statements). Restructurings, among other things, can result
in a temporary lack of focus and reduced productivity. These effects could recur in connection with
future acquisitions and other restructurings and our operating results and financial condition
could be negatively affected.
Some key components in our products come from sole or limited sources of supply, which exposes us
to potential supply shortages that could disrupt the manufacture and sale of our products
We and our contract manufacturers currently purchase a number of key components used to
manufacture our products from sole or limited sources of supply for which alternative sources may
not be available. From time to time, we have experienced shortages of key components, including
chips, oscillators and optical modules. We and our contract manufacturers have no guaranteed or
long-term supply arrangements for these or other components, including field programmable gate
arrays, or FPGAs, which are integrated circuits that can be repeatedly reprogrammed to perform
different sets of functions as required. Financial or other difficulties faced by our suppliers or
significant changes in market demand for necessary components could limit the availability to us
and our contract manufacturers of these components. Any interruption or delay in the supply of any
of these components could significantly harm our ability to meet scheduled product deliveries to
our customers and cause us to lose sales.
In addition, the purchase of these components on a sole or limited source basis subjects us to
risks of price increases and potential quality assurance problems. Consolidation involving
suppliers could further reduce the
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number of alternatives available to us and affect the
availability and cost of components. An increase in the cost of components could make our products
less competitive and result in lower gross margins.
There are limited substitute supplies available for many of these components, including field
programmable gate arrays. All of these components are critical to the production of our products,
and competition exists with other manufacturers for these key components. In the event that we can
no longer obtain materials from a sole source supplier, we might not be able to qualify or identify
alternative suppliers in a timely fashion, or at all.
Our reported financial results could suffer if there is an impairment of goodwill
We are required to test annually, and review when circumstances warrant, our goodwill
associated with past acquisitions and any future acquisitions, to determine if impairment has
occurred. If such assets are deemed impaired, an impairment loss equal to the amount by which the
carrying amount exceeds the implied fair value of the goodwill would be recognized. This would
result in an incremental charge for that quarter which would adversely impact our earnings for the
period in which the impairment was determined to have occurred. For example, such impairment could
occur if the market value of our common stock falls below the carrying value of our net assets for
a sustained period.
Recently, the turmoil in credit markets and the broader economy has contributed to extreme
price and volume fluctuations in global stock markets that have reduced the market price of many
technology company stocks, including ours. Further declines in our stock price or the failure of
our stock price to recover from previous declines, as well as any marked decline in our level of
revenues or margins, increase the risk that goodwill may become impaired in future periods. We
cannot accurately predict the amount and timing of any impairment of assets.
International activity may increase our cost of doing business or disrupt our business
We plan to continue to maintain or expand our international operations and sales activities.
Operating internationally involves inherent risks that we may not be able to control, including:
| difficulties in recruiting, hiring, training and retaining international personnel; | ||
| increased complexity and costs of managing international operations; | ||
| growing demand for and cost of technical personnel; | ||
| increased exposure to foreign currency exchange rate fluctuations; | ||
| commercial laws and business practices that favor local competition; | ||
| differing labor and employment laws; | ||
| changing governmental laws and regulations, including those related to income taxes; | ||
| supporting multiple languages; | ||
| reduced or limited protections of intellectual property rights; | ||
| more complicated logistical and distribution arrangements; | ||
| political and economic instability; and | ||
| difficulties in collecting receivables. |
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The above risks associated with our international operations and sales activities can restrict
or adversely affect our ability to sell in international markets, disrupt our business and subject
us to additional costs of doing business.
Adverse Resolution of Litigation May Harm Our Results of Operations or Financial Condition
We are a party to lawsuits in the normal course of our business (See Note 9 to the
Consolidated Financial Statements). Litigation can be expensive, lengthy, and disruptive to normal
business operations. Moreover, the results of complex legal proceedings are difficult to predict.
We cannot provide assurance that we will not be a party to additional lawsuits in the future or
that we will be able to favorably resolve our current lawsuits. To the extent lawsuits extend for
lengthy time periods or are adversely resolved, our results of operations and financial position
could be significantly harmed. For additional information regarding certain of the matters in
which we are involved, see Item 3, Legal Proceedings, contained in Part I of this report.
Claims that we infringe third-party intellectual property rights could result in significant
expenses or restrictions on our ability to sell our products
From time to time, other parties may assert patent, copyright, trademark and other
intellectual property rights to technologies that are important to our business. We cannot provide
assurance that others will not claim that we are infringing their intellectual property rights or
that we do not in fact infringe those intellectual property rights. We have not conducted a search
to determine whether the technology we have in our products infringes or misappropriates
intellectual property held by third parties.
Any claims asserting that our products infringe or may infringe proprietary rights of third
parties, if determined adversely to us, could significantly harm our results of operations. Any
claims, with or without merit, could:
| be time-consuming; | ||
| result in costly litigation; | ||
| divert the efforts of our technical and management personnel; | ||
| require us to modify the infringing products or to develop alternative technology, thereby causing product shipment delays and the loss or deferral of revenues; | ||
| require us to cease selling the products containing the intellectual property at issue; | ||
| require us to pay substantial damage awards; | ||
| expose us to indemnity claims from our customers; | ||
| damage our reputation; or | ||
| require us to enter into royalty or licensing agreements which, if required, may not be available on terms acceptable to us, if at all. |
In the event a claim against us were successful and we could not obtain a license to the
relevant technology on acceptable terms or license a substitute technology or redesign our products
to avoid infringement, our revenues,
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results of operations and competitive position could be
harmed. See Part I, Item 3 of this Form 10-K for additional information.
If we fail to accurately forecast our manufacturing requirements, we could incur additional costs
and experience manufacturing delays
We provide our contract manufacturers with rolling forecasts based on anticipated product
orders to determine our manufacturing requirements. Some of the components used in our products
have significant lead times or lead times which may unexpectedly increase depending on factors such
as the specific supplier, contract terms and the demand for components at a given time. Because of
these long lead times, we are often required to forecast and order products before we know what our
specific manufacturing requirements will be. If we overestimate our product orders, our contract
manufacturers may have excess inventory of completed products which we would be obligated to
purchase. This will lead to increased costs and the risk of obsolescence. If we underestimate our
product orders, our contract manufacturers may have inadequate inventory, which could result in
delays in shipments, the loss or deferral of revenues and higher costs of sales. Costs are also
added to our products when we are required to expedite delivery of our products to customers or of
components with long lead times to our contract manufacturers. We cannot be certain that we will
be able to accurately forecast our product orders and may in the future carry excess or obsolete
inventory, be unable to fulfill customer demand, or both, thereby harming our revenues, results of
operations and customer relationships.
Failure by our contract manufacturers to provide us with adequate supplies of high quality products
could harm our revenues, results of operations, competitive position and reputation
We currently rely on a limited number of contract manufacturers to manufacture and assemble
our products. We may experience delays in receiving product shipments from contract manufacturers
or other problems, such as inferior quality and insufficient quantity of product. We cannot be
certain that we will be able to effectively manage our contract manufacturers or that these
manufacturers will meet our future requirements for timely delivery of products of sufficient
quality and quantity. We intend to introduce new products and product enhancements, which will
require that we rapidly achieve adequate production volumes by effectively coordinating with our
suppliers and contract manufacturers. The inability of our contract manufacturers to provide us
with adequate supplies of high-quality products or the loss of any of our contract manufacturers
would cause a delay in our ability to fulfill customer orders while we obtain a replacement
manufacturer and would harm our revenues, results of operations, competitive position and
reputation.
We may not be able to expand our contract manufacturing capacity or our internal testing or
quality assurance functions as required to keep up with demand for our products. Any such failure
would in turn hinder our growth. If we do not expand these capacities and functions effectively or
in a timely manner, we may experience disruptions in product flow which could limit our revenues,
adversely affect our competitive position and reputation and result in additional cost,
cancellation of orders or both.
To the extent that our customers consolidate, they may reduce purchases of our products and demand
more favorable terms and conditions from us, which would harm our revenues and profitability
Consolidation of our customers could reduce the number of customers to whom our products could
be sold. These merged customers could obtain products from a source other than us or demand more
favorable terms and conditions from us, which would harm our revenues and profitability. In
addition, our significant customers may merge with or acquire our competitors and discontinue their
relationships with us.
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Our products may contain defects which may cause us to incur significant costs, divert our
attention from product development efforts and result in a loss of customers
Our existing products and any new or enhanced products we introduce may contain undetected
software or hardware defects when they are first introduced or as new versions are released. These
problems may cause us to incur significant damages or warranty and repair costs, divert the
attention of our engineering personnel from our product development efforts and cause significant
customer relation problems or loss of customers and reputation, all of which would harm our results
of operations. A successful claim against us for an amount exceeding the limit on our product
liability insurance policy would force us to use our own resources, to the extent available, to pay
the claim, which could result in an increase in our expenses and a reduction of our working capital
available for other uses, thereby harming our profitability and capital resources.
Our failure to protect our intellectual property may significantly harm our results of operations
and reputation
Our success and ability to compete is dependent in part on our ability to protect and maintain
our proprietary rights to our intellectual property. We currently rely on a combination of patent,
trade secret, trademark and copyright laws to establish and protect our intellectual property. To
date, we have relied primarily on trade secret laws to protect our proprietary processes and
know-how. We have patent applications and existing patents in the United States and other
jurisdictions. We cannot be certain that any of these applications will be approved or that any
such patents, if issued, or our existing patents, will be upheld. We also cannot be certain that
our existing patents and any such additional patents, if issued, will be effective in protecting
our proprietary technology.
We generally enter into assignment of rights and confidentiality agreements with our officers,
employees and consultants. We also generally limit access to and distribution of our source code
and further limit the disclosure and use of our other proprietary information. However, these
measures provide only limited protection of our intellectual property rights. In addition, we may
not have signed agreements containing adequate protective provisions in every case, and the
contractual provisions that are in place may not provide us with adequate protection in all
circumstances. Any infringement of our proprietary rights could result in significant litigation
costs, and any failure to adequately protect our proprietary rights could result in our
competitors offering similar products, potentially resulting in loss of one or more competitive
advantages, loss of market share and decreased revenues.
Despite our efforts to protect our proprietary rights, existing trade secret, copyright,
patent and trademark laws afford us only limited protection. In addition, the laws of some foreign
countries do not protect our proprietary rights to the same extent as do the laws of the United
States. Accordingly, we may not be able to prevent misappropriation of our technologies or to
deter others from developing similar technologies. Others may attempt to copy or reverse engineer
aspects of our products or to obtain and use information that we regard as proprietary. Further,
monitoring the unauthorized use of our products and our proprietary rights is difficult.
Litigation may be necessary to enforce our intellectual property rights or to determine the
validity and scope of the proprietary rights of others. Litigation of this type could result in
substantial costs and diversion of resources and could significantly harm our results of operations
and reputation.
The inability to successfully defend claims from taxing authorities or the adoption of new tax
legislation could adversely affect our operating results and financial position
We conduct business in many countries, which requires us to interpret the income tax laws and
rulings in each of those jurisdictions. Due to the complexity of tax laws in those jurisdictions
as well as the subjectivity of factual interpretations, our estimates of income tax liabilities may
differ from actual payments or assessments. Claims from tax authorities related to these
differences could have an adverse impact on our results of operations, financial condition and cash
flows. In addition, legislative bodies in the various countries in which we do business may from
time to time adopt new tax legislation that could have a material adverse affect on our results of
operations, financial
condition and cash flows.
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Our investment portfolio may become impaired by further deterioration of the financial markets
We follow an established investment policy and set of objectives designed to preserve
principal and liquidity, to generate a market return given the policys guidelines and to avoid
certain investment concentrations. The policy also sets forth credit quality standards and limits
our exposure to any one non-government issuer. Our cash equivalent and short- and long-term
investment portfolio as of December 31, 2009 consisted of money market funds, U.S. government and
government agency debt securities, corporate debt securities and auction rate securities. Due to
the adverse global economic conditions that continue to impact the financial markets and the
specific impacts on our underlying investments, in 2008, we recorded an other-than-tempory
impairment charge to earnings of $20.2 million related to our investments in illiquid auction rate
securities (ARS) and our investment in bonds issued by Lehman Brothers Holdings, Inc., which
filed for bankruptcy in September 2008. For the year ended December 31, 2009, we recorded an
additional other-than-temporary impairment charge to earnings of $2.8 million (pre-tax) related to
our illiquid ARS. As of December 31, 2009, the estimated fair values of our illiquid ARS
approximated $5.7 million.
Although the remainder of our investment portfolios carrying value approximated fair value as
of December 31, 2009, we cannot predict future market conditions or market liquidity, or the future
value of our investments. As a result, we can provide no assurance that our investment portfolio
will not be further impaired in the future and that any such impairment will not materially and
adversely impact our financial condition, results of operations and cash flows.
Changes in laws, regulations and financial accounting standards may affect our reported results of
operations
Changes in accounting regulations and standards, such as increased use of fair value measures
and the potential requirement that U.S. registrants prepare financial statements in accordance with
International Financial Reporting Standards (IFRS), can have a significant effect on our results.
New pronouncements and varying interpretations of pronouncements have occurred in the past and are
likely to occur in the future as a result of recent Congressional and regulatory actions. New
laws, regulations and accounting standards, as well as the questioning of, or changes to, currently
accepted accounting practices in the technology industry may adversely affect our financial
results, which could have an adverse effect on our stock price.
Our business is subject to changing regulation of corporate governance and public disclosure that
has resulted in increased costs and may continue to result in additional costs in the future
We are subject to rules and regulations of federal and state regulatory authorities, including
The Nasdaq Stock Market LLC (Nasdaq) and financial market entities charged with the protection of
investors and the oversight of companies whose securities are publicly traded. During the past few
years, these entities, including the Public Company Accounting Oversight Board, the SEC and Nasdaq,
have issued new requirements and regulations and continue to develop additional regulations and
requirements partly in response to laws enacted by Congress, most notably the Sarbanes-Oxley Act of
2002 (SOX). Our efforts to comply with these requirements and regulations have resulted in, and
are likely to continue to result in, increased general and administrative expenses and a diversion
of substantial management time and attention from revenue-generating activities to compliance
activities.
In particular, our efforts to comply with Section 404 of SOX and the related regulations
regarding our required assessment of our internal control over financial reporting and our external
auditors audit of the effectiveness of our internal control over financial reporting, has
required, and continues to require, the commitment of significant financial and managerial
resources. Moreover, because these laws, regulations and standards are subject to varying
interpretations, their application in practice may evolve over time as new guidance becomes
available. This evolution may result in continuing uncertainty regarding compliance matters and
additional costs necessitated by ongoing revisions to our disclosure and governance practices.
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If we fail to maintain our relationships with industry experts, our products may lose industry and
market recognition and sales could decline
Our relationships with industry experts in the field of performance analysis and measurement
of networks and network equipment are critical for maintaining our industry credibility and for
developing new products and testing methodologies in a timely fashion. These experts have
established standard testing methodologies that evaluate new network equipment products and
technologies. We provide these experts and their testing labs with our products and engineering
assistance to perform tests on these new network equipment products and technologies. These
industry experts refer to our products in their publications which has given our products industry
recognition. In addition, these labs offer us the opportunity to test our products on the newest
network equipment and technologies, thereby assisting us in developing new products that are
designed to meet evolving technological needs. We cannot be certain that we will be able to
maintain our relationships with industry experts or that our competitors will not maintain similar
or superior relationships with industry experts. If we are unable to maintain our relationships
with industry experts or if competitors have superior relationships with them, our products may
lose industry and market recognition which could harm our reputation and competitive position and
cause our sales to decline.
Our headquarters, many of our customers and some of our contract manufacturers and suppliers are
located in California where natural disasters have occurred and may occur in the future
Currently, our corporate headquarters, many of our customers and some of our contract
manufacturers and suppliers are located in California. California historically has been vulnerable
to natural disasters and other risks, such as earthquakes, fires and floods, which at times have
disrupted the local economy and posed physical risks to our property. We and some of our
customers, contract manufacturers and suppliers may not have adequate redundant, multiple site
capacity. In the event of a natural disaster, our ability to conduct business could be
significantly disrupted, thereby harming our results of operations.
Man-made problems such as computer viruses or terrorism may disrupt our operations and harm our
operating results
Despite our implementation of network security measures, our network may be vulnerable to
computer viruses, break-ins and similar disruptions from unauthorized tampering with our computer
systems. Any such event could have a material adverse effect on our business, operating results
and financial condition. In addition, the effects of war or acts of terrorism could have a
material adverse effect on our business, operating results and financial condition. The continued
threat of terrorism and heightened security and military action in response to this threat, or any
future acts of terrorism, may cause further disruption to the economy and create further
uncertainties in the economy. Energy shortages, such as gas or electricity shortages, could have
similar negative impacts. To the extent that such disruptions or uncertainties result in delays or
cancellations of customer orders, or the manufacture or shipment of our products, our business,
operating results and financial condition could be materially and adversely affected.
Provisions of our articles of incorporation and bylaws may make it difficult for a third party to
acquire us, despite the possible benefits to our shareholders
Our Board of Directors has the authority to issue up to one million shares of preferred stock
and to determine the price, rights, preferences, privileges and restrictions, including voting
rights, of those shares without any further vote or action by the shareholders. The rights of the
holders of our common stock are subject to, and may be adversely affected by, the rights of the
holders of any preferred stock that we may issue. The issuance of preferred stock could have the
effect of making it more difficult for a third party to acquire a majority of our outstanding
voting stock. Furthermore, some provisions of our articles of incorporation and bylaws could delay
or make more difficult a merger, tender offer or proxy contest involving us.
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These provisions of our articles of incorporation and bylaws may have the effect of delaying,
deferring or preventing a change in our control despite possible benefits to our shareholders, may
discourage bids at a premium over the market price of our common stock and may harm the market
price of our common stock and the voting and other rights of our shareholders.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
Our corporate headquarters are located in Calabasas, California, where we currently lease
approximately 84,100 square feet of space which houses our research and development, sales and
marketing, finance and administration and manufacturing operations. This lease terminates on May
31, 2013, and we have an option to extend the term of the lease for an additional five-year period.
We also lease office space for our sales and support offices in the United Kingdom, Germany,
France, Canada, South Korea, Japan, China, Singapore, India and in various states throughout the
United States. Additionally, we have leased research and development facilities in Romania, India,
Australia, the United Kingdom and Canada. We believe that our current facilities will be adequate
to meet our needs for the next 12 months, or that we will be able to obtain additional space when
and as needed on acceptable terms.
Item 3. Legal Proceedings
Ixia v. Charles Bettinelli and IneoQuest Technologies, Inc. In October 2005, Ixia filed a
complaint against its former employee, Charles Bettinelli, and his then-employer, IneoQuest
Technologies, Inc. (IneoQuest) in Los Angeles County Superior Court. Ixias complaint alleged
breach of contract, misappropriation of trade secrets, intentional interference with contract and
prospective business advantage, unfair competition, fraud, and violation of California Penal Code
Section 502 (computer data access and fraud act). IneoQuest filed a motion for summary judgment in
June 2008. In October 2008, IneoQuests motion for summary judgment was denied in its entirety,
and the matter went to trial in September 2009. Ixia sought monetary damages in excess of $10
million in addition to equitable relief. After a three-week trial, the jury returned a verdict in
mid-October 2009 finding that (i) Mr. Bettinelli breached his non-disclosure agreement with Ixia;
and (ii) both IneoQuest and Mr. Bettinelli misappropriated Ixias trade secrets and used Ixias
trade secret customer contact information. Notwithstanding the jurys finding of wrongdoing by
IneoQuest and Mr. Bettinelli, the jury did not award damages to Ixia. Judgment was therefore
entered by the Court on November 24, 2009. IneoQuest, Mr. Bettinelli and Ixia each filed motions
for attorneys fees after entry of the judgment. On February 25, 2010, IneoQuest was awarded costs
in the amount of approximately $278,000. IneoQuest and Ixias motions for attorneys fees were
both denied, and Mr. Bettinellis motion for attorneys fees was continued for hearing on March 24,
2010. Ixia filed its Notice of Appeal from the judgment in favor of Mr. Bettinelli only on
February 18, 2010. Pursuant to an agreement between Ixia and Mr. Bettinelli, Ixia dismissed the
appeal on March 4, 2010 in exchange for Mr. Bettinellis withdrawal of his motion for attorneys
fees and mutual releases.
In a related proceeding based on the same facts, Mr. Bettinelli was criminally charged with
felony violation of Penal Code Section 502 for his unauthorized use of Ixias computer data; he
pleaded no contest to the felony charge in September 2008, which was reduced to a misdemeanor at
sentencing upon his payment of $75,000 to Ixia as restitution.
IneoQuest Technologies, Inc. vs. Ixia. In November 2008, IneoQuest filed a complaint against
Ixia in the United States District Court for the Central District of California. The complaint
alleges that Ixia makes and sells products that infringe a patent owned by IneoQuest, and that Ixia
misappropriated IneoQuests trade secrets, in addition to numerous other related claims. The
patent at issue allegedly relates to a system and method for analyzing the performance of multiple
transportation streams of streaming media in packet-based networks. IneoQuest seeks a permanent
injunction enjoining Ixia from infringing the patent at issue and from using
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IneoQuests trade secrets and confidential information, unspecified general and exemplary
damages, and attorneys fees and costs.
In January 2009, Ixia filed an answer and counterclaim to IneoQuests complaint denying
IneoQuests claims and raising several affirmative defenses. Ixia has also asserted a counterclaim
against IneoQuest seeking declaratory relief that Ixia has not infringed the IneoQuest patent and
that such patent is invalid. In April 2009, Ixia filed an amended answer and counterclaim to
IneoQuests complaint in which Ixia asserted that IneoQuest has infringed four patents owned by
Ixia. Although the Company cannot predict the outcome of this matter, Ixia believes that it has
strong defenses to IneoQuests claims and is defending the action vigorously. The parties
commenced discovery in this matter in the 2009 second quarter. The parties filed a Joint Claim
Construction brief on November 30, 2009, and are awaiting a claim construction ruling from the
Court.
Tucana Telecom NV vs. Catapult. On May 22, 2007, the Antwerp Court of Appeal heard an appeal
by Tucana Telecom NV, a Belgian company, of the previous dismissal by the Antwerp Commercial Court
of an action by Tucana against Catapult. Tucana had sought damages of 12,461,000 Euros
(approximately $17.9 million as of December 31, 2009) for the alleged improper termination in 2002
by Catapult of Tucanas distribution agreement with Catapult. On June 19, 2007, the Antwerp Court
of Appeal confirmed the Commercial Courts dismissal of Tucanas action and assessed the costs of
the appeal against Tucana. On July 22, 2008, Catapult was notified by its Belgian counsel that
Tucana has appealed the judgment of the Antwerp Court of Appeal to the Belgian Supreme Court. In a
decision dated January 14, 2010, the Belgium Supreme Court set aside the decision of the Antwerp
Court of Appeal and remanded the matter for trial to the Gent Court of Appeal. The matter has not
yet been set for trial.
Catapult believes that it properly terminated any contract it had with Tucana and that Tucana
is not entitled to any damages in this matter. Catapult has defended the action vigorously to date
and will continue to do so. Catapult may be able to seek indemnification from Tekelec for any
damages assessed against Catapult in this matter under the terms of the Asset Purchase Agreement
that Catapult entered into with Tekelec, although there is no assurance that such indemnification
would be available. It is not possible to determine the amount of any loss that might be incurred
in this matter.
We are not aware of any other pending legal proceedings than the matters mentioned above that,
individually or in the aggregate, would have a material adverse effect on our business, results of
operations or financial position. We may in the future be party to litigation arising in the
ordinary course of business, including claims that we allegedly infringe upon third party
trademarks or other intellectual property rights. Such claims, even if without merit, could result
in the expenditure of significant financial and managerial resources.
Item 4. Reserved
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PART II
Item 5. Market for Registrants Common Equity, Related Shareholder Matters and Issuer Purchases of
Equity Securities
(a) | Market Price, Dividends and Related Matters |
Ixias Common Stock is traded on the Nasdaq Global Select Market under the symbol XXIA. The
following table sets forth the high and low closing sales prices of our Common Stock as reported on
the Nasdaq Global Select Market for the following time periods.
High | Low | |||||||
2009 |
||||||||
First quarter |
$ | 6.00 | $ | 4.36 | ||||
Second quarter |
7.03 | 4.98 | ||||||
Third quarter |
7.70 | 6.08 | ||||||
Fourth quarter |
8.22 | 6.33 | ||||||
2008 |
||||||||
First quarter |
$ | 9.52 | $ | 6.82 | ||||
Second quarter |
8.36 | 6.30 | ||||||
Third quarter |
9.09 | 6.75 | ||||||
Fourth quarter |
7.40 | 4.73 |
On February 19, 2010, the closing sales price reported for our Common Stock was $8.10 per
share, and as of that date there were approximately 27 shareholders of record.
We have never declared or paid cash dividends on our Common Stock and do not anticipate paying
any dividends in the foreseeable future.
The following graph compares the cumulative total return on the Companys Common Stock with
the cumulative total return of the Nasdaq Composite Index and the Nasdaq Telecommunications Index
for the five-year period commencing January 1, 2005. Ixia is one of the companies that makes up
the Nasdaq Telecommunications Index. The stock price performance shown on the graph below is not
necessarily indicative of future price performance.
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Comparison of Five-Year Cumulative Total Return*
among Ixia, the Nasdaq Composite Index
and the Nasdaq Telecommunications Index
among Ixia, the Nasdaq Composite Index
and the Nasdaq Telecommunications Index
12/31/04 | 12/31/05 | 12/31/06 | 12/31/07 | 12/31/08 | 12/31/09 | |||||||||||||||||||
Ixia |
$ | 100 | $ | 88.04 | $ | 57.11 | $ | 56.40 | $ | 34.38 | $ | 44.32 | ||||||||||||
Nasdaq Composite Index |
100 | 101.33 | 114.01 | 123.71 | 73.11 | 105.61 | ||||||||||||||||||
Nasdaq
Telecommunications
Index |
100 | 91.66 | 119.67 | 132.55 | 77.09 | 107.17 |
* | Assumes (i) $100 invested on December 31, 2004 in Ixia Common Stock, the Nasdaq Composite Index and the Nasdaq Telecommunications Index and (ii) immediate reinvestment of all dividends. |
(b) Use of Proceeds
None.
(c) Issuer Repurchases of Equity Securities
None.
Item 6. Selected Financial Data
The following selected consolidated financial data should be read in conjunction with
Managements Discussion and Analysis of Financial Condition and Results of Operations and our
consolidated financial statements and the notes to those consolidated financial statements. The
consolidated statement of operations data set forth below for the years ended December 31, 2009, 2008 and 2007 and the consolidated
balance sheet data as of
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December 31, 2009 and 2008 are derived from, and are qualified in their
entirety by reference to, the Companys audited consolidated financial statements included
elsewhere in this Form 10-K. The consolidated statements of operations data set forth below for
the years ended December 31, 2006 and 2005 and the consolidated balance sheet data as of December
31, 2007, 2006 and 2005 are derived from the audited consolidated financial statements not included
herein, but which were previously filed with the SEC.
2009 (2) | 2008(2) | 2007(3) | 2006(4) | 2005 | ||||||||||||||||
Consolidated Statement of Operations Data (in
thousands, except per share data): |
||||||||||||||||||||
Revenues: |
||||||||||||||||||||
Products |
$ | 142,871 | $ | 146,802 | $ | 148,226 | $ | 155,388 | $ | 130,045 | ||||||||||
Services |
35,123 | 29,065 | 25,895 | 24,744 | 20,808 | |||||||||||||||
Total revenues |
177,994 | 175,867 | 174,121 | 180,132 | 150,853 | |||||||||||||||
Costs and operating expenses: (1) |
||||||||||||||||||||
Cost of revenues products |
36,722 | 32,411 | 32,724 | 29,437 | 24,239 | |||||||||||||||
Cost of revenues services |
3,859 | 4,475 | 3,870 | 2,681 | 2,216 | |||||||||||||||
Research and development |
53,977 | 49,167 | 47,407 | 43,450 | 32,404 | |||||||||||||||
Sales and marketing |
60,374 | 59,374 | 57,420 | 59,020 | 39,359 | |||||||||||||||
General and administrative |
28,061 | 25,502 | 24,927 | 23,800 | 16,438 | |||||||||||||||
Amortization of intangible assets |
11,391 | 5,664 | 7,108 | 6,450 | 5,169 | |||||||||||||||
Acquisition related(5) |
6,179 | 1,479 | | | | |||||||||||||||
Restructuring |
4,637 | | | | | |||||||||||||||
Impairment of purchased technology and
intangible assets |
| | 3,263 | | | |||||||||||||||
Total costs and operating expenses |
205,200 | 178,072 | 176,719 | 164,838 | 119,825 | |||||||||||||||
(Loss) income from operations |
(27,206 | ) | (2,205 | ) | (2,598 | ) | 15,294 | 31,028 | ||||||||||||
Interest and other income, net |
2,160 | 6,574 | 11,723 | 9,409 | 5,055 | |||||||||||||||
Other-than-temporary impairment on
investments |
(2,761 | ) | (20,243 | ) | | | | |||||||||||||
(Loss) income before income taxes |
(27,807 | ) | (15,874 | ) | 9,125 | 24,703 | 36,083 | |||||||||||||
Income tax expense |
16,396 | 21 | 2,119 | 11,222 | 7,593 | |||||||||||||||
Net (loss) income |
$ | (44,203 | ) | $ | (15,895 | ) | $ | 7,006 | $ | 13,481 | $ | 28,490 | ||||||||
(Loss) earnings per share: |
||||||||||||||||||||
Basic |
$ | (0.70 | ) | $ | (0.24 | ) | $ | 0.10 | $ | 0.20 | $ | 0.44 | ||||||||
Diluted |
$ | (0.70 | ) | $ | (0.24 | ) | $ | 0.10 | $ | 0.20 | $ | 0.41 | ||||||||
Weighted average number of common and
common equivalent shares outstanding: |
||||||||||||||||||||
Basic |
62,710 | 65,087 | 67,936 | 67,005 | 65,168 | |||||||||||||||
Diluted |
62,710 | 65,087 | 69,386 | 68,792 | 69,227 |
(1)Stock-based compensation
included in: |
||||||||||||||||||||
Cost of revenues products |
$ | 478 | $ | 513 | $ | 519 | $ | 590 | $ | | ||||||||||
Cost of revenues services |
182 | 195 | 197 | 224 | | |||||||||||||||
Research and development |
4,491 | 4,166 | 5,243 | 6,481 | | |||||||||||||||
Sales and marketing |
2,989 | 3,411 | 4,416 | 7,838 | | |||||||||||||||
General and administrative |
2,395 | 2,360 | 2,659 | 2,890 | |
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(2) | Our 2009 and 2008 results include a pre-tax other-than-temporary impairment charge of $2.8 million and $15.8 million, respectively, to earnings related to our investments in auction rate securities. Our 2008 results also include a pre-tax other-than-temporary impairment charge of $4.4 million to earnings related to our investments in bonds issued by Lehman Brothers Holdings, Inc. In 2009, our income tax expense includes a $28.1 million charge related primarily to the establishment of a valuation allowance against our remaining net U.S. deferred tax assets. In 2008, our income tax expense includes a $7.9 million charge related primarily to the establishment of a valuation allowance against our deferred tax assets associated with the unrealized impairment (capital) losses as discussed above. | |
(3) | Our 2007 results include a pre-tax impairment charge of $3.3 million, which consists of the impairment of purchased technology of $1.5 million and the impairment of certain intangible assets of $1.8 million related to the acquisition of Communication Machinery Corporation in July 2005 and to the acquisition of the mobile video test product line from Dilithium Networks in January 2006. | |
(4) | Effective January 1, 2006, our results of operations for 2009, 2008, 2007 and 2006 include $10.5 million, $10.6 million, $13.0 million and $18.0 million, respectively, of pre-tax stock-based compensation expense. | |
(5) | In 2009, we adopted new accounting guidance for business combinations. As a result, transactions costs related to our acquisitions of Catapult and the N2X Business were expensed as incurred rather than treated as part of the purchase price. |
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
Consolidated Balance Sheet Data (in thousands): |
||||||||||||||||||||
Cash and cash equivalents |
$ | 15,061 | $ | 192,791 | $ | 188,892 | $ | 64,644 | $ | 51,837 | ||||||||||
Short-term investments in marketable
securities |
10,337 | 9,850 | 4,999 | 152,703 | 124,456 | |||||||||||||||
Working capital |
46,937 | 217,882 | 206,059 | 235,168 | 191,176 | |||||||||||||||
Long-term investments in marketable
securities |
53,582 | 3,657 | 54,609 | 4,354 | 25,392 | |||||||||||||||
Total assets |
309,088 | 328,426 | 369,440 | 349,059 | 322,216 | |||||||||||||||
Total shareholders equity |
236,665 | 273,196 | 316,500 | 300,789 | 263,480 |
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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those anticipated in these
forward-looking statements as a result of many factors. The consolidated results of operations for
the years ended December 31, 2009, 2008 and 2007 are not necessarily indicative of the results that
may be expected for any future period. The following discussion should be read in conjunction with
the consolidated financial statements and the notes thereto included in Part IV, Item 15 of this
Form 10-K and in conjunction with the Risk Factors included in Part I, Item 1A of this Form 10-K.
Business Overview
We are a leading provider of converged test systems and services for wireless and wired
infrastructures and services. Our hardware and software allow our customers to test and measure the
performance, functionality, service quality and conformance of wireless and wired Internet Protocol
(IP) equipment and networks, and the applications that run over them. Our solutions generate,
capture, characterize and analyze high volumes of realistic network and application traffic,
identifying problems, assessing performance, ensuring functionality and interoperability, and
verifying conformance to industry specifications. We offer hardware platforms with interchangeable
media interfaces, utilizing a common set of applications, Application Programming Interfaces (APIs)
and automation tools that allow our customers to create integrated, easy-to-use automated test
environments. The networks that our systems analyze primarily include Ethernet networks operating
at speeds of up to 100 gigabits per second and wireless networks that carry data traffic over
optical fiber, electrical cable and airwaves. We also offer hardware platforms and equipment that
test wireless equipment, especially those associated with 3G (third generation), 4G (fourth
generation) and Long-Term Evolution (LTE) networks. Customers also use our suite of software
applications to test and verify web, Internet, security and business applications.
Acquisition of Catapult Communications Corporation. On June 23, 2009, we completed our
acquisition of all of the outstanding shares of common stock of Catapult Communications Corporation
(Catapult). Catapult provides advanced wireless test systems to network equipment manufacturers
and service providers worldwide. Catapults 3G and 4G wireless networking test solutions
complement our IP performance test systems and service verification platforms. With this
acquisition, we will be able to broaden our product portfolio and provide a single source solution
for testing converged multiplay IP services over wireless and wireline networks to new and existing
customers. The purchase price for Catapult totaled $106.6 million, or $65.4 million net of
Catapults existing cash and investment balances at the time of the acquisition. The Catapult
acquisition was funded from our existing cash and cash equivalents. The results of operations of
Catapult have been included in the consolidated statements of operations and cash flows since the
date of the acquisition.
Acquisition of Agilent Technologies N2X Data Network Testing Product Line. On October 30,
2009, we completed our acquisition from Agilent Technologies, Inc. (Agilent) of its N2X Data
Network Testing Product Line business (N2X Business) for $43.5 million in cash and the assumption
of certain liabilities of the N2X Business. In return for the consideration paid, we acquired
certain assets and liabilities of Agilents N2X Business, including inventory, accounts
receivables, fixed assets, accounts payable, customer relationships, certain intellectual property
rights, and other assets required to run the business. The N2X Business provides network equipment
manufacturers and service providers with solutions to validate the performance and scalability
characteristics of next-generation network equipment for voice, video and data (multiplay)
services. The acquisition was funded from our existing cash and investments. The results of
operations of the N2X Business have been included in the consolidated statements of operations and
cash flows since the date of the acquisition.
Revenues. Our revenues are principally derived from the sale and support of our test systems.
Product revenues primarily consist of sales of our hardware and software products. Our service
revenues primarily consist of the provision of post contract customer support and maintenance
(PCS) related to the initial period provided with the product purchase (generally for 90-day or
12-month periods) and separately purchased extended PCS contracts, and to our implied PCS
obligations. Service revenues also include separately purchased extended hardware warranty support
for certain of our products, training and other professional services. PCS on our software
products includes unspecified when and if available software upgrades and customer technical
support services. Our hardware
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products primarily consist of chassis and interface cards, and during the three years ended
December 31, 2009, our Ethernet interface cards have represented the majority of our product
revenues. In general, our Ethernet interface cards are used to test equipment and advanced IP
services in the core and at the edge of the Internet and in enterprise applications. Looking
forward, we expect that the sale of our Ethernet interface cards will continue to represent a
significant portion of our revenues. Excluding the impact of our recent acquisitions, we
experienced a significant year-over-year decline in our revenues from 2008 to 2009, due in part to
the global recession and our customers constraints in their capital expenditure and operating
budgets. While we did see some positive signs with respect to the stabilization of our business in
the fourth quarter of 2009, we remain uncertain about the extent and length of any economic
recovery and about our customers willingness to significantly increase spending levels in 2010.
These factors, among others, limit our ability to accurately forecast the future demand and revenue
trends for our products and services.
Sales to our largest customer accounted for $27.8 million, or 15.6%, of our total revenues in
2009, $36.9 million, or 21.0%, of our total revenues in 2008 and $41.7 million, or 23.9%, of our
total revenues in 2007. To date, we have generated the majority of our revenues from network
equipment manufacturers. While we expect that we will continue to have some customer concentration
for the foreseeable future, we continue to sell our products to a wider variety and increasing
number of customers. To the extent that we develop a broader and more diverse customer base, our
reliance on any one customer or customer type should diminish. From a geographic perspective, we
generate a majority of our revenues from sales to customer locations within the United States. We
generated revenues from product shipments and services to international locations of $76.3 million,
or 42.9% of our total revenues, in 2009, $63.0 million, or 35.8% of our total revenues, in 2008,
and $60.9 million, or 35.0% of our total revenues, in 2007. We intend to continue increasing our
sales efforts internationally with specific focus on Europe and the Asia Pacific region. Looking
forward, and given the recent acquisitions of Catapult and the N2X Business, we expect our
international revenues to continue to grow on an annualized basis as a percentage of our total
revenues.
In some instances our software products may be installed and operated independently from our
hardware products. At other times, our software products are installed on and work with our
hardware products to enhance the functionality of the overall test system. As our software is
generally more than incidental to the sale of our test systems, we recognize revenue by applying
software revenue recognition guidance.
Our test systems are generally fully functional at the time of shipment and do not require us
to perform any significant production, modification, customization or installation after shipment.
As such, revenue from hardware and software product sales to customers, including distributors, is
recognized upon shipment provided that (i) evidence of an arrangement exists, which is typically in
the form of a customer purchase order; (ii) delivery has occurred (i.e., risks and rewards of
ownership have passed to the customer); (iii) the sales price is fixed or determinable; and (iv)
collection is deemed probable.
When sales arrangements involve multiple elements, or multiple products, and we have
vendor-specific objective evidence (VSOE) of fair value for each element in the arrangement, we
recognize revenue based on the relative fair value of all elements within the arrangement. We
determine VSOE based on sales prices charged to customers when the same element is sold separately
or based upon stated substantive PCS renewal rates for certain arrangements. Many of our products,
such as our software products, typically include an initial period (generally 90-day or 12month
periods) of free PCS, which is not sold separately. Accordingly, we are unable to establish VSOE
for these products.
In cases where VSOE only exists for the undelivered elements such as PCS, we apply the
residual method to recognize revenue. Under the residual method, the total arrangement fee is
allocated first to the undelivered elements, typically PCS, based on their VSOE, and the residual
portion of the fee is allocated to the delivered elements, typically our hardware and software
products, and is recognized as revenue assuming all other revenue recognition criteria as described
above have been met.
If VSOE cannot be determined for all undelivered elements of an arrangement, we defer revenue
until the earlier of (i) the delivery of all elements or (ii) the establishment of VSOE for all
undelivered elements, provided
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that if the only undelivered element is PCS or a service, the total arrangement fee is
recognized as revenue over the PCS or service term.
Services revenues from our initial and separately purchased extended PCS arrangements
(generally offered for 12-month periods) are recognized ratably over the contractual coverage
period. In addition, for implied PCS obligations we defer revenues from product sales and allocate
these amounts to PCS revenues to account for the circumstances in which we provide PCS after the
expiration of the customers contractual PCS period. Deferred revenues for these implied PCS
obligations are recognized ratably over the implied PCS period, which is typically based on the
expected economic life of our software products of four years. To the extent we determine that
implied PCS is no longer being provided after the expiration of the customers contractual PCS
period, the remaining deferred revenue balance related to the implied PCS obligation is reversed
and recognized as revenue in the period of cessation of the implied PCS obligation. The implied
PCS obligation for our software products ceases upon (i) the license management of our software
upgrades and (ii) our determination not to provide PCS after the expiration of the contractual PCS
period. Our license management system locks a software license to a specific computer or Ixia
hardware chassis on which our software resides. The system then manages and controls the provision
of software upgrades to ensure that the upgrades are only provided to customers that are entitled
to receive such upgrades during an initial or extended PCS period. For software products that are
not controlled under a license management system and for certain customers where we provide implied
PCS outside of the contractual PCS period, we allocate and defer revenue for these implied PCS
obligations and recognize this revenue ratably over the implied PCS periods as described above.
For the years ended December 31, 2009, 2008 and 2007, services revenues related to our implied PCS
obligations approximated $3.9 million, $4.2 million and $3.4 million, respectively. For the years
ended December 31, 2009, 2008 and 2007, $575,000, $0 and $0, respectively, of deferred revenue
relating to implied PCS was reversed and recognized as product revenues as a result of the license
management of certain products and our determination not to provide PCS after the expiration of the
contractual PCS period. Future reversals of implied PCS deferred revenue may occur over the next
12 months as a result of the future license management of additional products and our determination
not to provide PCS to certain customers after the expiration of the contractual PCS period.
Revenues from our separately purchased extended hardware warranty arrangements are recognized
ratably over the contractual coverage period. We recognize revenues from training and other
professional services at the time the services are provided or completed, as applicable.
We use distributors to complement our direct sales and marketing efforts in certain
international markets. Due to the broad range of features and options available with our hardware
and software products, distributors generally do not stock our products and typically place orders
with us after receiving an order from an end customer. These distributors receive business terms
of sale generally similar to those received by our other customers.
Stock-Based Compensation. Share-based payments, including grants of stock options, restricted
stock units and employee stock purchase rights, are required to be recognized in the financial
statements based on the estimated fair values for accounting purposes on the grant date. We use
the Black-Scholes option pricing model to estimate the fair value for accounting purposes of our
share-based awards. The determination of the fair value for accounting purposes of share-based
awards using the Black-Scholes model is affected by our stock price and a number of assumptions,
including expected volatility, expected life and risk-free interest rate. The expected life and
expected volatility are estimated based on historical and other data trended into the future. The
risk-free interest rate assumption is based on observed interest rates appropriate for the terms of
our share-based awards. Stock-based compensation expense recognized in our consolidated financial
statements is based on awards that are ultimately expected to vest. The amount of stock-based
compensation expense is reduced for estimated forfeitures based on historical experience as well as
future expectations. Forfeitures are required to be estimated at the time of grant and revised, if
necessary, in subsequent periods if estimated and actual forfeitures differ from these initial
estimates. We evaluate the assumptions used to value share-based awards on a periodic basis. If
factors change and we employ different assumptions, stock-based compensation expense may differ
significantly from what we have recorded in the past. If there are any modifications or
cancellations of the underlying unvested securities, we may be required to accelerate, increase or
cancel any remaining unearned stock-based compensation expense. Consistent with our past practice,
we attribute the value of stock-based compensation to expense based on the graded, or accelerated
multiple-option, approach.
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For the years ended December 31, 2009, 2008 and 2007, stock-based compensation expense was
$10.5 million, $10.6 million and $13.0 million, respectively. Our stock-based compensation expense
declined for the year ended December 31, 2008 as compared to the comparable prior period in 2007
due in part to (i) an increase in estimated and actual forfeitures and (ii) the decline in the
price of our common stock and weighted grant date fair values for new awards resulting in lower
total stock-based compensation cost. The aggregate balance of gross unrecognized stock-based
compensation to be expensed in the years 2010 and through 2013 related to unvested share-based
awards as of December 31, 2009 was approximately $15.4 million. To the extent that we grant
additional share-based awards, future expense may increase by the additional unearned compensation
resulting from those grants. We anticipate that we will continue to grant additional share-based
awards in the future as part of our long-term incentive compensation programs. The impact of
future grants cannot be estimated at this time because it will depend on a number of factors,
including the amount of share-based awards granted and the then current fair values of such awards
for accounting purposes.
Cost of Revenues. Our cost of revenues related to the sale of our hardware and software
products includes materials, payments to third party contract manufacturers, royalties, and
salaries and other expenses related to our manufacturing, operations, technical support and
professional service personnel. We outsource the majority of our manufacturing operations, and we
conduct supply chain management, quality assurance, documentation control, shipping and some final
assembly at our facility in Calabasas, California. Accordingly, a significant portion of our cost
of revenues related to our products consists of payments to our contract manufacturers. Cost of
revenues related to the provision of services includes salaries and other expenses associated with
customer and technical support services, professional services and the warranty cost of hardware
that is replaced or repaired during the warranty coverage period. Cost of revenues does not
include an allocation of the amortization of intangible assets related to our acquisitions of
certain businesses, product lines and technologies, which are discussed below and included on a
separate line item within our consolidated statements of operations.
Our cost of revenues as a percentage of total revenues is primarily affected by the following
factors:
| our pricing policies and those of our competitors; | ||
| the pricing we are able to obtain from our component suppliers and contract manufacturers; | ||
| the mix of customers and sales channels through which our products are sold; | ||
| the mix of our products sold, such as the mix of software versus hardware product sales; | ||
| new product introductions by us and by our competitors; | ||
| demand for our products; and | ||
| production volume. |
In the near term, although we anticipate that our cost of revenues as a percentage of total
revenues will remain relatively flat, we expect to continue to experience pricing pressure on
larger transactions and from larger customers as a result of competition and the current global
business environment.
Operating Expenses. Our operating expenses are generally recognized when incurred and consist
of research and development, sales and marketing, general and administrative, amortization of
intangible assets, acquisition related costs and restructuring expenses. In dollar terms, we
expect total operating expenses, excluding stock-based compensation expenses discussed above and
amortization of intangible assets, acquisition related costs and restructuring expenses discussed
below, to increase significantly in 2010 when compared to 2009 due to our acquisitions of Catapult
and the N2X Business (See Note 2 to the Consolidated Financial Statements). Due to the ongoing uncertainty with respect to the global business environment, it is
difficult to
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accurately forecast our revenue, and therefore we are unable to accurately project our
expected operating expense trends as a percentage of total revenues.
Research and development expenses consist primarily of salaries and other personnel costs
related to the design, development, testing and enhancement of our products. We expense our
research and development costs as they are incurred. We also capitalize and depreciate over a
five-year period costs of our products used for internal purposes.
Sales and marketing expenses consist primarily of compensation and related costs for personnel
engaged in direct sales, sales support and marketing functions, as well as promotional and
advertising expenditures. We also capitalize and depreciate over a two-year period costs of our
products used for sales and marketing activities, including product demonstrations for potential
customers.
General and administrative expenses consist primarily of salaries and related expenses for
executive, finance, legal, human resources, information technology and administrative personnel, as
well as professional fees (e.g., legal and accounting), facility costs related to our corporate
headquarters, insurance costs and other general corporate expenses.
Amortization of intangible assets consists of the amortization of the purchase price of the
various intangible assets over their estimated useful lives. Periodically we review goodwill and
other intangible assets for impairment. An impairment charge would be recorded to the extent that
the carrying value exceeds its estimated fair value in the period that the impairment circumstances
occurred. The future amortization of acquired intangible assets depends on a number of factors,
including the extent to which we acquire additional businesses, technologies or product lines or
are required to record impairment charges related to our acquired intangible assets. See Notes to
the Consolidated Financial Statements for additional information.
Acquisition related costs are expensed as incurred and consist primarily of transaction and
integration related costs such as success-based banking fees, professional fees for legal,
accounting, tax, due diligence, valuation and other related services, change in control payments,
consulting fees, required regulatory costs and other related expenses. We expect our acquisition
related expenses to fluctuate over time based on the timing of our acquisitions and related
integration activities.
Restructuring expenses consist primarily of employee severance costs and related charges, as
well as facility-related charges to consolidate operations. We expect to incur additional
restructuring expenses over the near term as we complete the integrations of our recent
acquisitions. In January 2010, we announced a company-wide restructuring initiative in light of
our acquisition of the N2X Business in the fourth quarter of 2009. We expect to record
restructuring charges for severance and other related costs of approximately $3 million to $4
million on a pre-tax basis to reflect the impact of this restructuring. Approximately 80 positions
have been or will be eliminated. For additional information, please see Note 3 to the
Consolidated Financial Statements included in this Form 10-K.
Interest and Other Income, Net. Interest and other income, net represents interest on cash
and a variety of securities, including money market funds, U.S. government and government agency
debt securities, corporate debt securities and auction rate securities, and certain foreign
currency gains and losses.
Income Tax. Income tax is determined based on the amount of earnings and enacted federal,
state and foreign tax rates, adjusted for allowable credits and deductions and for the effects of
equity compensation plans. Our income tax provision may also be affected by changes to our
estimates of uncertain tax positions and the recording of valuation allowances against certain
deferred tax assets and changes to these valuation allowances in future periods.
Critical Accounting Policies and Estimates
Managements discussion and analysis of financial condition and results of operations is based
upon our consolidated financial statements which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation of these financial
statements requires us to make
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estimates and judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we
evaluate our estimates and judgments, including those related to revenue recognition, allowance for
doubtful accounts, write-downs for obsolete inventory, income taxes, acquisition purchase price
allocation, impairments of long-lived assets and marketable securities, stock-based compensation,
and contingencies and litigation. We base our estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances. Actual results may
differ materially from these estimates.
We apply the following critical accounting policies in the preparation of our consolidated
financial statements:
| Revenue Recognition Policy. We recognize revenue as discussed in Revenues in the Business Overview section of Item 7. | ||
| Acquisition Purchase Price Allocation. When we acquire a business, product line or rights to a product or technology, we allocate the purchase price to the various tangible and intangible assets acquired and the liabilities assumed, based on their estimated fair values. Determining the fair value of certain assets and liabilities acquired is subjective in nature and often involves the use of significant estimates and assumptions, some of which may be based in part on historical experience and information obtained from the management of the acquired business, and are inherently uncertain. Many of the estimates and assumptions used to determine fair values, such as those for purchased technologies and customer relationships, are made based on forecasted information and discount rates. To assist in the purchase price allocation process, as well as the determination of estimated useful lives of acquired intangible assets, we may obtain appraisals from valuation specialists. Unanticipated events and circumstances may occur which may affect the accuracy or validity of such estimates and assumptions. | ||
| Allowance for Doubtful Accounts. Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is based on our best estimate of the amount of probable credit losses in existing accounts receivable. The allowance for doubtful accounts is determined based on historical write-off experience, our assessment of current customer information and other relevant data. We review the allowance for doubtful accounts monthly. Past due balances of 60 days and over are reviewed individually for collectibility. In light of the recent turmoil in the domestic and global economies that has affected many companies, our estimates and judgments with respect to the collectability of our receivables have become subject to greater uncertainty than in more stable periods. If our estimate of uncollectible accounts is too low, cost and expenses may increase in future periods. Account balances are charged off against the allowance when we believe it is probable the receivable will not be recovered. We do not have any off-balance-sheet credit exposure related to our customers. | ||
| Write-Down of Obsolete Inventory. We write down inventory for estimated obsolescence, excessive quantities or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual future demand is less favorable than our initial estimate, additional inventory write-downs may be required. | ||
| Income Taxes. We operate in numerous states and countries through our various subsidiaries, and must allocate our income, expenses, and earnings under the various laws and regulations of each of these taxing jurisdictions. Accordingly, our provision for income taxes represents our total estimate of the liability that we have incurred in doing business each year in all of our locations. Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases and are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered. In determining whether we need to record a valuation allowance against our deferred tax assets, management must make a number of estimates, assumptions and judgments, including estimates of future earnings and taxable income. We establish a valuation allowance to reduce deferred tax assets to the amount we believe is more likely than not to be realized. |
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Annually, we file tax returns that represent our filing positions with each jurisdiction and settle our return liabilities. Each jurisdiction has the right to audit those returns and may take different positions with respect to income and expense allocations and taxable earnings determinations. Effective January 1, 2007, we adopted changes issued by the Financial Accounting Standards Board (FASB) to accounting for uncertainty in income taxes. Under the accounting guidance, we may provide for estimated liabilities in our consolidated financial statements associated with uncertain tax return filing positions that are subject to audit by various tax authorities. Because the determinations of our annual provisions are subject to assumptions, judgments and estimates, it is likely that actual results may vary from those recognized in our consolidated financial statements. As a result, additions to, or reductions of, income tax expense will occur each year for prior reporting periods as our estimates or judgments change, or as actual tax returns and tax audits are settled. We recognize any such prior year adjustment in the discrete quarterly period in which it is determined. | |||
| Impairment of Long-Lived Assets. We evaluate our identifiable definite life intangible assets and other long-lived assets for impairment, when events or changes in circumstances indicate that a potential impairment may exist. We first estimate the undiscounted cash flows to be generated from the use and ultimate disposition of the applicable asset. To the extent that the estimated undiscounted cash flows fall below the carrying value of the related intangible or other long lived asset, we write-down the asset to its estimated fair value. Fair value is generally determined based on discounted cash flows. Determining the fair value based on discounted cash flows is subjective in nature and often involves the use of significant estimates and assumptions about future results and discount rates. We evaluate the recoverability of our goodwill on an annual basis or if events or changes in circumstances indicate that an impairment in the value of goodwill recorded on our balance sheet may exist. Impairment losses are recorded to the extent that the carrying value of the goodwill exceeds its estimated fair value. We completed our annual goodwill impairment test of our single reporting unit in the fourth quarter of 2009 and determined that there was no impairment. | ||
| Stock-Based Compensation. We record stock-based compensation as discussed in Stock-based Compensation in the Business Overview section of Item 7. | ||
| Impairment of Marketable Securities. We periodically review our marketable securities for impairment. If we conclude that any of our investments are impaired, we determine whether such impairment is other-than-temporary. Factors we consider to make such a determination include, among others, the severity of the impairment, the reason for the decline in value and the potential recovery period. If any impairment is considered other-than-temporary, we write down the asset to its fair value and take a charge to earnings for the portion of the write-down related to credit losses with the balance, if any, recorded to other comprehensive income. | ||
| Contingencies and Litigation. We evaluate contingent liabilities, including threatened or pending litigation, and record accruals when the loss is deemed probable and the liability can reasonably be estimated. We make these assessments based on the facts and circumstances of each situation and in some instances based in part on the advice of outside legal counsel. |
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Results of Operations
The following table sets forth certain statement of operations data as a percentage of total
revenues for the periods indicated:
2009 | 2008 | 2007 | ||||||||||
Revenues: |
||||||||||||
Products |
80.3 | % | 83.5 | % | 85.1 | % | ||||||
Services |
19.7 | 16.5 | 14.9 | |||||||||
Total revenues |
100.0 | 100.0 | 100.0 | |||||||||
Costs and operating expenses: (1) |
||||||||||||
Cost of revenues products |
20.6 | 18.4 | 18.8 | |||||||||
Cost of revenues services |
2.2 | 2.5 | 2.2 | |||||||||
Research and development |
30.3 | 28.0 | 27.2 | |||||||||
Sales and marketing |
33.9 | 33.8 | 33.0 | |||||||||
General and administrative |
15.7 | 14.6 | 14.3 | |||||||||
Amortization of intangible assets |
6.4 | 3.2 | 4.1 | |||||||||
Acquisition related |
3.5 | 0.8 | | |||||||||
Restructuring |
2.6 | | | |||||||||
Impairment
of purchased technology and intangible assets |
| | 1.9 | |||||||||
Total costs and operating expenses |
115.2 | 101.3 | 101.5 | |||||||||
Loss from operations |
(15.2 | ) | (1.3 | ) | (1.5 | ) | ||||||
Interest and other income, net |
1.2 | 3.7 | 6.7 | |||||||||
Other-than-temporary impairment on investments |
(1.6 | ) | (11.4 | ) | | |||||||
(Loss) income before income taxes |
(15.6 | ) | (9.0 | ) | 5.2 | |||||||
Income tax expense |
9.2 | | 1.2 | |||||||||
Net (loss) income |
(24.8 | )% | (9.0 | )% | 4.0 | % | ||||||
(1) Stock-based compensation included in: |
||||||||||||
Cost of revenues products |
0.3 | % | 0.3 | % | 0.3 | % | ||||||
Cost of revenues services |
0.1 | 0.1 | 0.1 | |||||||||
Research and development |
2.5 | 2.4 | 3.0 | |||||||||
Sales and marketing |
1.7 | 1.9 | 2.5 | |||||||||
General and administrative |
1.3 | 1.3 | 1.5 |
Comparison of the Years Ended December 31, 2009 and 2008
As a result of our acquisitions of Catapult Communications Corporation (Catapult) on June
23, 2009 and Agilent Technologies, Inc. (Agilent) N2X Data Network Testing Product Line business
(N2X Business) on October 30, 2009, our 2009 consolidated results of operations include the
results of these operations from the respective acquisition dates. The integration of Catapult and
its processes were substantially completed as of December 31, 2009, while the integration
activities were ongoing as of December 31, 2009 with respect to the N2X Business. To assist the
readers of our financial statements in reviewing our year over year consolidated operating results,
we have estimated the impacts of these acquisitions in the related Statement of Operations sections
below.
Revenues. In 2009, total revenues increased 1.2% to $178.0 million from $175.9 million in
2008. As a result of our acquisitions of Catapult in June 2009 and the N2X Business in October
2009 (2009 Acquisitions), revenues for 2009 included $24.1 million of revenue related to the 2009
Acquisitions. Revenues from products decreased to $142.9 million in 2009 from $146.8 million in
2008. Excluding the product revenues from our 2009 Acquisitions of approximately $19.2 million,
the decrease in product revenue was primarily due to a $20.1 million decrease in shipments of our
hardware products (primarily our Ethernet interface cards) in 2009 over 2008 and by a $2.3 million
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decrease in shipments of our software products (primarily our IxLoad and IxChariot software
products) in 2009 over 2008. Excluding the service revenues from our 2009 Acquisitions of
approximately $4.9 million, service revenues increased $1.2 million in 2009 compared to 2008
primarily due to a net increase in the ratable recognition of our PCS arrangements and extended
warranty contracts. In 2009, total revenues from Cisco Systems, our largest account, decreased to
$27.8 million, or 15.6% of our total revenue, from $36.9 million, or 21.0% of our total revenue. in
2008.
Cost of Revenues. As a percentage of total revenues, our total cost of revenues increased to
22.8% in 2009 from 20.9% in 2008. Our 2009 cost of goods sold included approximately $5.3 million
of cost of goods sold attributable to our 2009 Acquisitions. Excluding the cost of product
revenues of approximately $4.4 million related to our 2009 Acquisitions, our cost of product
revenues decreased to $32.3 million in 2009 from $32.4 million in 2008 primarily due to the
decrease in the costs of product shipped of approximately $2.2 million due to the decline in
product revenues, partially offset by higher royalty payments of $1.4 million and higher inventory
related charges for slow moving and excess inventory. Excluding the cost of service revenues of
approximately $844,000 related to our 2009 Acquisitions, our cost of service revenues decreased to
$3.0 million in 2009 from $4.5 million in 2008 primarily due to a decline in technical support
costs, including warranty expenses, of approximately $1.1 million.
Research and Development Expenses. In 2009, research and development expenses increased 9.8%
to $54.0 million from $49.2 million in 2008. As a result of our 2009 Acquisitions, our research
and development expenditures in 2009 included approximately $8.5 million related to the research
and development activities of the acquired operations. Excluding the incremental research and
development costs related to the 2009 Acquisitions, the decrease in research and development
expenses in 2009 as compared to 2008 was primarily due to lower compensation and related employee
costs, including travel, of $4.4 million. The decrease in compensation and related employee costs
was primarily due to the elimination of our company-wide bonus plan in 2009, lower compensation due
to the Ixia Restructuring announced in the second quarter of 2009 and favorable foreign currency
exchange rates, particularly in Romania and India where the local currencies weakened against the
U.S. Dollar in 2009 as compared to the same period of 2008. These expense decreases were partially
offset by higher consulting costs of $1.2 million (primarily in India and the United States) in
2009 compared to 2008.
Sales and Marketing Expenses. In 2009, sales and marketing expenses increased 1.7% to $60.4
million from $59.4 million in 2008. As a result of our 2009 Acquisitions, our sales and marketing
costs in 2009 included approximately $8.6 million related to these acquisitions. Excluding the
incremental sales and marketing costs related to the 2009 Acquisitions, the decrease of $7.6
million was primarily due to lower compensation and related employee costs, including travel, of
$5.0 million, lower facilities and depreciation costs of $1.3 million and lower training and
marketing programs of $705,000. The decrease in compensation and related employee costs in 2009 as
compared to the same period of 2008 was primarily due to lower commissions related to the year over
year decline in sales, the Ixia Restructuring announced in the second quarter of 2009 and the
elimination of our company-wide bonus plan in 2009.
General and Administrative Expenses. In 2009, general and administrative expenses increased
10.0% to $28.1 million from $25.5 million in 2008. As a result of our 2009 Acquisitions, our
general and administrative costs in 2009 included approximately $2.9 million related to these
acquisitions. Excluding the incremental general and administrative costs related to the 2009
Acquisitions, the decrease of $316,000 was primarily due to lower compensation and related employee
costs, including travel, of $986,000, lower recruiting fees of $559,000 and lower facilities and
depreciation costs of $471,000, partially offset by higher legal fees and expenses of $1.5 million
related primarily to litigation. The decrease in compensation and related employee costs in 2009
as compared to the same period of 2008 was primarily due to the elimination of our company-wide
bonus plan in 2009.
Amortization of Intangible Assets. In 2009, amortization of intangible assets increased to
$11.4 million from $5.7 million in 2008. The increase primarily related to the incremental
amortization of intangibles related to our 2009 Acquisitions, partially offset by the completion of
amortization periods for certain intangible assets.
Acquisition Related Expenses. Acquisition related expenses for 2009 and 2008 were $6.2
million and $1.5 million, respectively. Acquisition related expenses incurred in 2009 increased
over the same periods in 2008 primarily due to our acquisitions of Catapult in June 2009 and the
N2X Business in October 2009. As a result of our
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adoption of the new accounting guidance for business combinations on January 1, 2009,
acquisition related costs in 2009 were expensed rather than capitalized and treated as part of the
applicable purchase price. Acquisition costs expensed in 2008 related to transactions that were
not consummated as of December 31, 2008. For additional information, please see Note 2 to
Consolidated Financial Statements.
Restructuring. Restructuring expenses for 2009 were $4.6 million and consisted primarily of
employee severance costs related to the Ixia Restructuring initiated during the second quarter of
2009 and the Catapult Restructuring initiated during the third quarter of 2009. There were no
restructuring expenses incurred in 2008. The Ixia Restructuring included a net reduction in force
of approximately 80 positions, which represented approximately 10% of our worldwide work force,
including contractors, prior to the announcement of the restructuring. The Catapult Restructuring
included a net reduction in force of approximately 45 positions, which represented approximately 4%
of our worldwide work force, including contractors, prior to the announcement of the restructuring.
In January 2010, our management approved, committed to and initiated a plan to restructure our
operations in light of our acquisition of the N2X Business in the fourth quarter of 2010 (N2X
Restructuring). The N2X Restructuring included a net reduction in force of approximately 80
positions, which represented approximately 7% of our worldwide work force, including contractors,
at the end of the fourth quarter of 2009. We expect to record restructuring charges for severance
and other related costs of approximately $3 million to $4 million on a pre-tax basis to reflect the
impact of the N2X Restructuring.
We expect that these restructuring initiatives when combined will produce cost savings of
approximately $22.0 million on an annualized basis. For additional information, see Note 3 to Consolidated Financial Statements.
Interest and Other Income, Net. Interest and other income, net decreased to $2.2 million in
2009 from $6.6 million in 2008. This decrease was primarily due to lower average cash and
investment balances in the aggregate and lower effective yields in 2009 compared to the same period
in 2008. The lower average cash and investment balance in the aggregate was primarily due to the
payments for our 2009 Acquisitions.
Other-than-temporary Impairment on Investments. For 2009 and 2008, other-than-temporary
impairments on investments were $2.8 million and $20.2 million, respectively. When, in the opinion
of management, a decline in the fair value of an investment is considered to be
other-than-temporary, such investment is written down to its fair value. During 2009,
other-than-temporary impairments on investments included impairment charges of $2.8 million
(pre-tax) to earnings related to our illiquid auction rate securities (ARS). During 2008,
other-than-temporary impairments on investments included impairment charges of $15.8 million
(pre-tax) to earnings related to our ARS and an impairment charge of $4.4 million (pre-tax) to
earnings related to our investments in bonds issued by Lehman Brothers Holdings, Inc. As of
December 31, 2009, the estimated fair values of our ARS approximated $5.7 million. See Note 5 to Consolidated Financial Statements.
Income Tax Expense. Income tax expense increased to $16.4 million, or an effective rate of
-59.0%, in 2009 from $21,000, or an effective rate of -0.1%, in 2008. The increase in our overall
tax expense was primarily due to the detriment associated with recording a full valuation allowance
against our net U.S. deferred tax assets.
Our effective tax rate differs from the federal statutory rate due to state taxes, significant
permanent differences and the change in our valuation allowance on our net U.S. deferred tax
assets. Significant permanent differences arise due to research and development credits and stock
based compensation expense that is not expected to generate a tax deduction, such as stock
compensation expense on grants to foreign employees, offset by tax benefits in the current period
from disqualifying dispositions.
Realization of our deferred tax assets is dependent primarily on the generation of future
taxable income. In considering the need for a valuation allowance we consider our historical, as
well as future projected taxable income along with other objectively verifiable evidence. During
2009, management evaluated the need for a valuation allowance against our net U.S. deferred tax
assets and concluded that a full valuation allowance against our net U.S. deferred tax assets was
warranted in the fourth quarter of 2009 due to, among other reasons, (i) the recently realized
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cumulative accounting losses sustained in the U.S., (ii) the recently completed three-year
projections in which we expect to realize additional accounting losses in the U.S., (iii) the
determination that we would be in a U.S. taxable loss position in 2009 and (iv) our uncertainty
with respect to generating future U.S. taxable income in the near term given our recently completed
U.S. projections and a number of inherent uncertainties such as the future level of U.S. tax
deductions from our share-based awards. As a result, a non-cash income tax charge of $28.1 million
was recorded to increase our valuation allowance in 2009. During 2008, we recorded an $8.1 million
valuation allowance to fully offset the deferred tax assets primarily related to the unrealized
loss recorded as a result of the impairment of certain marketable securities. See Note 8
to Consolidated Financial Statements.
Comparison of the Years Ended December 31, 2008 and 2007
Revenues. In 2008, total revenues increased 1.0% to $175.9 million from $174.1 million in
2007. This overall increase primarily relates to the $3.2 million increase in service revenues,
partially offset by a $1.4 million decrease in product revenue. Revenues from services increased
to $29.1 million in 2008 from $25.9 million in 2007 primarily due to an increase in the ratable
recognition of revenues under our extended PCS and warranty contracts and our implied PCS
arrangements. Revenues from products decreased to $146.8 million in 2008 from $148.2 million in
2007 primarily due to a $5.5 million decrease in shipments of our software products (primarily our
Layer 2/3 and IxChariot software products) in 2008. This decrease in shipments of our software
products was partially offset by a $3.3 million increase in shipments of our interface cards
(primarily our Ethernet interface cards) in 2008 compared to 2007. In 2008, total revenues from
Cisco Systems, our largest account, decreased to $36.9 million, or 21.0% of our total revenue, from
$41.7 million, or 23.9% of our total revenue, in 2007.
Cost of Revenues. As a percentage of total revenues, our total cost of revenues decreased to
20.9% in 2008 from 21.0% in 2007. Our cost of product revenues remained relatively flat at $32.4
million in 2008 and $32.7 million in 2007. In 2008, our cost of providing services increased to
$4.5 million from $3.9 million in 2007 primarily due to costs associated with our technical support
team, including warranty costs, partially offset by lower costs related to our professional
services business.
Research and Development Expenses. In 2008, research and development expenses increased 3.7%
to $49.2 million from $47.4 million in 2007. This increase was primarily due to higher
compensation and related employee costs of approximately $2.2 million and a non-recurring benefit
of approximately $400,000 from a favorable property tax ruling in 2007. The higher compensation
and related employee costs primarily related to annual salary increases. The above increases were
partially offset by a reduction in stock-based compensation expense of approximately $1.1 million
in 2008.
Sales and Marketing Expenses. In 2008, sales and marketing expenses increased 3.4% to $59.4
million from $57.4 million in 2007. This increase was primarily due to higher compensation and
related employee costs of approximately $1.7 million, higher travel expense of approximately
$448,000, and a non-recurring benefit of approximately $400,000 from a favorable property tax
ruling that occurred in 2007. The higher compensation and related employee costs in 2008 compared
to 2007 primarily related to additions to our sales and marketing team and annual salary increases,
partially offset by lower commissions earned by sales personnel. The above net increase was
partially offset by a reduction in stock-based compensation expense of approximately $1.0 million
in 2008.
General and Administrative Expenses. In 2008, general and administrative expenses increased
2.3% to $25.5 million from $24.9 million in 2007. During 2007, general and administrative expenses
included $1.2 million in professional fees, temporary assistance and other costs related to the
completion during 2007 of the restatement of certain of our previously filed financial statements
as more fully described in our 2006 Form 10-K. Excluding the above costs, general and
administrative expenses increased by approximately $1.8 million from $23.7 million in 2007 to $25.5
million in 2008. This increase was primarily due to higher professional fees of $1.3 million
principally related to litigation costs, higher rent and other facilities costs at our corporate
headquarters of $861,000, and higher compensation and related employee costs of $403,000 due in
part to annual salary increases. These increases were partially offset by lower recruiting fees of
$428,000 and lower stock-based compensation of $300,000 in 2008.
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Amortization of Intangible Assets. In 2008, amortization of intangible assets decreased to
$5.7 million from $7.1 million in 2007. This decrease was primarily related to the completion of
amortization periods for certain intangible assets during 2008 and the impairment charge recorded
in 2007 attributable to certain intangible assets related to the acquisition of Communication
Machinery Corporation in July 2005 and the acquisition of the mobile video test product line from
Dilithium Networks in January 2006.
Acquisition Related Expenses. In 2008, acquisition related expenses totaled $1.5 million
which consisted of professional fees and other costs related to certain strategic initiatives, of
which approximately half of these costs related to the acquisition of Catapult. For additional
information, please see Note 3 to Consolidated Financial Statements.
Impairment of Purchased Technology and Intangible Assets. In 2007, we recognized impairment
charges of $1.5 million attributable to purchased technology and $1.8 million attributable to
certain intangible assets related to the wireless LAN testing tools acquired as part of
Communication Machinery Corporation in July 2005 and the acquisition of the mobile video test
product line from Dilithium Networks in January 2006. We determined that the future expected
undiscounted cash flows were less than the carrying value of the affected identifiable intangible
assets, which indicated that an impairment existed. To measure the impairment, we used the
discounted cash flow approach to reduce the carrying value of the affected assets to fair value,
which resulted in the $3.3 million impairment of the above noted purchased technology and other
identifiable intangible assets. See Note 7 to our Consolidated Financial Statements.
Interest and Other Income, Net. Interest and other income, net decreased to $6.6 million in
2008 from $11.7 million in 2007. This decrease was primarily due to the lower effective yields
during 2008 as compared to the same period in 2007.
Other-than-temporary Impairment on Investments. In 2008, other-than-temporary impairments on
investments totaled $20.2 million. There were no such impairments in 2007. During 2008,
other-than-temporary impairments on investments included an impairment charge of $15.8 million
(pre-tax) to earnings related to our illiquid auction rate securities (ARS) and an impairment
charge of $4.4 million (pre-tax) to earnings related to our investments in bonds issued by Lehman
Brothers Holdings, Inc. As of December 31, 2008, the estimated fair values of our ARS and LBHI
bonds approximated $3.2 million and $446,000, respectively. See Note 5 to Consolidated
Financial Statements.
Income Tax Expense. Income tax expense decreased to $21,000, or an effective rate of -0.1%,
in 2008 from $2.1 million, or an effective rate of 23.2%, in 2007. The effective tax rate in 2008
differs from the effective tax rate in 2007 primarily due to a decrease in pre-tax book earnings.
Liquidity and Capital Resources
We have funded our operations with our cash balances, cash generated from operations and
proceeds from our initial public offering and from stock option exercises. The following table
sets forth our cash and short- and long-term investments as of December 31, 2009, 2008 and 2007 (in
thousands):
As of December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Cash and cash equivalents |
$ | 15,061 | $ | 192,791 | $ | 188,892 | ||||||
Short-term marketable securities |
10,337 | 9,850 | 4,999 | |||||||||
Long-term marketable securities |
53,582 | 3,657 | 54,609 | |||||||||
$ | 78,980 | $ | 206,298 | $ | 248,500 | |||||||
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Our cash, cash equivalents and short- and long-term investments, when viewed as a whole,
decreased to $79.0 million as of December 31, 2009 from $206.3 million as of December 31, 2008
primarily due to (i) the acquisition of Catapult in June 2009 for $106.6 million, which was
partially offset by Catapults existing cash and investments balance of $41.2 million, and (ii) the
acquisition of the N2X Business in October 2009 for $44.1 million. Our cash, cash equivalents and
short- and long-term investments, when viewed as a whole, decreased to $206.3 million as of
December 31, 2008 from $248.5 million as of December 31, 2007 primarily due to the repurchase of
$43.6 million of our common stock pursuant to our stock buyback programs.
As of December 31, 2009, 2008 and 2007, we held investments in illiquid auction rate
securities with estimated fair values of $5.7 million, $3.2 million and $14.3 million, respectively
(See Note 5 to Consolidated Financial Statements).
The following table sets forth our summary cash flows for the years ended December 31, 2009,
2008 and 2007 (in thousands):
Year Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Cash (used in) provided by operating activities |
$ | (4,725 | ) | $ | 24,335 | $ | 45,769 | |||||
Cash (used in) provided by investing activities |
(168,005 | ) | 19,082 | 78,491 | ||||||||
Cash used in financing activities |
(5,000 | ) | (39,518 | ) | (12 | ) |
Cash Flows from Operating Activities
Operating cash inflows are principally provided by cash collections on sales to our customers.
Our primary uses of cash from operating activities are for personnel-related expenditures, product
costs and facility-related payments. Going forward, our cash flows from operating activities will
be impacted by (i) the extent to which we grow our customer sales and spend on additional headcount
in order to grow our business and (ii) by our working capital management.
Cash used in operating activities was $4.7 million for the year ended December 31, 2009
compared to cash provided by operating activities of $24.3 million for the year ended December 31,
2008. This decline in cash flow generated from operations was primarily due to (i) a $14.3 million
increase of net working capital changes in 2009 when compared to 2008 that adversely impacted cash
flow due in part to an $11.8 million increase in accounts receivable as of December 31, 2009 when
compared to December 31, 2008 related to an increased amount of shipments at the end of 2009 when
compared to the end of 2008, and (ii) an increase of approximately $9.0 million of restructuring
and acquisition related costs in 2009 when compared to 2008 due to the acquisitions of Catapult and
the N2X Business, as well as the two restructuring programs implemented during 2009. See Notes to
Consolidated Financial Statements for additional information.
Cash provided by operating activities was $24.3 million and $45.8 million for the years ended
December 31, 2008 and 2007, respectively. This decline in cash flow generated from operations was
primarily due to (i) a $11.1 million increase of net working capital changes in 2008 when compared
to 2007 that adversely impacted cash flow due in part to the timing of shipments and collections
(i.e., accounts receivable increased by $1.6 million as of December 31, 2008 when compared to
December 31, 2007 versus a $3.8 million decrease in accounts receivable as of December 31, 2007
when compared to December 31, 2006), (ii) an increase in operating expenditures of approximately
$8.0 million in 2008 over 2007, and (iii) a drop in interest income receipts of approximately $5.0
million in 2008 when compared to 2007.
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Cash Flows from Investing Activities
Our cash inflow from investing activities principally relate to proceeds from the sale and
maturities of our investments in marketable securities. Our primary uses of cash from investing
activities are for payments to acquire products, technologies and businesses, purchases of
marketable security investments and capital expenditures to support our growth. Going forward, we
expect our cash flows from investing activities to fluctuate based on the number of product,
technology and/or business acquisitions we close using cash, if any, and the timing of our sales,
maturities and purchases of marketable securities.
Cash used in investing activities was $168.0 million for the year ended December 31, 2009
compared to cash provided by investing activities of $19.1 million for the year ended December 31,
2008. This decline in cash flow provided by investing activities was primarily due to a $120.2
million increase in cash used to acquire businesses in 2009 when compared to 2008 due to the
acquisitions of Catapult and the N2X Business in 2009. In addition, during 2009, $37.2 million of
cash was used for net purchases of marketable securities compared to $30.2 million of net proceeds
from marketable securities in 2008.
Cash provided by investing activities was $19.1 million and $78.5 million for the years ended
December 31, 2008 and 2007, respectively. During 2008, $30.2 million of cash was provided from net
proceeds of marketable securities compared to $92.8 million of net proceeds from marketable
securities in 2007.
Cash Flows from Financing Activities
Our cash inflow from financing activities over the past three years has principally related to
proceeds from the exercise of stock options and employee stock purchase plan options. Our primary
uses of cash from financing activities over the past three years has related to the repurchase of
our common stock pursuant to approved stock buyback plans. Going forward, we expect our cash flows
from financing activities to fluctuate based on the number of exercises of share-based awards which
is dependent on the performance of our stock price. If deemed appropriate and approved by our
Board of Directors, we may raise additional capital through a debt or equity financing, or initiate
further stock buyback programs.
Cash used in financing activities was $5.0 million and $39.5 million for the years ended
December 31, 2009 and 2008, respectively. This decline in cash flow used in financing activities
was primarily due to a $35.2 million decline in stock repurchases in 2009 when compared to 2008.
Cash used in financing activities was $39.5 million and $12,000 for the years ended December
31, 2008 and 2007, respectively. This increase in cash flow used in financing activities was
primarily due to a $34.4 million increase in stock repurchases in 2008 when compared to 2007. In
addition, cash flows provided by exercises of share-based awards declined by $5.0 million in 2008
when compared to 2007.
We believe that our existing balances of cash and cash equivalents, investments and cash flows
expected to be generated from our operations will be sufficient to satisfy our operating
requirements for at least the next twelve months. Nonetheless, we may seek additional sources of
capital as necessary or appropriate to fund acquisitions or to otherwise finance our growth or
operations; however, there can be no assurance that such funds, if needed, will be available on
favorable terms, if at all. Our access to the capital markets to raise funds, through the sale of
equity or debt securities, is subject to various factors, including the conditions in the U.S.
capital markets and the timely filing of our periodic reports with the Commission.
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Financial Commitments
Our significant financial commitments at December 31, 2009 are as follows (in thousands):
Less than | More than | |||||||||||||||||||
Total | 1 year | 1-3 years | 3-5 years | 5 years | ||||||||||||||||
Operating leases |
$ | 18,290 | $ | 7,025 | $ | 8,864 | $ | 2,139 | $ | 262 | ||||||||||
Purchase obligations |
2,875 | 2,875 | | | | |||||||||||||||
$ | 21,165 | $ | 9,900 | $ | 8,864 | $ | 2,139 | $ | 262 | |||||||||||
Purchase obligations in the table above consist of purchase orders issued to certain of our
contract manufacturers in the normal course of business to purchase specified quantities of certain
interface cards and chassis. It is not our intent, nor is it reasonably likely, that we would
cancel these executed purchase orders.
As of December 31, 2009, we had a net liability for uncertain tax positions of approximately
$5.0 million, which may be payable by us in the future. We are not able to reasonably estimate the
timing of the payments or the amount by which the liability for uncertain tax positions will
increase or decrease over time; therefore, the liability of $5.0 million is excluded from the table
above. See Note 8 to our Consolidated Financial Statements.
Recent Accounting Pronouncements
See Note 1 to Consolidated Financial Statements.
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Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
Interest Rate Sensitivity
The primary objective of our investment activities is to maintain the safety of principal and
preserve liquidity while maximizing yields without significantly increasing risk. Some of the
fixed rate securities that we have invested in may be subject to market risk. This means that a
change in prevailing interest rates may cause the principal amount of the investment to fluctuate.
We do not enter into investments for trading or speculative purposes. We maintain our portfolio of
cash equivalents and investments in a variety of securities, including U.S. government and federal
agency securities, corporate debt securities, auction rate securities and money market funds. Our
cash equivalents and investments consist of both fixed and variable rate securities. We do not use
any derivatives or similar instruments to manage our interest rate risk. Fixed-rate securities may
have their fair market value adversely impacted due to a rise in interest rates. Our fixed rate
securities are currently classified as available-for-sale securities. While we do not intend to
sell these fixed rate securities prior to maturity based on a sudden change in market interest
rates, should we choose to sell these securities in the future, our consolidated operating results
or cash flows may be adversely affected. A smaller portion of our cash equivalents and investments
portfolio consists of variable interest rate securities. Accordingly, we also have interest rate
risk with these variable rate securities as the income produced may decrease if interest rates
fall. We do not believe that a 100 basis point decrease in interest rates will have a significant
impact on our interest income, operating results or liquidity.
Exchange Rate Sensitivity
The majority of our revenue and expenses are denominated in U.S. dollars. However, since we
have sales, marketing and development operations outside of the United States, we do have some
transactions that are denominated in foreign currencies, primarily the Japanese Yen, Romanian Lei,
Indian Rupee, Chinese Yuan, Singapore Dollar, Canadian Dollar, Swedish Kronor, Euro and British
Pound. We utilize foreign currency forward contracts to hedge certain accounts receivable amounts
that are denominated in Japanese Yen. These contracts are used to reduce our risk associated with
exchange rate movements, as gains and losses on these contracts are intended to offset exchange
losses and gains on underlying exposures. Changes in the fair value of these forward contracts are
recorded immediately in earnings. We do not enter into foreign exchange forward contracts for
speculative or trading purposes and we do not expect net gains or losses on these derivative
instruments to have a material impact on our results of operations or cash flows.
Item 8. Financial Statements and Supplementary Data
Our financial statements and supplementary data required by this Item are provided in the
consolidated financial statements of the Company included in this Form 10-K as listed in Item 15(a)
of this Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Based on our managements evaluation (with the participation of our Chief Executive Officer
and Chief Financial Officer), as of the end of the period covered by this Annual Report, our Chief
Executive Officer and Chief Financial Officer have concluded that our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934,
as amended (the Exchange Act)), were effective to ensure that information required to be
disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in Securities and Exchange Commission
rules
51
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and forms and 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.
Managements Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act. Our internal control over financial reporting is a process designed by, or under the
supervision of, our Chief Executive Officer and our Chief Financial Officer, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of our financial
statements for external purposes in accordance with U.S. generally accepted accounting principles
(GAAP). Because of its inherent limitations, our internal control over financial reporting may
not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with policies or procedures may deteriorate.
As of December 31, 2009, our management (with the participation of our Chief Executive Officer
and our Chief Financial Officer) conducted an evaluation of the effectiveness of our internal
control over financial reporting based on the framework in Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on
this evaluation, management concluded that our internal control over financial reporting was
effective as of December 31, 2009 based on criteria in Internal Control Integrated Framework
issued by the COSO.
Our managements evaluation has excluded the N2X Business from its assessment of internal
control over financial reporting as of December 31, 2009 because it was acquired by the Company in
a purchase business combination during late 2009. Total assets and total revenues of the N2X
Business represented 3.2% and 3.9%, respectively, of the related consolidated financial statement
amounts as of and for the year ended December 31, 2009.
The effectiveness of our internal control over financial reporting as of December 31, 2009 has
been audited by PricewaterhouseCoopers LLP, our independent registered public accounting firm, as
stated in its report which is included elsewhere herein.
Changes in Internal Control over Financial Reporting
There have not been any changes in our internal control over financial reporting (as such term
is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended
December 31, 2009 that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and our Chief Financial Officer, does
not expect that our disclosure controls and procedures or our internal control over financial
reporting are or will be capable of preventing or detecting all errors and all fraud. Any
controls, no matter how well designed and operated, can provide only reasonable, not absolute,
assurance that the objectives of the controls will be met. The design of controls must reflect the
fact that there are resource constraints, and the benefits of controls must be considered relative
to their costs. Further, because of the inherent limitations in all controls, no evaluation of
controls can provide absolute assurance that misstatements due to error or fraud will not occur or
that all control issues and instances of fraud, if any, within the Company have been detected.
These inherent limitations include the realities that judgments in decision-making can be faulty
and that breakdowns can occur because of simple error or mistake. Controls can also be
circumvented by the individual acts of some persons, by collusion of two or more people, or by
management override of the controls. The design of controls is based in part on certain
assumptions about the
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likelihood of future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions.
Item 9B. | Other Information |
None.
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PART III
Item 10. | Directors, Executive Officers and Corporate Governance |
Certain information required by this Item is incorporated herein by reference to information
appearing in our definitive Proxy Statement for our Annual Meeting of Shareholders to be held on
May 27, 2010, which information will appear under the captions entitled Proposal 1 Election of
Directors, Executive Officers and Section 16(a) Beneficial Ownership Reporting Compliance.
The Proxy Statement will be filed with the Commission within 120 days after our last fiscal
year-end which was December 31, 2009.
The Registrant has adopted a Code of Ethics for its Chief Executive and Senior Financial
Officers, a copy of which is included as Exhibit 14.1 to this Annual Report on Form 10-K.
Item 11. | Executive Compensation |
The information required by this Item is incorporated herein by reference to information
appearing in our definitive Proxy Statement for our Annual Meeting of Shareholders to be held on
May 27, 2010, which information will appear under the captions Proposal 1 Election of Directors
- Compensation of Directors, Executive Compensation and Other Information, Compensation
Discussion and Analysis and Compensation Committee Report. The Proxy Statement will be filed
with the Commission within 120 days after our last fiscal year-end which was December 31, 2009.
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The information required by this Item is incorporated herein by reference to information
appearing in our definitive Proxy Statement for our Annual Meeting of Shareholders to be held on
May 27, 2010, which information will appear under the captions Common Stock Ownership of Principal
Shareholders and Management and Executive Compensation and Other Information Equity
Compensation Plan Information. The Proxy Statement will be filed with the Commission within 120
days after our last fiscal year-end which was December 31, 2009.
Item 13. | Certain Relationships and Related Transactions, and Director Independence |
Any information required by this Item is incorporated herein by reference to information
appearing in our definitive Proxy Statement for our Annual Meeting of Shareholders to be held on
May 27, 2010, which information will appear under the caption entitled Certain Relationships and
Related Transactions, and Proposal 1 Election of Directors. The Proxy Statement will be
filed with the Commission within 120 days after our last fiscal year-end which was December 31,
2009.
Item 14. | Principal Accounting Fees and Services |
The information required by this Item is incorporated herein by reference to information
appearing in our definitive Proxy Statement for our Annual Meeting of Shareholders to be held on
May 27, 2010, which information will appear under the caption Proposal 4 Ratification of
Appointment of Independent Registered Public Accounting Firm. The Proxy Statement will be filed
with the Commission within 120 days after our last fiscal year-end which was December 31, 2009.
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PART IV
Item 15. | Exhibits, Financial Statement Schedules |
(a) The following documents are filed as part of this Report:
(1) Consolidated Financial Statements
The consolidated financial statements listed in the accompanying Index to Consolidated
Financial Statements are filed as part of this report.
(2) Financial Statement Schedule
The financial statement schedules have been omitted because they are not applicable or the
information required to be set forth therein is included in the consolidated financial statements
or notes thereto.
(3) Exhibits
2.1 | Agreement and Plan of Merger dated as of May 11, 2009 among the Company, Catapult Communications Corporation and Josie Acquisition Company(1) | ||
2.2 | Asset Purchase Agreement, dated October 21, 2009, by and between the Company and Agilent Technologies, Inc. (2) | ||
3.1 | Amended and Restated Articles of Incorporation, as amended(3) | ||
3.2 | Bylaws, as amended(4) | ||
10.1* | Amended and Restated 1997 Equity Incentive Plan (5) | ||
10.2* | Amended and Restated Non-Employee Director Stock Option Plan(6) | ||
10.3* | Employee Stock Purchase Plan(7) | ||
10.3.1* | Amendment No. 1, dated May 9, 2003, to Ixia Employee Stock Purchase Plan(8) | ||
10.3.2* | Supplemental Provisions, effective April 14, 2006, to Ixia Employee Stock Purchase Plan(9) | ||
10.4* | Officer Severance Plan(10), together with Amendment to the Officer Severance Plan(11) | ||
10.5* | Ixia Officer Severance Plan (as Amended and Restated effective January 1, 2009)(12) | ||
10.6* | Form of Indemnity Agreement between Ixia and its directors and executive officers(13) | ||
10.7 | Office Lease Agreement dated September 14, 2007 between MS LPC Malibu Property Holdings, LLC and Ixia(14) | ||
10.8 | License, Distribution and Option Agreement, dated July 7, 2003, between NetIQ Corporation and Ixia(15) | ||
10.9 | First Amendment to License, Distribution and Option Agreement dated as of January 6, 2005 between the Registrant and NetIQ Corporation(16) | ||
10.10 | Second Amendment to License, Distribution and Option Agreement dated as of June 16, 2005 between the Registrant and NetIQ Corporation(17)(18) | ||
10.11* | Compensation of Named Executive Officers and Chief Executive Officer for 2008 and 2009(19) | ||
10.12* | Summary of Compensation for the Registrants Non-Employee Directors(20) | ||
10.13* | Ixia 2008 Executive Officer Bonus Plan(21) | ||
10.14* | Employment Offer Letter Agreement dated as of August 8, 2007 between the Company and Atul Bhatnagar(22) | ||
10.15.1* | Ixia 2008 Equity Incentive Plan, including Amendment No. 1 dated May 28, 2008(23) | ||
10.15.2 | Amendment No. 2 to Ixia 2008 Equity Incentive Plan, as amended(24) | ||
10.16 | Master Services Agreement dated as of January 26, 2009 between the Company and Plexus Services Corp and its Affiliates and subsidiaries(25) | ||
14.1 | Code of Ethics for Chief Executive and Senior Financial Officers(26) | ||
21.1 | Subsidiaries of the Registrant | ||
23.1 | Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm |
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31.1 | Certificate of Chief Executive Officer of Ixia pursuant to Rule 13a-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
31.2 | Certificate of Chief Financial Officer of Ixia pursuant to Rule 13a-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
32.1 | Certificate of Chief Executive Officer and Chief Financial Officer of Ixia pursuant to Rule 13a-14(b) under the Exchange Act and Section 906 of the Sarbanes-Oxley Act of 2002. |
* | Constitutes a management contract or compensatory plan or arrangement required to be filed as an exhibit to this Annual Report on Form 10-K. | |
(1) | Incorporated by reference to Exhibit 2.1 to Ixias Current Report on Form 8-K (File No. 000-31523), as filed with the Commission on May 12, 2009. | |
(2) | Incorporated by reference to Exhibit 2.1 to Ixias Current Report on Form 8-K (File No. 000-31523), as filed with the Commission on October 27, 2009. | |
(3) | Incorporated by reference to Exhibit No. 3.1 to Amendment No. 1 to the Registrants Registration Statement on Form S-1 (Reg. No. 333-42678) filed with the Commission on September 5, 2000. | |
(4) | Incorporated by reference to Exhibit No. 3.1 to the Registrants Current Report on Form 8-K (File No. 000-31523) filed with the Commission on November 16, 2007. | |
(5) | Incorporated by reference to Exhibit 4.1 to the Registrants Registration Statement on Form S-8 (Reg. No. 333-117969) filed with the Commission on August 5, 2004. | |
(6) | Incorporated by reference to Exhibit 4.2 to the Registrants Registration Statement on Form S-8 (Reg. No. 333-117969) filed with the Commission on August 5, 2004. | |
(7) | Incorporated by reference to Exhibit No. 10.3 to Amendment No. 1 to the Registrants Registration Statement on Form S-1 (Reg. No. 333-42678) filed with the Commission on September 5, 2000. | |
(8) | Incorporated by reference to Exhibit 4.2 to the Registrants Registration Statement on Form S-8 (Registration No. 333-107818) filed with the Commission on August 8, 2003. | |
(9) | Incorporated by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K (File No. 000-31523) filed with the Commission on April 20, 2006. | |
(10) | Incorporated by reference to Exhibit No. 10.4 to Amendment No. 1 to the Registrants Registration Statement on Form S-1 (Reg. No. 333-42678) filed with the Commission on September 5, 2000. | |
(11) | Incorporated by reference to Exhibit 10.2 to the Registrants Current Report on Form 8-K (File No. 000-31523) filed with the Commission on January 7, 2009. | |
(12) | Incorporated by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K (File No. 000-31523) filed with the Commission on January 7, 2009. | |
(13) | Incorporated by reference to Exhibit No. 10.5 to Amendment No. 1 to the Registrants Registration Statement on Form S-1 (Reg. No. 333-42678) filed with the Commission on September 5, 2000. | |
(14) | Incorporated by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K (File No. 000-31523) filed with the Commission on September 25, 2007. | |
(15) | Incorporated by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K (File No. 000-31523) filed with the Commission on August 19, 2003. | |
(16) | Incorporated by reference to Exhibit 10.1 to the Registrants Quarterly Report on Form 10-Q (File No. 000-31523) for the fiscal quarter ended June 30, 2005. | |
(17) | Incorporated by reference to Exhibit 10.2 to the Registrants Quarterly Report on Form 10-Q (File No. 000-31523) for the fiscal quarter ended June 30, 2005. | |
(18) | Confidential treatment has been requested with respect to a portion of this exhibit, which portion has been omitted and filed separately with the Commission. |
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(19) | Incorporated by reference to Exhibit 10.2 to the Registrants Annual Report on Form 10-K (File No. 000-31523) for the fiscal year ended December 31, 2008. | |
(20) | Incorporated by reference to Exhibit 10.17 to the Registrants Annual Report on Form 10-K (File No. 000-31523) for the fiscal year ended December 31, 2006. | |
(21) | Incorporated by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K (File No. 000-31523) filed with the Commission on April 17, 2008. | |
(22) | Incorporated by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K (File No. 000-31523) filed with the Commission on September 4, 2007. | |
(23) | Incorporated by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K (File No. 000-31523) filed with the Commission on June 3, 2008. | |
(24) | Incorporated by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K (File No. 000-31523) filed with the Commission on June 2, 2009. | |
(25) | Incorporated by reference to Exhibit 10.1 to the Registrants Quarterly Report on Form 10 Q (File No. 000 31523) for the fiscal quarter ended March 31, 2009. | |
(26) | Incorporated by reference to Exhibit 14.1 to the Registrants Annual Report on Form 10-K (File No. 000-31523) for the fiscal year ended December 31, 2003. |
(b) Exhibits
See the list of Exhibits under Item 15(a)(3) of this Annual Report on Form 10-K.
(c) Financial Statement Schedules
See the Schedule under Item 15(a)(2) of this Annual Report on Form 10-K.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: March 5, 2010 | IXIA |
|||
/s/ Atul Bhatnagar | ||||
Atul Bhatnagar | ||||
Chief Executive Officer | ||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been
signed below by the following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
Name | Title | Date | ||
/s/ Atul Bhatnagar
|
President, Chief Executive Officer and Director (Principal Executive Officer) | March 5, 2010 | ||
/s/ Thomas B. Miller
|
Chief Financial Officer (Principal Financial and Accounting Officer) |
March 5, 2010 | ||
/s/ Errol Ginsberg
|
Chief Innovation Officer and Chairman of the Board | March 5, 2010 | ||
/s/ Jon F. Rager
|
Director | March 5, 2010 | ||
/s/ Gail Hamilton
|
Director | March 5, 2010 | ||
/s/ Jonathan Fram
|
Director | March 5, 2010 | ||
/s/ Laurent Asscher
|
Director | March 5, 2010 |
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IXIA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page | ||||
60 | ||||
62 | ||||
63 | ||||
64 | ||||
66 | ||||
67 |
59
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Report of Independent Registered Public Accounting Firm
To Board of Directors and Stockholders of Ixia:
In our opinion, the accompanying consolidated balance sheets and the related consolidated
statements of operations, shareholders equity and cash flows present fairly, in all material
respects, the financial position of Ixia and its subsidiaries at December 31, 2009 and 2008, and
the results of their operations and their cash flows for each of the three years in the period
ended December 31, 2009 in conformity with accounting principles generally accepted in the United
States of America. Also in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2009, based on criteria
established in Internal Control Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Companys management is responsible for these
financial statements, for maintaining effective internal control over financial reporting and for
its assessment of the effectiveness of internal control over financial reporting, included in
Managements Report on Internal Control Over Financial Reporting appearing under Item 9A. Our
responsibility is to express opinions on these financial statements and on the Companys internal
control over financial reporting based on our integrated audits. We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement and whether effective internal
control over financial reporting was maintained in all material respects. Our audits of the
financial statements included examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement presentation. Our
audit of internal control over financial reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audits also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our opinions.
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in
which it accounts for business combinations in 2009.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
As described in Managements Report on Internal Control over Financial Reporting appearing under
Item 9A, management has excluded the N2X Business from its assessment of internal control over
financial reporting as of December 31, 2009 because it was acquired by the Company in a purchase
business combination during late 2009. We have also excluded the N2X Business from our audit of
internal control over financial reporting. Total assets
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and total revenues of the N2X Business represented 3.2% and 3.9%, respectively, of the related
consolidated financial statement amounts as of and for the year ended December 31, 2009.
/s/ PricewaterhouseCoopers LLP
Los Angeles, California
March 5, 2010
March 5, 2010
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IXIA
Consolidated Balance Sheets
(in thousands)
(in thousands)
December 31, | December 31, | |||||||
2009 | 2008 | |||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 15,061 | $ | 192,791 | ||||
Short-term investments in marketable securities |
10,337 | 9,850 | ||||||
Accounts receivable, net |
55,765 | 34,001 | ||||||
Inventories |
14,541 | 14,966 | ||||||
Deferred income taxes |
| 4,855 | ||||||
Prepaid expenses and other current assets |
9,727 | 4,981 | ||||||
Total current assets |
105,431 | 261,444 | ||||||
Investments in marketable securities |
53,582 | 3,657 | ||||||
Property and equipment, net |
18,693 | 18,506 | ||||||
Deferred income taxes |
| 14,945 | ||||||
Intangible assets, net |
69,132 | 10,592 | ||||||
Goodwill |
60,121 | 16,728 | ||||||
Other assets |
2,129 | 2,554 | ||||||
Total assets |
$ | 309,088 | $ | 328,426 | ||||
Liabilities and Shareholders Equity |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 6,136 | $ | 4,729 | ||||
Accrued expenses |
21,253 | 18,823 | ||||||
Deferred revenues |
29,842 | 19,558 | ||||||
Income taxes payable |
1,263 | 452 | ||||||
Total current liabilities |
58,494 | 43,562 | ||||||
Deferred revenues |
7,309 | 6,109 | ||||||
Other liabilities |
6,620 | 5,559 | ||||||
Total liabilities |
72,423 | 55,230 | ||||||
Commitments and contingencies (Note 9) |
||||||||
Shareholders equity: |
||||||||
Preferred stock, without par value; 1,000
shares authorized and none outstanding |
| | ||||||
Common stock, without par value; 200,000
shares authorized at December 31, 2009 and
2008; 63,062 and 63,391 shares issued and
outstanding as of December 31, 2009 and 2008,
respectively |
87,283 | 92,386 | ||||||
Additional paid-in capital |
118,754 | 107,882 | ||||||
Retained earnings |
28,979 | 73,182 | ||||||
Accumulated other comprehensive income (loss) |
1,649 | (254 | ) | |||||
Total shareholders equity |
236,665 | 273,196 | ||||||
Total liabilities and shareholders equity |
$ | 309,088 | $ | 328,426 | ||||
The accompanying notes are an integral part of these consolidated financial statements
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IXIA
Consolidated Statements of Operations
(in thousands, except per share data)
(in thousands, except per share data)
Year Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Revenues: |
||||||||||||
Products |
$ | 142,871 | $ | 146,802 | $ | 148,226 | ||||||
Services |
35,123 | 29,065 | 25,895 | |||||||||
Total revenues |
177,994 | 175,867 | 174,121 | |||||||||
Costs and operating expenses: (1) |
||||||||||||
Cost of revenues products |
36,722 | 32,411 | 32,724 | |||||||||
Cost of revenues services |
3,859 | 4,475 | 3,870 | |||||||||
Research and development |
53,977 | 49,167 | 47,407 | |||||||||
Sales and marketing |
60,374 | 59,374 | 57,420 | |||||||||
General and administrative |
28,061 | 25,502 | 24,927 | |||||||||
Amortization of intangible assets |
11,391 | 5,664 | 7,108 | |||||||||
Acquisition related |
6,179 | 1,479 | | |||||||||
Restructuring |
4,637 | | | |||||||||
Impairment of purchased technology and intangible
assets |
| | 3,263 | |||||||||
Total costs and operating expenses |
205,200 | 178,072 | 176,719 | |||||||||
Loss from operations |
(27,206 | ) | (2,205 | ) | (2,598 | ) | ||||||
Interest and other income, net |
2,160 | 6,574 | 11,723 | |||||||||
Other-than-temporary impairment on investments |
(2,761 | ) | (20,243 | ) | | |||||||
(Loss) income before income taxes |
(27,807 | ) | (15,874 | ) | 9,125 | |||||||
Income tax expense |
16,396 | 21 | 2,119 | |||||||||
Net (loss) income |
$ | (44,203 | ) | $ | (15,895 | ) | $ | 7,006 | ||||
(Loss) earnings per share: |
||||||||||||
Basic |
$ | (0.70 | ) | $ | (0.24 | ) | $ | 0.10 | ||||
Diluted |
$ | (0.70 | ) | $ | (0.24 | ) | $ | 0.10 | ||||
Weighted average number of common and common
equivalent shares outstanding: |
||||||||||||
Basic |
62,710 | 65,087 | 67,936 | |||||||||
Diluted |
62,710 | 65,087 | 69,386 | |||||||||
|
||||||||||||
(1) Stock-based compensation included in: |
||||||||||||
Cost of revenues products |
$ | 478 | $ | 513 | $ | 519 | ||||||
Cost of revenues services |
182 | 195 | 197 | |||||||||
Research and development |
4,491 | 4,166 | 5,243 | |||||||||
Sales and marketing |
2,989 | 3,411 | 4,416 | |||||||||
General and administrative |
2,395 | 2,360 | 2,659 |
The accompanying notes are an integral part of these consolidated financial statements
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IXIA
Consolidated Statements of Shareholders Equity
(in thousands)
Consolidated Statements of Shareholders Equity
(in thousands)
Accumulated | ||||||||||||||||||||||||
Additional | Other | |||||||||||||||||||||||
Common Stock | Paid-In | Retained | Comprehensive | |||||||||||||||||||||
Shares | Amount | Capital | Earnings | Income (loss) | Total | |||||||||||||||||||
Balance as of December 31, 2006 |
67,351 | $ | 132,413 | $ | 86,305 | $ | 82,071 | $ | | $ | 300,789 | |||||||||||||
Net income |
7,006 | 7,006 | ||||||||||||||||||||||
Change in unrealized gains and
losses on investments, net of
tax |
(2,844 | ) | (2,844 | ) | ||||||||||||||||||||
Cumulative translation adjustment |
18 | 18 | ||||||||||||||||||||||
Comprehensive income |
4,180 | |||||||||||||||||||||||
Shares issued pursuant to stock
incentive plans, exercise of
employee stock purchase plan
options and warrants |
1,739 | 8,870 | 8,870 | |||||||||||||||||||||
Repurchase of shares pursuant to
stock buyback program |
(919 | ) | (9,191 | ) | (9,191 | ) | ||||||||||||||||||
Stock-based compensation |
13,034 | 13,034 | ||||||||||||||||||||||
Stock award tax shortfall |
(1,182 | ) | (1,182 | ) | ||||||||||||||||||||
Balance as of December 31, 2007 |
68,171 | 132,092 | 98,157 | 89,077 | (2,826 | ) | 316,500 | |||||||||||||||||
Net loss |
(15,895 | ) | (15,895 | ) | ||||||||||||||||||||
Change in unrealized gains and
losses on investments, net of
tax |
(1,680 | ) | (1,680 | ) | ||||||||||||||||||||
Reclassification adjustment for
investment losses recognized in
net loss, net of tax |
4,191 | 4,191 | ||||||||||||||||||||||
Cumulative translation adjustment |
61 | 61 | ||||||||||||||||||||||
Comprehensive loss |
(13,323 | ) | ||||||||||||||||||||||
Shares issued pursuant to stock
incentive plans and employee
stock purchase plan options |
1,029 | 3,897 | 3,897 | |||||||||||||||||||||
Repurchase of shares pursuant to
stock buyback programs |
(5,809 | ) | (43,603 | ) | (43,603 | ) | ||||||||||||||||||
Stock-based compensation |
10,645 | 10,645 | ||||||||||||||||||||||
Stock award tax shortfall |
(920 | ) | (920 | ) | ||||||||||||||||||||
Balance as of December 31, 2008 |
63,391 | 92,386 | 107,882 | 73,182 | (254 | ) | 273,196 | |||||||||||||||||
Net loss |
(44,203 | ) | (44,203 | ) | ||||||||||||||||||||
Change in unrealized gains and
losses on investments, net of
tax |
1,959 | 1,959 | ||||||||||||||||||||||
Cumulative translation adjustment |
(56 | ) | (56 | ) | ||||||||||||||||||||
Comprehensive loss |
(42,300 | ) |
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Shares issued pursuant to stock
incentive plans and employee
stock purchase plan options |
1,294 | 3,321 | 3,321 | |||||||||||||||||||||
Repurchase of shares pursuant to
stock buyback programs |
(1,623 | ) | (8,424 | ) | (8,424 | ) | ||||||||||||||||||
Stock-based compensation |
10,535 | 10,535 | ||||||||||||||||||||||
Stock award tax windfall |
337 | 337 | ||||||||||||||||||||||
Balance as of December 31, 2009 |
63,062 | $ | 87,283 | $ | 118,754 | $ | 28,979 | $ | 1,649 | $ | 236,665 | |||||||||||||
The accompanying notes are an integral part of these consolidated financial statements
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IXIA
Consolidated Statements of Cash Flows
(in thousands)
Consolidated Statements of Cash Flows
(in thousands)
Year Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Cash flows from operating activities: |
||||||||||||
Net (loss) income |
$ | (44,203 | ) | $ | (15,895 | ) | $ | 7,006 | ||||
Adjustments to reconcile net (loss) income to net cash
provided by operating activities: |
||||||||||||
Depreciation |
10,195 | 11,527 | 11,560 | |||||||||
Amortization of intangible assets |
11,391 | 5,664 | 7,108 | |||||||||
Impairment on investments |
2,761 | 20,243 | | |||||||||
Impairment of purchased technology and intangible assets |
| | 3,263 | |||||||||
Stock-based compensation |
10,535 | 10,645 | 13,034 | |||||||||
Deferred income taxes |
22,955 | (2,455 | ) | (1,478 | ) | |||||||
Tax benefit (shortfall) from stock award transactions |
337 | (920 | ) | (1,182 | ) | |||||||
Excess tax benefits from stock-based compensation |
(103 | ) | (188 | ) | (309 | ) | ||||||
Changes in operating assets and liabilities, net of
effect of acquisitions: |
||||||||||||
Accounts receivable, net |
(11,819 | ) | (1,596 | ) | 3,816 | |||||||
Inventories |
5,606 | (2,235 | ) | (1,127 | ) | |||||||
Prepaid expenses and other current assets |
(2,589 | ) | (1,596 | ) | 797 | |||||||
Other assets |
1,560 | (1,599 | ) | (468 | ) | |||||||
Accounts payable |
(240 | ) | 2,255 | 279 | ||||||||
Accrued expenses |
(6,494 | ) | (167 | ) | 2,146 | |||||||
Deferred revenues |
361 | (248 | ) | 1,367 | ||||||||
Income taxes payable and other liabilities |
(4,978 | ) | 900 | (43 | ) | |||||||
Net cash (used in) provided by operating activities |
(4,725 | ) | 24,335 | 45,769 | ||||||||
Cash flows from investing activities: |
||||||||||||
Purchases of property and equipment |
(8,025 | ) | (8,540 | ) | (10,931 | ) | ||||||
Purchases of available-for-sale securities |
(262,704 | ) | | (54,150 | ) | |||||||
Proceeds from available-for-sale securities |
225,529 | 2,001 | 161,850 | |||||||||
Purchases of held-to-maturity securities |
| (8,924 | ) | (45,469 | ) | |||||||
Proceeds from held-to-maturity securities |
| 37,104 | 30,564 | |||||||||
Purchases of other intangible assets |
(362 | ) | (314 | ) | (175 | ) | ||||||
Payments in connection with acquisitions, net of cash
acquired |
(122,443 | ) | (2,245 | ) | (3,198 | ) | ||||||
Net cash (used in) provided by investing activities |
(168,005 | ) | 19,082 | 78,491 | ||||||||
Cash flows from financing activities: |
||||||||||||
Proceeds from exercise of stock options, warrants and
employee stock purchase plan options |
3,321 | 3,897 | 8,870 | |||||||||
Repurchase of common stock |
(8,424 | ) | (43,603 | ) | (9,191 | ) | ||||||
Excess tax benefits from stock-based compensation |
103 | 188 | 309 | |||||||||
Net cash used in financing activities |
(5,000 | ) | (39,518 | ) | (12 | ) | ||||||
Net (decrease) increase in cash and cash equivalents |
(177,730 | ) | 3,899 | 124,248 | ||||||||
Cash and cash equivalents at beginning of year |
192,791 | 188,892 | 64,644 | |||||||||
Cash and cash equivalents at end of year |
$ | 15,061 | $ | 192,791 | $ | 188,892 | ||||||
Supplemental disclosure of cash flow information: |
||||||||||||
Cash paid during the year for: |
||||||||||||
Income taxes |
$ | 1,326 | $ | 5,443 | $ | 4,724 | ||||||
The accompanying notes are an integral part of these consolidated financial statements
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IXIA
Notes to Consolidated Financial Statements
1. Business and Summary of Significant Accounting Policies
Business
We are a leading provider of converged test systems and services for wireless and wired
infrastructures and services. Our hardware and software allow our customers to test and measure the
performance, functionality, service quality and conformance of wireless and wired Internet Protocol
(IP) equipment and networks, and the applications that run over them. Our solutions generate,
capture, characterize and analyze high volumes of realistic network and application traffic,
identifying problems, assessing performance, ensuring functionality and interoperability, and
verifying conformance to industry specifications. We offer hardware platforms with interchangeable
media interfaces, utilizing a common set of applications, Application Programming Interfaces (APIs)
and automation tools that allow our customers to create integrated, easy-to-use automated test
environments. The networks that our systems analyze primarily include Ethernet networks operating
at speeds of up to 100 gigabits per second and wireless networks that carry data traffic over
optical fiber, electrical cable and airwaves. We also offer hardware platforms and equipment that
test wireless equipment, especially those associated with 3G (third generation), 4G (fourth
generation) and Long-Term Evolution (LTE) networks. Customers also use our suite of software
applications to test and verify web, Internet, security and business applications.
Use of Estimates
In the normal course of preparing financial statements in conformity with accounting
principles generally accepted in the United States, management is required 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 and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those estimates.
Consolidation
All subsidiaries are consolidated as they are 100% owned by us. All significant intercompany
transactions and accounts are eliminated in consolidation.
Cash and Cash Equivalents
We consider all highly liquid investments with a maturity of three months or less at the date
of purchase to be cash equivalents. Cash and cash equivalents are carried at cost, which
approximates fair value. We generally place funds that are in excess of current needs in high
credit quality instruments such as money market funds. There are no restrictions on the use of
cash and investments.
Fair Value of Financial Instruments
Our financial instruments, including cash and cash equivalents, accounts receivable, accounts
payable and other liabilities are carried at cost, which approximates their fair values because of
the short-term maturity of these instruments and the relative stability of interest rates.
We utilize foreign currency forward contracts to hedge certain accounts receivable amounts
that are denominated in Japanese Yen. These contracts are used to reduce the risk associated with
exchange rate movements, as gains and losses on these contracts are intended to offset exchange
losses and gains on underlying exposures. Changes in the fair value of these forward contracts are
recorded immediately in earnings. We do not enter into foreign exchange forward contracts for
speculative or trading purposes. To date, net gains and losses on the above transactions have not
been significant. As of December 31, 2009, we did not have any significant foreign currency
forward contracts outstanding.
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Investments in Marketable Securities
We determine the appropriate classification of investments in marketable securities at the
time of purchase and reevaluate such determination at each balance sheet date. Accretion and
amortization of purchase discounts and premiums are included in interest and other income, net.
Available-for-sale securities are stated at fair value. The net unrealized gains or losses on
available-for-sale securities are reported as a separate component of accumulated other
comprehensive income or loss, net of tax. The specific identification method is used to compute
realized gains and losses on our marketable securities. Gross realized gains and gross realized
losses on our marketable securities were not significant for the years ended December 31, 2009,
2008 and 2007.
As of December 31, 2009, our available-for-sale securities consisted of U.S. government and
government agency debt securities, corporate debt securities and auction rate securities. As of
December 31, 2008, our available-for-sale securities consisted of corporate debt securities and
auction rate securities. In light of the worsening economic climate and volatility in the
financial markets, during the fourth quarter of 2008, we transferred our remaining investments in
corporate debt securities issued by banks and financial institutions from held-to-maturity
securities to available-for-sale securities. As a result of this transfer, we recorded a gross
unrealized loss of $332,000 through other comprehensive income during the fourth quarter of 2008.
As of December 31, 2009, our U.S. government and government agency debt and corporate debt
securities had a weighted contractual maturity of 1.24 years.
We periodically review our marketable securities for impairment. If we conclude that any
of our investments are impaired, we determine whether such impairment is other-than-temporary.
Factors we consider to make such a determination include, among others, the severity of the
impairment, the reason for the decline in value and the potential recovery period. In April 2009,
we adopted accounting guidance which amended the other-than-temporary impairment model for debt
securities. Under the accounting guidance, declines in the fair value of held-to-maturity and
available-for-sale debt securities below their cost that are deemed to be other-than-temporary are
reflected in earnings to the extent the impairment is related to credit losses. The amount of the
impairment related to other factors is recognized in other comprehensive income. During 2007, we
recorded an unrealized temporary loss of $4.7 million (pre-tax) related to our auction rate
securities through other comprehensive income. During the fourth quarter of 2008, we recorded an
unrealized other-than-temporary impairment charge of $15.8 million (pre-tax) to earnings related to
our auction rate securities, which included the reclassification of the unrealized temporary loss
of $4.7 million (pre-tax) recorded through other comprehensive income for the year ended December
31, 2007. During 2008, we also recorded an other-than-temporary impairment charge of $4.4 million
to earnings related to our investments in bonds issued by Lehman Brothers Holdings, Inc. During
2009, we recorded an other-than-temporary impairment charge of $2.8 million (pre-tax) to earnings
related to our illiquid auction rate securities. See Note 5 for additional information.
Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The
allowance for doubtful accounts is based on the best estimate of the amount of probable credit
losses in existing accounts receivable. The allowance for doubtful accounts is determined based on
historical write-off experience, our assessment of current customer information and other relevant
data. We review the allowance for doubtful accounts monthly. Past due balances of 60 days and
over are reviewed individually for collectibility. Account balances are charged off against the
allowance when management believes it is probable the receivable will not be recovered. We do not
have any off-balance-sheet credit exposure related to our customers.
Inventories
Inventories are goods held for sale in the normal course of business. Inventories are stated
at the lower of cost (first-in, first-out) or market. The inventory balance is segregated between
raw materials, work in process (WIP) and finished goods. Raw materials are low level components,
many of which are purchased from vendors, WIP is partially assembled products and finished goods
are products that are ready to be shipped to end customers. Consideration is given to inventory
shipped and received near the end of a period and the transaction is recorded
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when transfer of title occurs. We regularly evaluate inventory for obsolescence and adjust to
net realizable value based on inventory that is obsolete or in excess of current demand.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation of our
computer software and equipment is computed using the straight-line method based upon the estimated
useful lives of the applicable assets, ranging from two to five years. Leasehold improvements are
amortized over the lesser of the lease term or the estimated useful lives of the improvements.
Useful lives are evaluated regularly by management in order to determine recoverability in light of
current technological conditions. Property and equipment also includes the cost of our products
used for research and development and sales and marketing activities, including product
demonstrations for potential customers. Repairs and maintenance are charged to expense as incurred
while renewals and improvements are capitalized. Upon the sale or retirement of property and
equipment, the accounts are relieved of the cost and the related accumulated depreciation, with any
resulting gain or loss included in the statements of operations.
Goodwill, Purchased Intangible and Other Long-Lived Assets
Goodwill is recorded as the difference, if any, between the aggregate consideration paid for
an acquisition and the fair value of the acquired net tangible and intangible assets. Although
goodwill is not amortized, we review our goodwill for impairment annually, or more frequently, if
events or changes in circumstances warrant a review. We completed our annual impairment test of
our single reporting unit in the fourth quarter of 2009 and determined that there was no
impairment.
Acquired intangible assets with finite lives, including purchased technology and customer
relationships, are amortized over their estimated useful lives and reflected in the Amortization of
Intangible Assets line item on our statements of operations. Our acquired intangible assets are
reviewed for impairment whenever an impairment indicator exists. We continually monitor events or
changes in circumstances that could indicate that the carrying amounts of our long-lived assets,
including our intangible assets, may not be recoverable. When such events or changes in
circumstances occur, we assess recoverability by determining whether the carrying value of such
assets will be recovered through the undiscounted expected future cash flows. If the future
undiscounted cash flows are less than the carrying amount of these assets, we recognize an
impairment loss based on the excess of the carrying amount over the fair value of the assets. Fair
value is determined using a discounted cash flow analysis that involves the use of significant
estimates and assumptions, some of which may be based in part on historical experience, forecasted
information and discount rates. During the year ended December 31, 2007, we recorded an impairment
loss related to previously acquired purchased technology and certain other intangible assets (see
Note 7 for additional information). No such impairments were recorded during the years ended
December 31, 2009 and 2008.
Litigation
We are currently involved in certain legal proceedings. We accrue for losses when the loss is
deemed probable and the liability can reasonably be estimated. Where a liability is probable and
there is a range of estimated loss with no best estimate in the range, we record the minimum
estimated liability related to the claim. As additional information becomes available, we assess
the potential liability related to our pending litigation and revise our estimates. See Note 9 for
additional information.
Product Warranty
We generally provide an initial standard warranty (generally for 90-day or 12-month periods)
on our hardware products after product shipment and accrue for estimated future warranty costs
based on actual historical experience and other relevant data, as appropriate, at the time product
revenue is recognized. All product warranty expenses are reflected within cost of sales in the
accompanying consolidated statements of operations. Accrued product warranty costs are included as
a component of accrued expenses in the accompanying consolidated balance sheets.
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Activity in the product warranty liability account for the years presented is as follows (in
thousands):
December 31, | December 31, | December 31, | ||||||||||
2009 | 2008 | 2007 | ||||||||||
Balance at beginning of year |
$ | 933 | $ | 577 | $ | 344 | ||||||
Current year provision |
533 | 619 | 596 | |||||||||
Expenditures |
(544 | ) | (263 | ) | (363 | ) | ||||||
Adjustments relating to pre-existing warranties |
(421 | ) | | | ||||||||
Balance at end of year |
$ | 501 | $ | 933 | $ | 577 | ||||||
Revenue Recognition
Our revenues are principally derived from the sale and support of our test systems. Product
revenues primarily consist of sales of our hardware and software products. Our service revenues
primarily consist of the provision of post contract customer support and maintenance (PCS)
related to the initial period provided with the product purchase (generally for 90-day or 12-month
periods) and separately purchased extended PCS contracts, and to our implied PCS obligations.
Service revenues also include separately purchased extended hardware warranty support for certain
of our products, training and other professional services. PCS on our software products includes
unspecified when and if available software upgrades and customer technical support services. In
some instances our software products may be installed and operated independently from our hardware
products. At other times, our software products are installed on and work with our hardware
products to enhance the functionality of the overall test system. As our software is generally
more than incidental to the sale of our test systems, we recognize revenue by applying software
revenue recognition guidance.
Our test systems are generally fully functional at the time of shipment and do not require us
to perform any significant production, modification, customization or installation after shipment.
As such, revenue from hardware and software product sales to customers, including distributors, is
recognized upon shipment provided that (i) evidence of an arrangement exists, which is typically in
the form of a customer purchase order; (ii) delivery has occurred (i.e., risks and rewards of
ownership have passed to the customer); (iii) the sales price is fixed or determinable; and (iv)
collection is deemed probable.
When sales arrangements involve multiple elements, or multiple products, and we have
vendor-specific objective evidence (VSOE) of fair value for each element in the arrangement, we
recognize revenue based on the relative fair value of all elements within the arrangement. We
determine VSOE based on sales prices charged to customers when the same element is sold separately
or based upon stated substantive PCS renewal rates for certain arrangements. Many of our products,
such as our software products, typically include an initial period (generally 90-day or 12-month
periods) of free PCS, which is not sold separately. Accordingly, we are unable to establish VSOE
for these products.
In cases where VSOE only exists for the undelivered elements such as PCS, we apply the
residual method to recognize revenue. Under the residual method, the total arrangement fee is
allocated first to the undelivered elements, typically PCS, based on their VSOE, and the residual
portion of the fee is allocated to the delivered elements, typically our hardware and software
products, and is recognized as revenue assuming all other revenue recognition criteria as described
above have been met.
If VSOE cannot be determined for all undelivered elements of an arrangement, we defer revenue
until the earlier of (i) the delivery of all elements or (ii) the establishment of VSOE for all
undelivered elements, provided that if the only undelivered element is PCS or a service, the total
arrangement fee is recognized as revenue over the PCS or service term.
Services revenues from our initial and separately purchased extended PCS arrangements
(generally offered for 12-month periods) are recognized ratably over the contractual coverage
period. In addition, for implied PCS obligations we defer revenues from product sales and allocate
these amounts to PCS revenues to account for the
circumstances in which we provide PCS after the expiration of the customers contractual PCS
period. Deferred
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revenues for these implied PCS obligations are recognized ratably over the
implied PCS period, which is typically based on the expected economic life of our software products
of four years. To the extent we determine that implied PCS is no longer being provided after the
expiration of the customers contractual PCS period, the remaining deferred revenue balance related
to the implied PCS obligation is reversed and recognized as revenue in the period of cessation of
the implied PCS obligation. The implied PCS obligation for our software products ceases upon (i)
the license management of our software upgrades and (ii) our determination not to provide PCS after
the expiration of the contractual PCS period. Our implied PCS obligation also ceases for products
that are not license managed provided we have discontinued development, sales activities and
support for those specific products. Our license management system locks a software license to a
specific computer or Ixia hardware product on which our software resides. The system then manages
and controls the provision of software upgrades to ensure that the upgrades are only provided to
customers that are entitled to receive such upgrades during an initial or extended PCS period. For
the years ended December 31, 2009, 2008 and 2007, services revenues related to our implied PCS
obligations approximated $3.9 million, $4.2 million and $3.4 million, respectively. For the years
ended December 31, 2009, 2008 and 2007, $575,000, $0 and $0, respectively, of deferred revenue
relating to implied PCS was reversed and recognized as product revenues as a result of the license
management of certain products and our determination not to provide PCS after the expiration of the
contractual PCS period.
Revenues from our separately purchased extended hardware warranty arrangements are recognized
ratably over the contractual coverage period. We recognize revenues from training and other
professional services at the time the services are provided or completed, as applicable.
We use distributors to complement our direct sales and marketing efforts in certain
international markets. Due to the broad range of features and options available with our hardware
and software products, distributors generally do not stock our products and typically place orders
with us after receiving an order from an end customer. These distributors receive business terms
of sale generally similar to those received by our other customers.
Cost of Revenues
Our cost of revenues related to the sale of our hardware and software products includes
materials, payments to third party contract manufacturers, royalties, and salaries and other
expenses related to our manufacturing, operations, technical support and professional service
personnel. We outsource the majority of our manufacturing operations, and we conduct supply chain
management, quality assurance, documentation control, shipping and some final assembly and testing
at our facility in Calabasas, California. Accordingly, a significant portion of our cost of
revenues related to our products consists of payments to our contract manufacturers. Cost of
revenues related to the provision of services includes salaries and other expenses associated with
customer and technical support services, professional services and the warranty cost of hardware
that is replaced or repaired during the warranty coverage period. Cost of revenues does not
include the amortization of purchased technology related to our acquisitions of certain businesses,
product lines and technologies of $9.2 million, $4.8 million and $5.2 million for the years ended
December 31, 2009, 2008 and 2007, respectively, which are included within our Amortization of
Intangible Assets line item on our consolidated statements of operations.
Research and Development
Research and development expenses consist primarily of salaries and other personnel costs
related to the design, development, testing and enhancement of our products. Costs related to
research and development activities, including those incurred to establish the technological
feasibility of a software product, are expensed as incurred. If technological feasibility is
established, all development costs incurred until general product release are subject to
capitalization. To date, the establishment of technological feasibility of our products and
general release have substantially coincided. As a result, we have not capitalized any development
costs.
Software Developed for Internal Use
We capitalize costs of software, consulting services, hardware and payroll-related costs
incurred to purchase or develop internal-use software. We expense costs incurred during
preliminary project assessment, research and
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development, re-engineering, training and application maintenance phases. To date, internal
costs incurred to develop software for internal use have not been significant.
Advertising
Advertising costs are expensed as incurred. Advertising costs were $1.0 million, $1.0 million
and $912,000 for the years ended December 31, 2009, 2008 and 2007, respectively.
Stock-Based Compensation
Share-based payments, including grants of stock options, restricted stock units and employee stock
purchase rights, are required to be recognized in the financial statements based on the estimated
fair values for accounting purposes on the grant date. We use the Black-Scholes option pricing
model to estimate the fair value for accounting purposes of share-based awards. The determination
of the fair value of share-based awards utilizing the Black-Scholes model is affected by our stock
price and a number of assumptions, including expected volatility, expected life and risk-free
interest rate. The expected life and expected volatility are estimated based on historical and
other data trended into the future. The risk-free interest rate assumption is based on observed
interest rates appropriate for the terms of our share-based awards. Stock-based compensation
expense recognized in our consolidated financial statements is based on awards that are ultimately
expected to vest. The amount of stock-based compensation expense is reduced for estimated
forfeitures based on historical experience as well as future expectations. Forfeitures are
required to be estimated at the time of grant and revised, if necessary, in subsequent periods if
estimated and actual forfeitures differ from these initial estimates. We evaluate the assumptions
used to value share-based awards on a periodic basis. If factors change and we employ different
assumptions, stock-based compensation expense may differ significantly from what we have recorded
in the past. If there are any modifications or cancellations of the underlying unvested
share-based awards, we may be required to accelerate, increase or cancel any remaining unearned
stock-based compensation expense. We attribute the value of stock-based compensation to expense
based on the graded, or accelerated multiple-option, approach.
The balance of gross unrecognized stock-based compensation to be expensed in the periods 2010
through 2013 related to unvested share-based awards as of December 31, 2009 was approximately $15.4
million.
Income Taxes
We account for income taxes using the liability method. Deferred taxes are determined based
on the differences between the financial statement and tax bases of assets and liabilities, using
enacted tax rates in effect for the year in which the differences are expected to reverse.
Valuation allowances are established when necessary to reduce deferred tax assets to the amounts
expected to be realized.
We recognize, in our consolidated financial statements, the impact of tax positions that are
more likely than not to be sustained upon examination based on the technical merits of the
positions.
Earnings (Loss) Per Share
Basic (loss) earnings per share is computed using the weighted-average number of common shares
outstanding during the period. Diluted earnings per share is computed using the weighted-average
number of common shares and dilutive potential common shares outstanding during the period.
Dilutive potential common shares primarily consist of employee stock options.
Foreign Currency Translation and Transactions
Assets and liabilities of non-U.S. subsidiaries that operate in a local currency environment
are translated to U.S. Dollars at exchange rates in effect at the balance sheet date, with the
resulting translation adjustments included as a separate component in accumulated other
comprehensive income (loss), which have not been significant to date. Income and expense accounts
are translated at average exchange rates during the year. Where the U.S. Dollar is the functional
currency, certain balance sheet and income statement accounts are remeasured at historical exchange
rates
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and translation adjustments from the remeasurement of the local currency amounts to U.S.
Dollars are included in interest and other income, net. For the years ended December 31, 2009,
2008 and 2007, gains and losses resulting from foreign currency transactions have not been
significant and are included in interest and other income, net.
Comprehensive Income
Comprehensive income (loss) includes all changes in equity (net assets) during a period from
non-owner sources. Accumulated other comprehensive income (loss) includes unrealized gains and
losses on investments and foreign currency translation adjustments.
Segments
Operating segments are defined as components of an enterprise engaged in business activities
for which discrete financial information is available and regularly reviewed by the chief operating
decision maker (CODM) of the enterprise to make decisions about resources to be allocated to the
segment and to assess its performance. Our CODM is our Chief Executive Officer who reviews
operating results presented on a consolidated basis for the purposes of allocating resources and
evaluating financial performance. Accordingly, we have determined that we operated within one
separately reportable business segment as of, and for the years ended, December 31, 2009, 2008 and
2007. Future changes to our organizational structure or our business, or changes in the way our
CODM manages our business, may result in changes to our reportable segments.
Reclassifications and Presentation
Certain reclassifications have been made to prior period consolidated financial statements to
conform to the current presentation. These reclassifications include (i) presenting acquisition
related costs separately in the statements of operations and (ii) including amortization of
purchased technology within the amortization of intangible assets line item in the accompanying
consolidated statements of operations.
Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (FASB) issued an update of Accounting
Standards Codification (ASC) 105, Generally Accepted Accounting Principles, (GAAP) which
establishes the FASB Accounting Standards Codification, or Codification. The Codification
supersedes all existing accounting standard documents and the Codification is the single source of
authoritative non-governmental U.S. GAAP. All other accounting literature not included in the
Codification is considered non-authoritative. We have conformed these financial statements and
related Notes to the new Codification.
In October 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-13,
Multiple-Deliverable Revenue Arrangements (ASU 2009-13). ASU 2009-13 establishes the
accounting and reporting guidance for arrangements including multiple revenue-generating
activities. ASU 2009-13 provides amendments to the criteria for separating deliverables, and
measuring and allocating arrangement consideration to one or more units of accounting. The
amendments in ASU 2009-13 also establish a selling price hierarchy for determining the selling
price of a deliverable. Significantly enhanced disclosures are also required to provide
information about a vendors multiple-deliverable revenue arrangements, including information about
the nature and terms, significant deliverables, and its performance within arrangements. This
guidance also requires providing information about the significant judgments made and changes to
those judgments and about how the application of the relative selling-price method affects the
timing or amount of revenue recognition. This guidance is effective prospectively for revenue
arrangements entered into or materially modified in the fiscal years beginning on or after June 15,
2010 or on a retrospective basis. Early application is permitted. We expect to adopt ASU 2009-13
on January 1, 2011 and are currently evaluating the impact of adopting ASU 2009-13 on our
consolidated financial position, results of operations and cash flows.
In October 2009, the FASB issued ASU No. 2009-14, Certain Revenue Arrangements That Include
Software Elements (ASU 2009-14). ASU 2009-14 changes the accounting model for revenue
arrangements that include both tangible products and software elements that are essential to the
functionality, and scopes these products out
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of current software revenue guidance. The new guidance includes factors to help companies
determine the software elements that are considered essential to the functionality. The
amendments will now subject software-enabled products to other revenue guidance and disclosure
requirements, such as guidance surrounding revenue arrangements with multiple-deliverables. The
amendments in ASU 2009-14 are effective prospectively for revenue arrangements entered into or
materially modified in the fiscal years beginning on or after June 15, 2010 or on a retrospective
basis. Early application is permitted. We expect to adopt ASU 2009-14 on January 1, 2011 relating
to new revenue arrangements entered into or modified after that date, and are currently evaluating
the impact of adopting ASU 2009-14 on our consolidated financial position, results of operations
and cash flows.
2. Acquisitions
On January 1, 2009, we adopted the new accounting guidance for accounting for business
combinations, which established principles and requirements for how the acquirer of a business
recognizes, measures and discloses in its financial statements the identifiable assets acquired,
the liabilities assumed and any noncontrolling interest in the acquiree. The new accounting
guidance for business combinations also requires that transaction costs be expensed as incurred.
Prior to adoption of the new accounting guidance, transactions costs were recorded as part of the
purchase price. The guidance required prospective application for all acquisitions after January
1, 2009. Our acquisitions of Catapult Communications Corporation (Catapult) on June 23, 2009 and
Agilent Technologies, Inc.s (Agilent) N2X Data Network Testing Product Line business (N2X
Business) on October 30, 2009 have been accounted for in accordance with the new guidance.
Catapult Communications Corporation
On June 23, 2009, we completed our acquisition of all of the outstanding shares of common
stock of Catapult. Catapult provides advanced wireless test systems to network equipment
manufacturers and service providers worldwide. Catapults 3G and 4G wireless networking test
solutions complement our IP performance test systems and service verification platforms. With this
acquisition, we have broadened our product portfolio and are able to provide a single source
solution for testing converged IP services over wireless and wireline networks to new and existing
customers. In addition, we expect to realize operational and cost synergies, leverage the existing
sales channels and product development resources, and utilize the assembled workforce. These
factors, among others, contributed to a purchase price in excess of the estimated fair value of
Catapults net identifiable assets acquired, and, as a result, we have recorded goodwill in
connection with this transaction.
The aggregate consideration totaled $106.6 million and consisted of (i) $104.6 million paid
for the outstanding shares of common stock of Catapult and (ii) $2.0 million paid to holders of
options to purchase Catapult common stock that were cancelled in connection with the acquisition
and that had exercise prices lower than the per share purchase price. For the years ended December
31, 2009 and 2008, acquisition costs related to the Catapult transaction, including integration
activities, were $4.0 million and $741,000, respectively. These acquisition related costs have
been expensed as incurred, and have been included within the Acquisition Related expenses line item
on our consolidated statements of operations. The acquisition was funded from our existing cash
and cash equivalents.
The following table summarizes the preliminary allocation of the purchase price to the
estimated fair values of the assets acquired and liabilities assumed at the date of the Catapult
acquisition (in thousands):
Cash and cash equivalents |
$ | 28,190 | ||
Short-term investments in marketable securities |
8,638 | |||
Accounts receivable |
3,815 | |||
Inventories |
3,950 | |||
Other current assets |
3,331 | |||
Long-term investments in marketable securities |
4,366 | |||
Deferred income taxes (non-current) |
2,490 | |||
Other non-current assets |
2,108 | |||
Identifiable intangible assets |
48,790 | |||
Goodwill |
22,466 | |||
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Total assets acquired |
128,144 | |||
Accounts payable and accrued expenses |
(9,116 | ) | ||
Deferred revenues |
(5,900 | ) | ||
Other liabilities (non-current) |
(6,570 | ) | ||
Net assets acquired |
$ | 106,558 | ||
The preliminary purchase price allocation is pending the receipt of certain tax-related
information, such as the final tax attributes that will be finalized upon the filing of certain
pre-acquisition tax returns.
The identifiable intangible assets of $48.8 million consist of $26.7 million of acquired
technology, $13.4 million of customer relationships, $6.1 million of service agreements, $1.0
million related to a non-compete agreement and $1.6 million of other identifiable intangible
assets. These intangible assets will be amortized using a straight-line method over their expected
useful lives ranging from three to six years. The goodwill recorded in connection with this
transaction is not deductible for income tax purposes.
Agilent Technologies N2X Data Networks Product Line
On October 30, 2009, we completed our acquisition of AgilentsN2X Business. The N2X Business
provides network equipment manufacturers and service providers with solutions to validate the
performance and scalability characteristics of next-generation network equipment for voice, video
and data (multiplay) services. With this acquisition, we expect to be able to broaden our product
portfolio, expand our customer base, accelerate our growth in key markets and capture additional
market share. In addition, we expect to realize operational and cost synergies, leverage the
existing sales channels and product development resources, and utilize the assembled workforce. We
believe that these factors, among others, contributed to a purchase price in excess of the
estimated fair value of the net identifiable assets acquired, and, as a result, we recorded
goodwill in connection with this transaction.
We paid an initial cash purchase price of $44.1 million and assumed certain liabilities of
Agilent relating to the N2X Business. The cash purchase price was subject to a working capital
adjustment and has been subsequently reduced to $43.5 million. As a result, we have recorded a
$527,000 receivable due from Agilent. The aggregate purchase price was funded from our existing
cash and cash equivalents. In return for the consideration paid, we acquired certain assets and
liabilities of Agilents N2X Business, including inventory, accounts receivables, fixed assets,
accounts payable, customer relationships, certain intellectual property rights, and other assets.
The assembled workforce of the N2X Business was comprised of approximately 200 individuals engaged
primarily in research and development and sales activities. As part of the transaction, we also
entered into a Transition Services Agreement with Agilent whereby Agilent will continue to assist
in the operation of certain portions of the N2X Business for the first 2 to 4 months of 2010 as we
work to transition the employees and operations to Ixia. For the year ended December 31, 2009,
acquisition costs related to this transaction totaled $2.2 million. These acquisition costs have
been expensed as incurred, and have been included within the Acquisition Related expenses line item
on our consolidated statements of operations.
The following table summarizes the preliminary allocation of the purchase price to the
estimated fair values of the assets acquired and liabilities assumed at the date of the N2X
Business acquisition (in thousands):
Accounts receivable |
$ | 6,130 | ||
Inventories |
1,231 | |||
Property and equipment |
1,439 | |||
Identifiable intangible assets |
21,800 | |||
Goodwill |
20,927 | |||
Total assets acquired |
51,527 | |||
Accounts payable and accrued expenses |
(2,757 | ) | ||
Deferred revenues |
(5,223 | ) | ||
Net assets acquired |
$ | 43,547 | ||
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The preliminary purchase price allocation is based on a preliminary valuation of the assets
acquired and liabilities assumed, and our estimates and assumptions are subject to change within
the purchase price allocation period as valuations are finalized.
The identifiable intangible assets of $21.8 million consist of $10.4 million of acquired
technology, $10.0 million of customer relationships, $0.4 million related to a non-compete
agreement and $1.0 million related to order backlog. These intangible assets will be amortized
using a straight-line method over their expected economic lives ranging from six months to six
years. We currently estimate that approximately $8.2 million of the goodwill recorded in
connection with this transaction will be tax deductible for income tax purposes.
Pro Forma and Post Acquisition Results
The following table summarizes the unaudited pro forma total revenues and net loss of the
combined entities had the acquisitions of Catapult and the N2X Business occurred on January 1, 2009
and 2008, respectively (in thousands):
Year Ended | ||||||||
December 31, | ||||||||
2009 | 2008 | |||||||
(Pro forma) | (Pro forma) | |||||||
Total revenues |
$ | 229,978 | $ | 283,616 | ||||
Net loss |
(67,625 | ) | (22,928 | ) |
The combined results in the table above have been prepared for comparative purposes only and
include acquisition related adjustments for, among others items, amortization of identifiable
intangible assets and reductions in revenues related to the estimated fair value adjustment to
deferred revenues.
Since the acquisition dates, the results of Catapult and the N2X Business have been included
in our consolidated financial statements. Included in our consolidated results of operations for
the year ended December 31, 2009 are revenues of $24.1 million and a loss before income taxes of
approximately $11.3 million related to these acquisitions. The combined results, as well as those
of Catapult and the N2X Business included in our results subsequent to the acquisition date, do not
purport to be indicative of the results of operations which would have resulted had the acquisition
been effective at the beginning of the applicable periods noted above, or the future results of
operations of the combined entity.
3. Restructuring Costs
During the second quarter of 2009 and prior to the acquisition of Catapult, our management
approved, committed to and initiated a plan to restructure our operations (Ixia Restructuring).
The Ixia Restructuring included a net reduction in force of approximately 80 positions, which
represented approximately 10% of our worldwide work force, including contractors, prior to the
announcement of the restructuring. In 2009, we recognized restructuring costs related to our Ixia
Restructuring of approximately $1.1 million, which was recorded to the Restructuring line item
within our consolidated statements of operations. These costs primarily related to one-time
employee termination benefits consisting of severance and other related costs. The restructuring
was substantially completed during the third quarter of 2009, and as of December 31, 2009, we had
approximately $42,000 of liability reserved related to the Ixia Restructuring.
During the third quarter of 2009, our management approved, committed to and initiated a plan
to restructure our operations in light of our acquisition of Catapult (Catapult Restructuring).
The Catapult Restructuring included a net reduction in force of approximately 45 positions, which
represented approximately 4% of our worldwide work force, including contractors, at the beginning
of the third quarter of 2009. In 2009, we recognized restructuring costs related to our Catapult
Restructuring of approximately $3.2 million related to one-time employee termination benefits
consisting of severance and other related costs, as well as approximately $354,000 of
facility-related costs
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associated with the consolidation of certain research and development resources, which were
recorded to the Restructuring line item within our consolidated statements of operations. The
restructuring was substantially completed during the fourth quarter of 2009, and as of December 31,
2009, we had approximately $837,000 of liability reserved related to the Catapult Restructuring.
Activity and reserve balances for restructuring charges are as follows (in thousands):
Ixia | Catapult | |||||||||||
Total | Restructuring | Restructuring | ||||||||||
Reserve balances at January 1, 2009 |
$ | | $ | | $ | | ||||||
Charges |
4,637 | 1,120 | 3,517 | |||||||||
Payments |
(3,662 | ) | (1,078 | ) | (2,584 | ) | ||||||
Non-cash items |
(96 | ) | | (96 | ) | |||||||
Reserve balances at December 31, 2009 |
$ | 879 | $ | 42 | $ | 837 | ||||||
In January 2010, our management approved, committed to and initiated a plan to restructure our
operations in light of our acquisition of the N2X Business in the fourth quarter of 2010 (N2X
Restructuring). The N2X Restructuring includes a net reduction in force of approximately 80
positions, which represented approximately 7% of our worldwide work force, including contractors,
at the end of the fourth quarter of 2009.
4. Concentrations
Credit Risk
Financial instruments that subject us to concentrations of credit risk consist primarily of
cash and cash equivalents, investments and trade accounts receivable. We maintain our cash and
cash equivalents with reputable financial institutions, and at times, cash balances may be in
excess of FDIC insurance limits. We extend differing levels of credit to customers, do not
generally require collateral, and maintain reserves for potential credit losses based upon the
expected collectibility of accounts receivable.
The continuing uncertain conditions in the financial and credit markets have reduced our
ability to liquidate our auction rate securities that we have classified as long-term investments
in marketable securities on our balance sheet. Of our total cash and investments balance of $79.0
million as of December 31, 2009, $5.7 million consists of these illiquid auction rate securities.
See Note 5 for additional information.
Significant Customer
For the years ended December 31, 2009, 2008 and 2007, only one customer comprised more than
10% of total revenues as follows (in thousands, except percentages):
Year Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Amount of total revenues |
$ | 27,792 | $ | 36,857 | $ | 41,655 | ||||||
As a percentage of total revenues |
15.6 | % | 21.0 | % | 23.9 | % |
As of December 31, 2009 and 2008, we had receivable balances from the customer approximating
14.2% and 13.9%, respectively, of total accounts receivable.
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International Data
For the years ended December 31, 2009, 2008 and 2007, total international revenues based on
customer location consisted of the following (in thousands, except percentages):
Year Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Amount of total revenues |
$ | 76,325 | $ | 63,045 | $ | 60,946 | ||||||
As a percentage of total revenues |
42.9 | % | 35.8 | % | 35.0 | % |
As of December 31, 2009 and 2008, our property and equipment were geographically located as
follows (in thousands):
As of December 31, | ||||||||
2009 | 2008 | |||||||
United States |
$ | 10,874 | $ | 11,361 | ||||
Romania |
2,647 | 3,419 | ||||||
India |
2,506 | 2,761 | ||||||
Other |
2,666 | 965 | ||||||
$ | 18,693 | $ | 18,506 | |||||
Sources of Supply
We outsource the manufacture, assembly and testing of printed circuit board assemblies,
certain interface cards and certain chassis to a limited number of third party contract
manufacturers and assembly companies. We cannot be certain that we will be able to effectively
manage or retain our contract manufacturers, or that these contract manufacturers will continue to
operate as going concerns or to meet our future requirements for timely delivery of products of
sufficient quality and quantity. We and our contract manufacturers currently buy a number of key
components of our products from a limited number of suppliers, which are manufactured by a limited
number of companies. Although we believe that other contract manufacturers and suppliers could
provide similar services and components on comparable terms, a change in one of our key contract
manufacturers or suppliers could cause a delay in manufacturing, additional cost inefficiencies and
a possible loss of sales, which could adversely affect our consolidated operating results.
5. Selected Balance Sheet Data
Accounts Receivable, Net
Accounts receivable, net consisted of the following (in thousands):
December 31, | December 31, | |||||||
2009 | 2008 | |||||||
Trade accounts receivable |
$ | 56,419 | $ | 34,765 | ||||
Allowance for doubtful accounts |
(654 | ) | (764 | ) | ||||
$ | 55,765 | $ | 34,001 | |||||
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Activity in the allowance for doubtful accounts during the years presented is as follows (in
thousands):
December 31, | December 31, | December 31, | ||||||||||
2009 | 2008 | 2007 | ||||||||||
Balance at beginning of year |
$ | 764 | $ | 614 | $ | 1,174 | ||||||
Charged to cost and expenses |
372 | 300 | 300 | |||||||||
Reversal of cost and expenses |
| | (60 | ) | ||||||||
Deductions |
(482 | ) | (150 | ) | (800 | ) | ||||||
Balance at end of year |
$ | 654 | $ | 764 | $ | 614 | ||||||
Investments in Marketable Securities
Investments in marketable securities as of December 31, 2009 consisted of the following (in
thousands):
Amortized | Fair | |||||||
Cost | Value | |||||||
Available-for-sale short-term: |
||||||||
U.S. government and agency debt securities |
$ | 5,711 | $ | 5,713 | ||||
Corporate debt securities |
4,584 | 4,624 | ||||||
10,295 | 10,337 | |||||||
Available-for-sale long-term: |
||||||||
U.S. government and agency debt securities |
34,534 | 34,673 | ||||||
Corporate debt securities |
12,605 | 13,236 | ||||||
Auction rate securities |
3,823 | 5,673 | ||||||
50,962 | 53,582 | |||||||
$ | 61,257 | $ | 63,919 | |||||
Investments in marketable securities as of December 31, 2008 consisted of the following (in
thousands):
Amortized | Fair | |||||||
Cost | Value | |||||||
Available-for-sale short-term: |
||||||||
Corporate debt securities |
$ | 10,182 | $ | 9,850 | ||||
Available-for-sale long-term: |
||||||||
Auction rate securities |
3,211 | 3,211 | ||||||
Corporate debt securities |
446 | 446 | ||||||
3,657 | 3,657 | |||||||
$ | 13,839 | $ | 13,507 | |||||
During the latter half of 2007, certain of our auction rate securities failed to auction due
to sell orders exceeding buy orders. Of our total cash and investments balance of $79.0 million as
of December 31, 2009, we currently hold illiquid auction rate securities with an estimated fair
value of $5.7 million ($22.4 million at par value or original cost).
During the fourth quarter of 2008, Ambac Assurance Corporation (Ambac) exercised a put
option that effectively converted our auction rate debt securities with a par value of $15.0
million to Ambac Assurance Auction Market Preferred Shares (AMPS). The AMPS are not registered;
and provide holders with when, and if declared, noncumulative dividends and a liquidation
preference in the event of a liquidation or dissolution of Ambac provided
there are available funds to be distributed after creditor obligations have been met. The
AMPS do not have a conversion feature, mandatory redemption option or maturity date.
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We also hold auction rate securities with a par value of $4.0 million that were issued by a
trust created by a bank (the Trust) and mature in December 2017. The Trust is collateralized by
a bank deposit note and includes a pool of credit default swaps that were sold by the Trust, which
exposes the collateral to claims in the event of default of any of the related underlying bonds.
During the fourth quarter of 2008, the credit ratings of our auction rate securities issued by
Ambac and the Trust were significantly downgraded to as low as Ba1 (Moodys Investor Service) and
BBB (Standard & Poors), respectively. In light of the above and impact of the deepening financial
crisis on banks and financial institutions, we believed that our auction rate security investments
were other-than-temporarily impaired as it was probable that we would not collect the original
principal amounts and the monthly interest or dividend payments. Accordingly, during the fourth
quarter of 2008, we recorded an unrealized other-than-temporary impairment charge of $15.8 million
(pre-tax) to earnings related to our auction rate securities, which included the reclassification
of the unrealized temporary loss of $4.7 million (pre-tax) recorded through other comprehensive
income for the year ended December 31, 2007.
During the first quarter of 2009, the estimated fair values of our auction rate securities
issued by Ambac and the Trust declined substantially, and due to the ongoing financial crisis and
the relatively low credit ratings of our auction rate securities, among other factors, we believed
that our auction rate securities were other-than-temporarily impaired. Accordingly, during the
first quarter of 2009, we recorded an additional other-than-temporary impairment charge of $1.4
million (pre-tax) to earnings related to our auction rate securities issued by Ambac and the Trust.
During the third quarter of 2009, Standard & Poors Ratings Services downgraded the credit rating
of our auction rate securities issued by Ambac from B to C. Ambac Assurance also discontinued
paying monthly dividends on the AMPS effective August 1, 2009. Accordingly, an additional
other-than-temporary impairment charge of $1.4 million (pre-tax) was recorded in the third quarter
of 2009 related to our auction rate securities issued by Ambac.
As a result of our acquisition of Catapult in June 2009, we acquired additional illiquid
auction rate securities with an estimated aggregate fair value of $4.4 million at the acquisition
date. Since the date of acquisition, we have been able to sell nearly $1.0 million (fair value at
acquisition date) of these securities at a minimal loss. The remaining auction rate securities
that were acquired as part of the Catapult transaction represent interests in student loans,
closed-end mutual fund preferreds and municipal issues.
Based on the general lack of liquidity for our auction rate security portfolio as of December
31, 2009, we continue to classify these investments as long-term on our consolidated balance sheet.
We also hold investments in corporate debt securities that could be subject to default by the
issuer or could suffer declines in fair value that become other-than-temporary. We currently hold
bonds issued by Lehman Brothers Holdings, Inc. (LBHI) with a face value of $5.0 million and
maturity date in July 2010. In September 2008, LBHI filed for bankruptcy. As a result, the credit
rating of our LBHI bonds was significantly downgraded and LBHI ceased making interest payments on
the bonds. We believe that our investment in the LBHI bonds is other-than-temporarily impaired as
it is probable that we will not collect the total interest and principal amounts due according to
the contractual terms of the bonds. For the year ended December 31, 2008, we recorded pre-tax
other-than-temporary impairment charges of $4.4 million (i.e., the difference between our then
carrying value and estimated fair value of our LBHI bonds) to earnings.
It is possible that we could recognize future impairment charges on our auction rate
securities, LBHI bonds or our other investment securities we currently own if future events, new
information or the passage of time cause us to determine that a decline in our carrying value is
other-than-temporary. We will continue to review and analyze these securities each reporting
period.
In light of the worsening economic climate and volatility in the financial markets, during the
fourth quarter of 2008, we transferred our remaining investments in corporate debt securities
issued by banks and financial
institutions from held-to-maturity securities to available-for-sale securities. As a result
of this transfer, we recorded a gross unrealized loss of $332,000 through other comprehensive
income during the fourth quarter of 2008.
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Inventories
Inventories consisted of the following (in thousands):
December 31, | December 31, | |||||||
2009 | 2008 | |||||||
Raw materials |
$ | 3,674 | $ | 1,987 | ||||
Work in process |
4,731 | 4,932 | ||||||
Finished goods |
6,136 | 8,047 | ||||||
$ | 14,541 | $ | 14,966 | |||||
Property and Equipment, Net
Property and equipment, net consisted of the following (dollars in thousands):
December 31, | December 31, | |||||||||||
Useful Life | 2009 | 2008 | ||||||||||
(in years) | ||||||||||||
Computer equipment |
3 | $ | 10,178 | $ | 8,580 | |||||||
Computer software |
3-5 | 9,725 | 8,601 | |||||||||
Demonstration equipment |
2 | 13,382 | 12,592 | |||||||||
Development equipment |
5 | 16,872 | 15,466 | |||||||||
Furniture and other equipment |
5 | 16,751 | 15,216 | |||||||||
Leasehold improvements |
5-10 | 6,645 | 4,255 | |||||||||
73,553 | 64,710 | |||||||||||
Accumulated depreciation |
(54,860 | ) | (46,204 | ) | ||||||||
$ | 18,693 | $ | 18,506 | |||||||||
Accrued Expenses
Accrued expenses consisted of the following (in thousands):
December 31, | December 31, | |||||||
2009 | 2008 | |||||||
Accrued vacation |
$ | 4,990 | $ | 3,797 | ||||
Accrued payroll |
3,457 | 2,682 | ||||||
Accrued legal and professional fees |
2,395 | 1,251 | ||||||
Accrued commissions |
1,203 | 1,524 | ||||||
Due to third parties for technology and certain assets |
949 | 1,796 | ||||||
Accrued bonuses |
915 | 2,509 | ||||||
Accrued property and sales tax payable |
734 | 811 | ||||||
Accrued royalties |
727 | 14 | ||||||
Employee stock purchase plan payroll deductions |
689 | 687 | ||||||
Accrued warranty |
501 | 933 | ||||||
Deferred rent |
412 | 357 | ||||||
Accrued travel |
349 | 479 | ||||||
Other |
3,932 | 1,983 | ||||||
$ | 21,253 | $ | 18,823 | |||||
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6. | Fair Value Measurements |
Fair value is defined as the price that would be received to sell an asset or paid to transfer
a liability in the principal or most advantageous market for an asset or liability in an orderly
transaction between market participants at the measurement date. The hierarchy below lists three
levels of fair value based on the extent to which inputs used in measuring fair value are
observable in the market. We categorize each of our fair value measurements in one of these three
levels based on the lowest level input that is significant to the fair value measurement in its
entirety. These levels are:
Level 1.
|
Observable inputs such as quoted prices in active markets; | |
Level 2.
|
Inputs, other than the quoted prices 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 reporting entity to develop its own assumptions. |
Financial assets carried at fair value as of December 31, 2009 and 2008 are classified in the
table below in one of the three categories described above (in thousands):
December 31, 2009 | December 31, 2008 | |||||||||||||||||||||||||||||||
Quoted | ||||||||||||||||||||||||||||||||
Quoted Prices | Prices in | |||||||||||||||||||||||||||||||
in Active | Significant | Active | Significant | |||||||||||||||||||||||||||||
Markets for | Other | Significant | Markets for | Other | Significant | |||||||||||||||||||||||||||
Identical | Observable | Unobservable | Identical | Observable | Unobservable | |||||||||||||||||||||||||||
Assets | Inputs | Inputs | Assets | Inputs | Inputs | |||||||||||||||||||||||||||
Fair Value | (Level 1) | (Level 2) | (Level 3) | Fair Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||||||||||||||
Cash equivalents:(1) |
||||||||||||||||||||||||||||||||
Money market funds |
$ | 241 | $ | 241 | $ | | $ | | $ | 185,858 | $ | 185,858 | $ | | $ | | ||||||||||||||||
Short-term investments:(1) |
||||||||||||||||||||||||||||||||
U.S. Treasury, government and agency
debt securities |
5,713 | | 5,713 | | | | | | ||||||||||||||||||||||||
Corporate debt securities |
4,624 | | 4,624 | | 9,850 | | 9,850 | | ||||||||||||||||||||||||
Long-term investments: |
||||||||||||||||||||||||||||||||
U.S. Treasury, government and agency
debt securities |
34,673 | | 34,673 | | | | | | ||||||||||||||||||||||||
Corporate debt securities |
13,236 | | 13,236 | | 446 | | 446 | | ||||||||||||||||||||||||
Auction rate securities (2) |
5,673 | | | 5,673 | 3,211 | | | 3,211 | ||||||||||||||||||||||||
Total financial assets |
$ | 64,160 | $ | 241 | $ | 58,246 | $ | 5,673 | $ | 199,365 | $ | 185,858 | $ | 10,296 | $ | 3,211 | ||||||||||||||||
(1) | To estimate the fair value of our money market funds, U.S. government and agency debt securities, and corporate debt securities, we use the estimated fair value per our investment brokerage/custodial statements. To the extent deemed necessary, we may also obtain non-binding market quotes to corroborate the estimated fair values reflected in our investment brokerage/custodial statements. | |
(2) | Given the disruption in the auction process described in Note 5, there is no longer an actively quoted market price for these securities. Accordingly, we utilized models to estimate the fair values of these auction rate securities based on, among other items: (i) the underlying structure of each security; (ii) the present value of future principal, interest and/or dividend payments discounted at the appropriate rate considering the market rate and conditions; (iii) consideration of the probabilities of default, auction failure, or repurchase at par for each period; and (iv) credit quality and estimates of the recovery rates in the event of default for each security. These estimated fair values could change significantly based on, among other events: (i) a further deterioration in market conditions; (ii) further declines in the credit quality of our auction rate securities or of the issuers of our auction rate securities; or (iii) a cessation of dividend payments or default on interest or principal payments by the issuer of the securities. |
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The following table summarizes the activity for the years ended December 31, 2009 and
2008 for those financial assets (primarily our auction rate securities) where fair value
measurements are estimated utilizing Level 3 inputs (in thousands):
Year Ended December 31, | ||||||||
2009 | 2008 | |||||||
Beginning balance |
$ | 3,211 | $ | 14,345 | ||||
Unrealized gain recorded in other comprehensive income |
1,849 | | ||||||
Unrealized loss recorded in earnings (See Note 5) |
(2,761 | ) | (11,134 | ) | ||||
Settlements |
(992 | ) | | |||||
Additions from Catapult acquisition (See Note 2) |
4,366 | | ||||||
Ending balance |
$ | 5,673 | $ | 3,211 | ||||
Unrealized losses recorded in earnings for Level 3 assets
still held at December 31 |
$ | (2,761 | ) | $ | (11,134 | ) | ||
On April 1, 2009, we adopted accounting guidance for estimating fair value when the volume and
level of activity for the asset or liability have decreased significantly and in identifying
circumstances that indicate a transaction is not orderly. This guidance is necessary to maintain
the overall objective of fair value measurements, which is that fair value is the price that would
be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date under current market conditions. The adoption of this
accounting guidance had no impact on our financial position or results of operations.
On April 1, 2009, we adopted accounting guidance which amended the other-than-temporary
impairment model for debt securities. Under the accounting guidance, declines in the fair value of
held-to-maturity and available-for-sale debt securities below their cost that are deemed to be
other-than-temporary are reflected in earnings to the extent the impairment is related to credit
losses. The amount of the impairment related to other factors is recognized in other comprehensive
income.
Effective for the second quarter of 2009, we adopted accounting guidance which required
disclosures about the fair value of financial instruments in interim as well as in annual financial
statements. Our financial instruments, including cash and cash equivalents, accounts receivable,
accounts payable and other liabilities, are carried at cost, which approximates their fair values
because of the short-term maturity of these instruments and the relative stability of interest
rates.
7. | Goodwill and Other Intangible Assets |
The following table presents 2009 details of our total purchased intangible assets (in
thousands):
Weighted | ||||||||||||||||
Average | Accumulated | |||||||||||||||
Useful Life | Gross | Amortization | Net | |||||||||||||
(in years) | ||||||||||||||||
Goodwill |
$ | 60,121 | $ | | $ | 60,121 | ||||||||||
Other intangible assets: |
||||||||||||||||
Technology |
5.4 | $ | 70,742 | $ | (33,031 | ) | $ | 37,711 |
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Weighted | ||||||||||||||||
Average | Accumulated | |||||||||||||||
Useful Life | Gross | Amortization | Net | |||||||||||||
(in years) | ||||||||||||||||
Customer relationships |
5.9 | 24,910 | (2,943 | ) | 21,967 | |||||||||||
Service agreements |
4.7 | 6,770 | (1,144 | ) | 5,626 | |||||||||||
Non-compete |
3.8 | 2,338 | (1,059 | ) | 1,279 | |||||||||||
Trademark |
4.7 | 1,576 | (783 | ) | 793 | |||||||||||
Workforce |
4.0 | 395 | (395 | ) | | |||||||||||
Other |
0.8 | 4,038 | (2,282 | ) | 1,756 | |||||||||||
$ | 110,769 | $ | (41,637 | ) | $ | 69,132 | ||||||||||
The following table presents 2008 details of our total purchased intangible assets (in
thousands):
Weighted | ||||||||||||||||
Average | Accumulated | |||||||||||||||
Useful Life | Gross | Amortization | Net | |||||||||||||
(in years) | ||||||||||||||||
Goodwill |
$ | 16,728 | $ | | $ | 16,728 | ||||||||||
Other intangible assets: |
||||||||||||||||
Technology |
6.0 | $ | 35,633 | $ | (26,341 | ) | $ | 9,292 | ||||||||
Non-compete |
2.4 | 937 | (937 | ) | | |||||||||||
Trademark |
7.0 | 676 | (526 | ) | 150 | |||||||||||
Workforce |
4.0 | 395 | (395 | ) | | |||||||||||
Customer relationships |
5.1 | 1,511 | (1,511 | ) | | |||||||||||
Other |
1.4 | 3,072 | (1,922 | ) | 1,150 | |||||||||||
$ | 42,224 | $ | (31,632 | ) | $ | 10,592 | ||||||||||
In 2007, we recognized an impairment charge of $1.5 million consisting of $746,000 of
purchased technology and $765,000 of certain other intangible assets related to the wireless LAN
testing tools acquired as part of Communication Machinery Corporation in July 2005. Also, in
2007, we recognized an impairment charge of $1.8 million consisting of $700,000 of purchased
technology and $1.1 million of certain other intangible assets related to the acquisition of the
mobile video test product line from Dilithium Networks in January 2006. The impairment charges
resulted from lower than expected current and projected operating profits for the applicable
products and our decision to curtail sales and development efforts related to these products. We
determined that the future expected undiscounted cash flows were less than the carrying value of
the affected identifiable intangible assets, which indicated that an impairment existed. To
measure the impairment, we used the discounted cash flow approach to reduce the carrying value of
the affected assets to fair value, which resulted in the $3.3 million impairment of the above noted
purchased technology and other identifiable intangible assets.
The estimated future amortization expense of purchased intangible assets as of December 31,
2009 is as follows (in thousands):
2010 |
$ | 17,330 | ||
2011 |
14,496 | |||
2012 |
14,003 | |||
2013 |
13,153 | |||
2014 |
7,267 | |||
Thereafter |
2,883 | |||
$ | 69,132 | |||
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8. | Income Taxes |
The components of (loss) income before income taxes were (in thousands):
Year Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
U.S. |
$ | (33,246 | ) | $ | (19,992 | ) | $ | 5,761 | ||||
Foreign |
5,439 | 4,118 | 3,364 | |||||||||
$ | (27,807 | ) | $ | (15,874 | ) | $ | 9,125 | |||||
Income tax expense consisted of the following (in thousands):
Year Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Current: |
||||||||||||
Federal |
$ | (3,549 | ) | $ | 856 | $ | 3,123 | |||||
State |
670 | 594 | (268 | ) | ||||||||
Foreign |
1,692 | 1,025 | 741 | |||||||||
Deferred: |
||||||||||||
Federal |
17,112 | (1,171 | ) | (543 | ) | |||||||
State |
558 | (1,418 | ) | (1,483 | ) | |||||||
Foreign |
(87 | ) | 135 | 549 | ||||||||
Income tax expense |
$ | 16,396 | $ | 21 | $ | 2,119 | ||||||
The net effective income tax rate differed from the federal statutory income tax rate as
follows (dollars in thousands):
Year Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Federal statutory expense |
$ | (9,733 | ) | $ | (5,556 | ) | $ | 3,194 | ||||
State taxes, net of federal benefit |
(2,017 | ) | (1,393 | ) | (1,138 | ) | ||||||
Research and development credits |
(1,292 | ) | (813 | ) | (625 | ) | ||||||
Stock-based compensation |
633 | 543 | 809 | |||||||||
Domestic production activities deduction |
| (138 | ) | (276 | ) | |||||||
Foreign tax rate differential |
(298 | ) | (282 | ) | 113 | |||||||
Acquisition related costs |
702 | | | |||||||||
Valuation allowance |
28,078 | 7,942 | | |||||||||
Other |
323 | (282 | ) | 42 | ||||||||
Income tax expense |
$ | 16,396 | $ | 21 | $ | 2,119 | ||||||
Net effective income tax rate |
(59.0 | )% | (0.1 | )% | 23.2 | % |
The primary components of temporary differences that gave rise to deferred taxes were as
follows (in thousands):
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December 31, | December 31, | |||||||
2009 | 2008 | |||||||
Deferred tax assets: |
||||||||
Allowance for doubtful accounts |
$ | 307 | $ | 297 | ||||
Research and development credit carryforward |
10,732 | 5,380 | ||||||
Foreign tax credit carryforward |
1,418 | | ||||||
Deferred revenue |
3,078 | 4,168 | ||||||
Stock-based compensation |
8,635 | 6,385 | ||||||
Inventory adjustments |
2,796 | 1,876 | ||||||
Net operating loss carryforward |
6,035 | 445 | ||||||
Unrealized loss on investments |
7,913 | 8,004 | ||||||
Accrued liabilities and other |
2,986 | 2,713 | ||||||
43,900 | 29,268 | |||||||
Valuation allowance |
(36,150 | ) | (8,072 | ) | ||||
7,750 | 21,196 | |||||||
Deferred tax liabilities: |
||||||||
Depreciation and amortization |
(8,020 | ) | (1,396 | ) | ||||
Net deferred tax assets |
$ | (270 | ) | $ | 19,800 | |||
The realizability of deferred income tax assets is based on a more likely than not standard.
If it is determined that it is more likely than not that deferred income tax assets will not be
realized, a valuation allowance must be established against the deferred income tax assets.
Realization of our deferred tax assets is dependent primarily on the generation of future
taxable income. In considering the need for a valuation allowance we consider our historical as
well as future projected taxable income along with other positive and negative evidence in
assessing the realizability of our deferred tax assets.
During 2009, management evaluated the need for a full valuation allowance, net of federal
benefit, of $36.2 million against our net U.S. deferred tax assets and concluded that a full
valuation allowance against our net U.S. deferred tax assets was warranted in 2009 due to, among
other reasons, (i) the recently realized cumulative accounting losses sustained in the U.S., (ii)
the recently completed three-year projections in which we expect to realize additional accounting
losses in the U.S., (iii) the determination that we would be in a U.S. taxable loss position in
2009 and (iv) our uncertainty with respect to generating future U.S. taxable income in the near
term given our recently completed U.S. projections and a number of inherent uncertainties such as
the future level of U.S. tax deductions from our share-based awards.
During 2008, we recorded an $8.1 million valuation allowance to fully offset the deferred tax
assets primarily related to the unrealized loss recorded as a result of the impairment of certain
marketable securities (see also Note 5).
For the years ended December 31, 2009 and 2008, we recorded changes in our valuation allowance
of $28.1 million and $8.1 million, respectively. No valuation allowance was recorded as of
December 31, 2007.
As of December 31, 2009, we have gross federal and state research and development credit
carryforwards of approximately $6.5 million and $12.1 million, respectively. The federal
carryovers begin to expire 2021, while the state carryovers have an indefinite carryover period.
As of December 31, 2009, we have gross federal foreign tax credit carryforwards of
approximately $1.4 million which begin to expire 2013.
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At December 31, 2009, we have federal and state net operating loss (NOLs) carryforwards of
approximately $18.8 million and $35.4 million, respectively. The federal NOLs expire beginning
2022, and the state NOLs begin to expire 2012. Section 382 of the Internal Revenue Code imposes an
annual limitation on the utilization of net operating loss carryforwards related to acquired
corporations based on a statutory rate of return (usually the applicable federal funds rate as
defined in the Internal Revenue Code) and the value of the corporation at the time of a change in
ownership as defined by Section 382. We estimate that our annual limitation under Section 382 of
the Internal Revenue Code is approximately $5.1 million.
Cumulative undistributed earnings of foreign subsidiaries for which no deferred income taxes
have been provided approximated $48.7 million and $6.0 million at December 31, 2009 and December
31, 2008, respectively. Of the $48.7 million of undistributed earnings at December 31, 2009, $40.6
million related to our recent acquisition of Catapult. Deferred income taxes on these earnings
have not been provided as these amounts are considered to be permanent in duration.
At December 31, 2009, we had gross unrecognized tax benefits of approximately $10.6 million.
Of this total, approximately $5.0 million (net of the federal benefit on state issues) would affect
our effective tax rate if recognized. We classify liabilities for unrecognized tax benefits for
which we do not anticipate payment or receipt of cash within one year in noncurrent other
liabilities.
We recognize interest and penalties related to uncertain tax positions in income tax expense.
During the years ended December 31, 2009, 2008, and 2007, we recognized approximately $101,000,
$25,000, and $8,000, net of federal benefit, of interest within our statements of operations. We
had accrued interest, net of federal benefit, of $1.3 million and $34,000 at December 31, 2009 and
December 31, 2008, respectively. Approximately $1.2 million of the total interest accrued at
December 31, 2009 related to uncertain tax positions associated with the recent acquisition of
Catapult.
We file income tax returns in the U.S. federal jurisdiction and in various state and foreign
jurisdictions. With few minor exceptions, we are no longer subject to U.S. federal, state and
local, or non-U.S. income tax examinations by tax authorities in material jurisdictions for the tax
years ended prior to 2005.
A reconciliation of the beginning and ending amounts of gross unrecognized tax benefits is as
follows (in thousands):
2009 | 2008 | 2007 | ||||||||||
Unrecognized Tax Benefits beginning balance |
$ | 4,320 | $ | 4,367 | $ | 4,848 | ||||||
Acquired unrecognized tax benefits |
5,655 | | | |||||||||
Gross increases Tax positions taken in prior period |
6 | 18 | 164 | |||||||||
Gross decreases Tax positions taken in prior period |
| (13 | ) | (1,183 | ) | |||||||
Gross increases Tax positions taken in current
period |
878 | 617 | 707 | |||||||||
Lapse of statute of limitations |
(230 | ) | (669 | ) | (169 | ) | ||||||
Unrecognized Tax Benefits ending balance |
$ | 10,629 | $ | 4,320 | $ | 4,367 | ||||||
At December 31, 2009, we expect approximately $1.0 million in reductions to our recorded
liability for unrecognized tax benefits to occur over the next 12 months.
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9. | Commitments and Contingencies |
We lease our facilities under noncancelable operating leases for varying periods through
February 2016, excluding options to renew. The following are the future minimum commitments under
these leases (in thousands):
Year Ending | ||||
December 31, | ||||
2010 |
$ | 7,025 | ||
2011 |
4,692 | |||
2012 |
4,172 | |||
2013 |
1,896 | |||
2014 |
243 | |||
Thereafter |
262 | |||
$ | 18,290 | |||
Rent expense for the years ended December 31, 2009, 2008 and 2007 was approximately $6.5
million, $6.1 million and $5.2 million, respectively.
Litigation
Ixia v. Charles Bettinelli and IneoQuest Technologies, Inc. In October 2005, Ixia filed a
complaint against its former employee, Charles Bettinelli, and his then-employer, IneoQuest
Technologies, Inc. (IneoQuest) in Los Angeles County Superior Court. Ixias complaint alleged
breach of contract, misappropriation of trade secrets, intentional interference with contract and
prospective business advantage, unfair competition, fraud, and violation of California Penal Code
Section 502 (computer data access and fraud act). IneoQuest filed a motion for summary judgment in
June 2008. In October 2008, IneoQuests motion for summary judgment was denied in its entirety,
and the matter went to trial in September 2009. Ixia sought monetary damages in excess of $10
million in addition to equitable relief. After a three-week trial, the jury returned a verdict in
mid-October 2009 finding that (i) Mr. Bettinelli breached his non-disclosure agreement with Ixia;
and (ii) both IneoQuest and Mr. Bettinelli misappropriated Ixias trade secrets and used Ixias
trade secret customer contact information. Notwithstanding the jurys finding of wrongdoing by
IneoQuest and Mr. Bettinelli, the jury did not award damages to Ixia. Judgment was therefore
entered by the Court on November 24, 2009. IneoQuest, Mr. Bettinelli and Ixia each filed motions
for attorneys fees after entry of the judgment. On February 25, 2010, IneoQuest was awarded costs
in the amount of approximately $278,000. IneoQuest and Ixias motions for attorneys fees were
both denied, and Mr. Bettinellis motion for attorneys fees was continued for hearing on March 24,
2010. Ixia filed its Notice of Appeal from the judgment in favor of Mr. Bettinelli only on
February 18, 2010. Pursuant to an agreement between Ixia and Mr. Bettinelli, Ixia dismissed the
appeal on March 4, 2010 in exchange for Mr. Bettinellis withdrawal of his motion for attorneys
fees and mutual releases.
In a related proceeding based on the same facts, Mr. Bettinelli was criminally charged with
felony violation of Penal Code Section 502 for his unauthorized use of Ixias computer data; he
pleaded no contest to the felony charge in September 2008, which was reduced to a misdemeanor at
sentencing upon his payment of $75,000 to Ixia as restitution.
IneoQuest Technologies, Inc. vs. Ixia. In November 2008, IneoQuest filed a complaint against
Ixia in the United States District Court for the Central District of California. The complaint
alleges that Ixia makes and sells products that infringe a patent owned by IneoQuest, and that Ixia
misappropriated IneoQuests trade secrets, in addition to numerous other related claims. The
patent at issue allegedly relates to a system and method for analyzing the performance of multiple
transportation streams of streaming media in packet-based networks. IneoQuest seeks a permanent
injunction enjoining Ixia from infringing the patent at issue and from using IneoQuests trade
secrets and confidential information, unspecified general and exemplary damages, and attorneys
fees and costs.
In January 2009, Ixia filed an answer and counterclaim to IneoQuests complaint denying
IneoQuests claims and raising several affirmative defenses. Ixia has also asserted a counterclaim
against IneoQuest seeking declaratory relief that Ixia has not infringed the IneoQuest patent and
that such patent is invalid. In April 2009, Ixia filed an
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amended answer and counterclaim to IneoQuests complaint in which Ixia asserted that
IneoQuest has infringed four patents owned by Ixia. Although the Company cannot predict the
outcome of this matter, Ixia believes that it has strong defenses to IneoQuests claims and is
defending the action vigorously. The parties commenced discovery in this matter in the 2009 second
quarter. The parties filed a Joint Claim Construction brief on November 30, 2009, and are awaiting
a claim construction ruling from the Court.
Tucana Telecom NV vs. Catapult. On May 22, 2007, the Antwerp Court of Appeal heard an appeal
by Tucana Telecom NV, a Belgian company, of the previous dismissal by the Antwerp Commercial Court
of an action by Tucana against Catapult. Tucana had sought damages of 12,461,000 Euros
(approximately $17.9 million as of December 31, 2009) for the alleged improper termination in 2002
by Catapult of Tucanas distribution agreement with Catapult. On June 19, 2007, the Antwerp Court
of Appeal confirmed the Commercial Courts dismissal of Tucanas action and assessed the costs of
the appeal against Tucana. On July 22, 2008, Catapult was notified by its Belgian counsel that
Tucana has appealed the judgment of the Antwerp Court of Appeal to the Belgian Supreme Court. In a
decision dated January 14, 2010, the Belgium Supreme Court set aside the decision of the Antwerp
Court of Appeal and remanded the matter for trial to the Gent Court of Appeal. The matter has not
yet been set for trial.
Catapult believes that it properly terminated any contract it had with Tucana and that Tucana
is not entitled to any damages in this matter. Catapult has defended the action vigorously to date
and will continue to do so. Catapult may be able to seek indemnification from Tekelec for any
damages assessed against Catapult in this matter under the terms of the Asset Purchase Agreement
that Catapult entered into with Tekelec, although there is no assurance that such indemnification
would be available. It is not possible to determine the amount of any loss that might be incurred
in this matter.
We are not aware of any other pending legal proceedings than the matters mentioned above that,
individually or in the aggregate, would have a material adverse effect on our business, results of
operations or financial position. We may in the future be party to litigation arising in the
ordinary course of business, including claims that we allegedly infringe upon third party
trademarks or other intellectual property rights. Such claims, even if without merit, could result
in the expenditure of significant financial and managerial resources.
Indemnifications
In the normal course of business, we provide certain indemnifications, commitments and
guarantees of varying scope to customers, including against claims of intellectual property
infringement made by third parties arising from the use of our products. We also have certain
obligations to indemnify our officers, directors and employees for certain events or occurrences
while the officer, director or employee is or was serving at our request in such capacity. The
duration of these indemnifications, commitments and guarantees varies and in certain cases, is
indefinite. Many of these indemnifications, commitments and guarantees do not provide for any
limitation of the maximum potential future payments that we could be obligated to make. However,
our director and officer insurance policy may enable us to recover a portion of any future payments
related to our officer, director or employee indemnifications. Historically, costs related to
these indemnifications, commitments and guarantees have not been significant and accordingly, we
believe the estimated fair value of these indemnifications, commitments and guarantees are not
material. With the exception of the product warranty accrual (see Note 1), no liabilities have
been recorded for these indemnifications, commitments and guarantees.
10. Shareholders Equity
Stock Award Plans
Our Amended and Restated 1997 Equity and Incentive Plan, as amended (the 1997 Plan),
provides for the issuance of share-based awards to our eligible employees and consultants. The
share-based awards may include incentive stock options, nonqualified stock options, restricted
stock units (RSU) or restricted stock awards. Options become exercisable over a vesting period
as determined by the Board of Directors and expire over terms not exceeding 10 years from the date
of grant. The exercise price for options granted under the 1997 Plan may not be granted at less
than 100% of the fair market value of our Common Stock on the date of grant (110% if granted to an
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employee who owns more than 10% of the voting shares of the outstanding stock). Options
generally vest over a four-year period. In the event the holder ceases to be employed by us, all
unvested options are forfeited and all vested options may be exercised within a period of up to 30
days after the optionees termination for cause, up to three months after termination other than
for cause or as a result of death or disability, or up to six months after termination as a result
of disability or death. The 1997 Plan terminated in May 2008 and as such, no shares are available
for future grant. As of December 31, 2009, 4.4 million awards remained outstanding under the 1997
Plan.
Our 2008 Equity Incentive Plan, as amended (the 2008 Plan), provides for the issuance of
share-based awards to our eligible employees and consultants. The share-based awards may include
incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock
units (RSU) or restricted stock awards. Options become exercisable over a vesting period as
determined by the Board of Directors and expire over terms not exceeding 10 years from the date of
grant. The exercise price for options granted under the 2008 Plan may not be granted at less than
100% of the fair market value of our Common Stock on the date of grant (110% if granted to an
employee who owns more than 10% of the voting shares of the outstanding stock). Options generally
vest over a four-year period. In the event the holder ceases to be employed by us, all unvested
options are forfeited and all vested options may be exercised within a period of up to 90 days
after termination other than (i) for termination for cause for which the vested options are
forfeited on the termination date or (ii) as a result of death or disability for which vested
options may be exercised for up to 180 days after termination. The 2008 Plan will terminate in May
2018, unless terminated sooner by the Board of Directors. As of December 31, 2009, we have
reserved 11.6 million shares of our Common Stock for issuance under the 2008 Plan, 4.6 million
shares of which were available for future grant as of such date.
Our Amended and Restated Non-Employee Director Equity Incentive Plan (the Director Plan)
provides for the issuance of share-based awards to our non-employee directors. We have reserved a
total of 400,000 shares of Common Stock for issuance under the Director Plan. The grants under the
plan are automatic and non-discretionary. Effective May 2007, the Director Plan provides for an
initial grant to a non-employee director of 10,000 RSUs upon the directors appointment to the
Board of Directors, which vest in eight equal quarterly installments. The Director Plan also
provides for each non-employee director to be granted 4,000 RSUs upon the directors re-election to
the Board of Directors at an annual meeting of shareholders. These subsequent grants vest in four
equal quarterly installments commencing on the 15th day of the second calendar month during the
first calendar quarter following the calendar quarter in which the RSUs are granted. The Director
Plan will terminate in September 2010, unless terminated sooner by the Board of Directors. As of
December 31, 2009, the Director Plan had approximately 206,000 shares available for future grant.
The following table summarizes stock option activity for the year ended December 31, 2009 (in
thousands, except per share and contractual life data):
Weighted | ||||||||||||||||
Weighted | Average | |||||||||||||||
Average | Remaining | Aggregate | ||||||||||||||
Number | Exercise Price | Contractual | Intrinsic | |||||||||||||
of Options | Per Share | Life (in years) | Value | |||||||||||||
Outstanding as of December 31, 2008 |
8,443 | $ | 8.30 | |||||||||||||
Granted |
1,939 | $ | 6.12 | |||||||||||||
Exercised |
(268 | ) | $ | 1.53 | ||||||||||||
Forfeited/canceled |
(887 | ) | $ | 8.97 | ||||||||||||
Outstanding as of December 31, 2009 |
9,227 | $ | 7.98 | 3.74 | $ | 5,534 | ||||||||||
Exercisable as of December 31, 2009 |
5,359 | $ | 8.40 | 2.44 | $ | 2,925 | ||||||||||
Excluding the effects of the incremental gross stock-based compensation related to the Stock
Option Exchange Program in August of 2008 discussed below, the weighted average grant-date fair
value of options granted for the years ended December 31, 2009, 2008 and 2007 was $2.15, $2.96 and
$4.51 per share, respectively. The total intrinsic value of options exercised during the years
ended December 31, 2009, 2008 and 2007 was $1.4 million, $1.7
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million and $5.5 million, respectively. As of December 31, 2009, the remaining unrecognized
compensation expense related to stock options is expected to be recognized over a weighted average
period of 1.43 years.
The following table summarizes RSU activity for the year ended December 31, 2009 (in
thousands, except per share data):
Weighted | ||||||||
Average Grant | ||||||||
Number | Date Fair Value | |||||||
of Awards | Per Share | |||||||
Outstanding as of December 31, 2008 |
1,475 | $ | 6.77 | |||||
Awarded |
1,166 | $ | 6.40 | |||||
Released |
(467 | ) | $ | 7.21 | ||||
Forfeited/canceled |
(90 | ) | $ | 6.54 | ||||
Outstanding as of December 31, 2009 |
2,084 | $ | 6.53 | |||||
The weighted average remaining contractual life and expense recognition period of the
outstanding RSUs as of December 31, 2009 was 1.63 years.
Employee Stock Purchase Plan
The employee stock purchase plan (the Plan) was adopted and approved in September 2000. The
Plan became effective upon the closing of our initial public offering in October 2000. We have
reserved a total of 4.0 million shares of Common Stock for issuance under the Plan, together with
the potential for an annual increase in the number of shares reserved under the Plan on May 1 of
each year. As of December 31, 2009, 634,000 shares were available for future issuance. For the
years ended December 31, 2009 and 2008, 559,000 and 405,000 shares, respectively, were issued under
the Plan.
The Plan permits eligible employees to purchase Common Stock, subject to limitations as set
forth in the Plan, through payroll deductions which may not exceed the lesser of 15% of an
employees compensation or $21,250 per annum.
The Plan is designed to provide our employees with an opportunity to purchase, on a periodic
basis and at a discount, shares of our Common Stock through payroll deductions. The Plan was
adopted and approved by the Board of Directors and the shareholders of the Company in 2000 and was
amended in May 2003 and in April 2006. The Plan is implemented in a series of consecutive,
overlapping 24-month offering periods, with each offering period consisting of four six-month
purchase periods. Offering periods begin on the first trading day on or after May 1 and November 1
of each year. During each 24-month offering period under the Plan, participants accumulate payroll
deductions which on the last trading day of each six-month purchase period within the offering
period are applied toward the purchase of shares of our Common Stock at a purchase price equal to
85% of the lower of (i) the fair market value of a share of our Common Stock as of the first
trading day of the 24-month offering period and (ii) the fair market value of a share of Common
Stock on the last trading day of the six-month purchase period. The Plan will terminate in
September 2010, unless it is earlier terminated by the Board of Directors.
Stock-Based Compensation Expense
We calculated the estimated fair value for accounting purposes of each share-based award on
the respective dates of grant using the Black-Scholes option-pricing model using the following
weighted average assumptions:
Year Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Expected lives (in years) |
3.6 | 4.0 | 4.5 | |||||||||
Risk-free interest rates |
1.7 | % | 2.4 | % | 4.4 | % | ||||||
Dividend yield |
0.0 | % | 0.0 | % | 0.0 | % | ||||||
Expected volatility |
46.5 | % | 48.2 | % | 52.4 | % |
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Stock Buyback Programs
We announced a six-month stock buyback program in November 2008 to repurchase up to $25
million of our common stock. This program expired in May 2009 and was in addition to the $50
million repurchase program, which was announced in August 2007 and completed in June 2008. From
January 1, 2009 through the May 2009 expiration date, we repurchased 1.6 million shares of our
common stock for $8.4 million, or approximately $5.19 per share. During 2008, we repurchased 5.8
million shares of our common stock for $43.6 million, or approximately $7.51 per share. During
2007, we repurchased 918,935 shares of our common stock for $9.2 million, or approximately $10.00
per share. These repurchased shares remain authorized, but are no longer issued and outstanding.
Option Exchange Program
During the second quarter of 2008, our shareholders approved a Stock Option Exchange Program
(the Program), which allowed current employees, other than executive officers and members of our
Board of Directors, to exchange certain underwater options for fewer new options. On August 7,
2008, we completed the Program by canceling 3.7 million old options and granting 2.6 million new
options. The canceled old options had per share exercise prices ranging from $9.30 to $21.50, and
the new options were granted with an exercise price of $8.58 per share, the closing price of our
common stock on August 7, 2008 as reported on the Nasdaq Global Select Market. The new options
have vesting schedules ranging from approximately one to four years and have contractual terms
ranging from approximately three to six years. The additional gross stock-based compensation
expense of $3.1 million related to this Program will be recognized over the vesting periods of one
to four years from the date of grant of the new options.
Accumulated Other Comprehensive Income (Loss)
The following table summarizes, as of each balance sheet date, the components of our
accumulated other comprehensive income (loss), net of income taxes (in thousands):
December 31, | ||||||||
2009 | 2008 | |||||||
Unrealized gains (losses) on marketable securities |
$ | 1,627 | $ | (332 | ) | |||
Foreign currency translation gains |
22 | 78 | ||||||
Total accumulated other comprehensive income (loss) |
$ | 1,649 | $ | (254 | ) | |||
11. Retirement Plan
We provide a 401(k) Retirement Plan (the Plan) to eligible employees who may authorize
contributions up to IRS annual deferral limits to be invested in employee elected investment funds.
As determined annually by the Board of Directors, we may contribute matching funds of 50% of the
employee contributions up to $2,500. These matching contributions vest based on the employees
years of service with us. For the years ended December 31, 2009, 2008 and 2007, we expensed and
made contributions to the Plan in the amount of approximately $70,000, $741,000 and $713,000,
respectively. The matching of employee 401(k) contributions was suspended in January 2009 and
reinstated in January 2010.
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12. Earnings Per Share
The following table sets forth the computation of basic and diluted (loss) earnings per share
for the periods indicated (in thousands, except per share data):
Year Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Basic Presentation |
||||||||||||
Numerator: |
||||||||||||
Net (loss) income |
$ | (44,203 | ) | $ | (15,895 | ) | $ | 7,006 | ||||
Denominator: |
||||||||||||
Weighted average common shares |
62,710 | 65,087 | 67,936 | |||||||||
Basic (loss) earnings per share |
$ | (0.70 | ) | $ | (0.24 | ) | $ | 0.10 | ||||
Diluted presentation |
||||||||||||
Denominator: |
||||||||||||
Shares used to calculate basic |
62,710 | 65,087 | 67,936 | |||||||||
Weighted average effect of
stock options and other
share-based awards |
| | 1,450 | |||||||||
Denominator for diluted computation |
62,710 | 65,087 | 69,386 | |||||||||
Diluted (loss) earnings per share |
$ | (0.70 | ) | $ | (0.24 | ) | $ | 0.10 | ||||
The diluted earnings per share computations for the years ended December 31, 2009, 2008 and
2007, exclude employee stock options and other share-based awards to purchase or otherwise acquire
10.5 million, 7.0 million and 6.4 million shares, respectively, which were antidilutive.
13. Quarterly Financial Summary (Unaudited)
Three Months Ended | ||||||||||||||||||||||||||||||||
Dec. 31 | Sep. 30 | Jun. 30 | Mar. 31 | Dec. 31 | Sep. 30 | Jun. 30 | Mar. 31 | |||||||||||||||||||||||||
2009 | 2009 | 2009 | 2009 | 2008(1) | 2008(1) | 2008 | 2008 | |||||||||||||||||||||||||
(in thousands, except per share data) | ||||||||||||||||||||||||||||||||
Statement of Operations Data: |
||||||||||||||||||||||||||||||||
Total revenues |
$ | 56,091 | $ | 46,374 | $ | 38,405 | $ | 37,124 | $ | 40,972 | $ | 47,324 | $ | 45,920 | $ | 41,651 | ||||||||||||||||
Total cost of revenues(2) |
15,820 | 14,324 | 9,983 | 9,674 | 9,958 | 10,238 | 11,012 | 10,456 | ||||||||||||||||||||||||
Gross profit |
40,271 | 32,050 | 28,422 | 27,450 | 31,014 | 37,086 | 34,908 | 31,195 | ||||||||||||||||||||||||
(Loss) income before income taxes |
(6,470 | ) | (9,388 | ) | (5,906 | ) | (6,043 | ) | (19,164 | ) | 509 | 2,762 | 19 | |||||||||||||||||||
Net (loss) income(3) |
(31,335 | ) | (6,223 | ) | (2,654 | ) | (3,991 | ) | (18,265 | ) | 483 | 1,781 | 106 | |||||||||||||||||||
(Loss) earnings per share: |
||||||||||||||||||||||||||||||||
Basic |
$ | (0.50 | ) | $ | (0.10 | ) | $ | (0.04 | ) | $ | (0.06 | ) | $ | (0.29 | ) | $ | 0.01 | $ | 0.03 | $ | 0.00 | |||||||||||
Diluted |
$ | (0.50 | ) | $ | (0.10 | ) | $ | (0.04 | ) | $ | (0.06 | ) | $ | (0.29 | ) | $ | 0.01 | $ | 0.03 | $ | 0.00 |
(1) | In the third and fourth quarters of 2008, we recorded other-than-temporary impairment charges of $4.3 million and $15.9 million, respectively, related to our previous investments in auction rate securities and our investment in long term bonds issued by Lehman Brothers Holdings, Inc. See Note 5 for additional information. | |
(2) | For the quarters ended December 31, 2009, September 30, 2009, June 30, 2009, March 31, 2009, December 31, 2008, September 30, 2008, June 30, 2008, March 31, 2008, total cost of revenues include charges related to amortization of intangible assets of $3.8 million, $3.0 million, $1.2 million, $1.2 million, $1.2 million, $1.2 million, $1.2 million, and $1.2 million, respectively. | |
(3) | In the fourth quarter of 2009, our income tax expense includes a $27.6 million charge related primarily to the establishment of a valuation allowance against our remaining net U.S. deferred tax assets. In the fourth quarter of 2008, our income tax expense includes a $7.7 million charge, related primarily to the establishment of a valuation allowance against our deferred tax assets associated with the unrealized impairment (capital) losses discussed in footnote 1 above. |
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EXHIBIT INDEX
Exhibit No. | Description | |
21.1
|
Subsidiaries of the Registrant | |
23.1
|
Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm | |
31.1
|
Certification of Chief Executive Officer of Ixia pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2
|
Certification of Chief Financial Officer of Ixia pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1
|
Certifications of Chief Executive Officer and Chief Financial Officer of Ixia pursuant to Rule 13a-14(b) under the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
94