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EX-32.1 - CERTIFICATION OF THE CEO & CFO PURSUANT TO 18 U.S.C SECTION 1350 - RUCKUS WIRELESS INCexhibit32_1xceo-cfo1.htm
EX-31.2 - CERTIFICATION OF THE CFO - RUCKUS WIRELESS INCexhibit31_2xcfo1.htm
EXCEL - IDEA: XBRL DOCUMENT - RUCKUS WIRELESS INCFinancial_Report.xls
EX-31.1 - CERTIFICATION OF THE CEO - RUCKUS WIRELESS INCexhibit31_1xceo1.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 Form 10-Q

x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014

o    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to        

Commission file number: 001-35734
Ruckus Wireless, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
 
 
54-2072041
(State or other jurisdiction of
incorporation or organization)
 
 
 
(I.R.S. Employer
Identification Number)
 
350 West Java Drive
Sunnyvale, California 94089
(650) 265-4200
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)

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   x     No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer  
x
Accelerated filer  
¨
Non-accelerated filer  
¨ (Do not check if a smaller reporting company)
Smaller reporting company  
¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o    No x

On October 27, 2014, 84,177,529 shares of the registrant's common stock, $0.001 par value, were outstanding.



TABLE OF CONTENTS
 
PART I - FINANCIAL INFORMATION
Page
 
 
 
 
 
 
PART II - OTHER INFORMATION
 
 

“Ruckus Wireless,” the Ruckus logos and other trademarks or service marks of Ruckus Wireless, Inc. appearing in this Quarterly Report on Form 10-Q are the property of Ruckus Wireless, Inc. Trade names, trademarks and service marks of other companies appearing in this report are the property of their respective holders.


1


PART I. FINANCIAL INFORMATION
ITEM 1.        FINANCIAL STATEMENTS
 
RUCKUS WIRELESS, INC.
Condensed Consolidated Balance Sheets
(unaudited, in thousands, except par value)
 
September 30,

December 31,
 
2014

2013
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
116,836

 
$
91,282

Short-term investments
72,103

 
60,878

Accounts receivable, net of allowance for doubtful accounts of $1,000 and $400 as of September 30, 2014 and December 31, 2013, respectively
52,728

 
44,638

Inventories
18,131

 
16,748

Deferred costs
2,967

 
4,207

Deferred tax assets
7,384

 
7,715

Prepaid expenses and other current assets
5,765

 
5,227

Total current assets
275,914

 
230,695

Property and equipment, net
13,322

 
11,472

Goodwill
9,945

 
9,945

Intangible assets, net
8,056

 
9,671

Non-current deferred tax asset
15,870

 
15,317

Restricted cash
5,000

 
5,000

Other assets
1,203

 
1,122

Total assets
$
329,310

 
$
283,222

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
24,166

 
$
19,131

Accrued compensation
14,536

 
11,759

Accrued liabilities
5,603

 
6,231

Deferred revenue
31,949

 
33,139

Total current liabilities
76,254

 
70,260

Non-current deferred revenue
10,006

 
7,098

Non-current deferred tax liabilities
854

 
854

Other non-current liabilities
1,314

 
1,161

Total liabilities
88,428

 
79,373

Commitments and contingencies (Note 7)


 


Stockholders’ equity:
 
 
 
Common stock, $0.001 par value; 250,000 shares authorized as of September 30, 2014 and December 31, 2013; 84,082 and 80,691 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively
84

 
81

Additional paid–in capital
257,365

 
225,575

Accumulated other comprehensive loss
(28
)
 
(2
)
Accumulated deficit
(16,539
)
 
(21,805
)
Total stockholders’ equity
240,882

 
203,849

Total liabilities and stockholders’ equity
$
329,310

 
$
283,222

See notes to condensed consolidated financial statements.

2


RUCKUS WIRELESS, INC.
Condensed Consolidated Statements of Operations
(unaudited, in thousands, except per share amounts)

Three Months Ended September 30,

Nine Months Ended September 30,

2014

2013

2014

2013
Revenue:
 
 
 
 





Product
$
78,810


$
64,449


$
224,237


$
177,424

Service
6,191


4,479


16,816


12,619

Total revenue
85,001


68,928


241,053


190,043

Cost of revenue:
 




 



Product
23,193


21,165


66,898


56,660

Service
3,379


2,512


9,070


7,246

Total cost of revenue
26,572


23,677


75,968


63,906

Gross profit
58,429


45,251


165,085


126,137

Operating expenses:
 




 



Research and development
19,614


16,268


56,707


44,980

Sales and marketing
24,720


21,106


72,402


57,522

General and administrative
8,017


8,410


24,812


23,291

Total operating expenses
52,351


45,784


153,921


125,793

Operating income (loss)
6,078


(533
)

11,164


344

Interest income
41


58


133


140

Other expense, net
(200
)

(102
)

(310
)

(329
)
Income (loss) before income taxes
5,919


(577
)

10,987


155

Income tax expense (benefit)
2,365


(634
)

5,721


(918
)
Net income
$
3,554


$
57


$
5,266


$
1,073

Net income per share:
 




 



Basic
$
0.04


$
0.00


$
0.06


$
0.01

Diluted
$
0.04


$
0.00


$
0.06


$
0.01

Weighted average shares used in computing net income per share:
 




 



Basic
83,388

 
77,735

 
82,334

 
75,771

Diluted
94,142

 
92,779

 
93,406

 
93,392

See notes to condensed consolidated financial statements.  


3


RUCKUS WIRELESS, INC.
Condensed Consolidated Statements of Comprehensive Income
(unaudited, in thousands)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Net income
$
3,554

 
$
57

 
$
5,266

 
$
1,073

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Unrealized gain (loss) on short-term investments
(13
)
 
25

 
(26
)
 
(13
)
Comprehensive income
$
3,541

 
$
82

 
$
5,240

 
$
1,060

See notes to condensed consolidated financial statements.  


4


RUCKUS WIRELESS, INC.
Condensed Consolidated Statements of Cash Flows
(unaudited, in thousands)
 
Nine Months Ended September 30,
 
2014
 
2013
Cash flows from operating activities
 
 
 
Net income
$
5,266

 
$
1,073

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
Depreciation and amortization
6,884

 
4,703

Provision for doubtful accounts
600

 
736

Stock-based compensation
18,869

 
12,815

Amortization of investment premiums, net of accretion of purchase discounts
863

 
666

Deferred income taxes
4,896

 
(1,524
)
Excess income tax benefit from the exercise of stock options
(5,099
)
 

Loss on disposal of property and equipment

 
34

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(8,690
)
 
(1,261
)
Inventories
(1,383
)
 
1,504

Deferred costs
1,240

 
1,563

Prepaid expenses and other current assets
(513
)
 
(2,017
)
Other assets
(131
)
 
156

Accounts payable
4,681

 
2,586

Accrued compensation
2,777

 
2,426

Accrued liabilities
(475
)
 
822

Deferred revenue
1,718

 
(4,876
)
Net cash provided by operating activities
31,503

 
19,406

Cash flows from investing activities
 
 
 
Purchase of investments
(86,123
)
 
(69,797
)
Proceeds from the maturity of investments
73,965

 

Purchase of property and equipment
(6,765
)
 
(5,914
)
Change in facility lease deposits
50

 
(190
)
Cash used in acquisition

 
(6,882
)
Change in restricted cash

 
(5,000
)
Net cash used in investing activities
(18,873
)
 
(87,783
)
Cash flows from financing activities:
 
 
 
Proceeds from exercise of stock options
5,792

 
4,997

Proceeds from employee stock purchase plan
2,033

 
1,486

Excess income tax benefit from the exercise of stock options
5,099

 

Initial public offering costs

 
(839
)
Net cash provided by financing activities
12,924

 
5,644

Net increase (decrease) in cash and cash equivalents
25,554

 
(62,733
)
Cash and cash equivalents at beginning of period
91,282

 
133,386

Cash and cash equivalents at end of period
$
116,836

 
$
70,653


See notes to condensed consolidated financial statements.

5



RUCKUS WIRELESS, INC.
Condensed Consolidated Statements of Cash Flows
(unaudited, in thousands)
 

Nine Months Ended September 30,

2014

2013
Supplemental disclosure of cash flow information



Cash paid for income taxes
$
728


$
785

Non-cash investing and financing activities



Purchases of property and equipment recorded in accounts payable and accrued liabilities
$
1,465

 
$
841

See notes to condensed consolidated financial statements.
 


6


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

NOTE 1—DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business— Ruckus Wireless, Inc. (“Ruckus”) is a leading provider of carrier-class Wi-Fi solutions. Ruckus’s solutions, which it calls Smart Wi-Fi, are used by service providers and enterprises to solve network capacity and coverage challenges associated with the rapidly increasing traffic and number of users and client devices on wireless networks. Ruckus’s Smart Wi-Fi solutions offer carrier-class features and functionality such as enhanced reliability, consistent performance, extended range and massive scalability. Ruckus’s products include gateways, wireless local area network (“WLAN”) controllers and high performance access points. These products incorporate the Company’s patented and proprietary technologies, such as Smart Radio, Smart QoS, Smart Mesh and Smart Scale, to enable high performance, reliable, adaptive and high capacity connectivity in a wide range of challenging operating conditions faced by service providers and enterprises.
Basis of Presentation— The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in Ruckus’s Annual Report on Form 10-K for the year ended December 31, 2013, filed on March 3, 2014.
The condensed consolidated balance sheet as of December 31, 2013, included herein, was derived from the audited financial statements as of that date, but does not include all disclosures including notes required by GAAP.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full year 2014 or any future period.
Principles of Consolidation— The condensed financial statements include the accounts of Ruckus and its wholly owned subsidiaries (collectively, the “Company”). All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates— The preparation of financial statements in conformity with GAAP in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Significant estimates and assumptions made by management include the determination of revenue recognition, allowance for doubtful accounts, goodwill and intangible asset valuation, the fair value of stock awards, inventory valuation, estimates of warranty liability and accounting for income taxes. Management bases its estimates on historical experience and also on assumptions that it believes are reasonable. Actual results could materially differ from those estimates.
Summary of Significant Accounting Policies— There have been no material changes to our significant accounting policies as compared to those described in our Annual Report on Form 10-K for the year ended December 31, 2013.
Recent Accounting Pronouncements— In May 2014, the Financial Accounting Standard Board (“FASB”) and International Accounting Standards Board (“IASB”) issued ASU 2014-09, Revenue from Contracts with Customers, a converged standard on revenue recognition. Some of the main areas of transition to the new standard include, among others, transfer of control (revenue is recognized when a customer obtains control of a good or service), allocation of transaction price based on relative standalone selling price (entities that sell multiple goods or services in a single arrangement must allocate the consideration to each of those goods or services), contract costs (entities sometimes incur costs, such as sales commissions or mobilization activities, to obtain or fulfill a contract), and disclosures (extensive disclosures are required to provide greater insight into both revenue that has been recognized, and revenue that is expected to be recognized in the future from existing contracts). This accounting standard will be effective for the Company beginning in its first quarter of fiscal 2017, with no early adoption permitted, using one of two methods of adoption: (i) retrospective to each prior reporting period presented, with the option to elect certain practical expedients as defined within the standard; or (ii) retrospective with the cumulative effect of initially applying the standard recognized at the date of initial application inclusive of certain additional disclosures. The Company is currently evaluating the impact of this accounting standard update on its consolidated financial position, results of operations and cash flows.
Concentrations of Credit Risk and Significant Customers— Financial instruments that subject the Company to significant concentrations of credit risk primarily consist of cash, cash equivalents, short-term investments and accounts receivable. The Company invests only in high credit quality instruments and maintains its cash, cash equivalents and short-term investments in fixed income securities. Management believes that the financial institutions that hold the Company’s investments are financially sound and, accordingly, are subject to minimal credit risk. Deposits held with banks may exceed the amount of insurance provided on such deposits. The Company’s accounts receivable are primarily derived from distributors and service providers located in the Americas, Europe, and Asia Pacific. The Company generally does not require its customers to provide collateral to support accounts receivable. To reduce credit risk, management performs ongoing credit evaluations of its customers’ financial condition. The Company has recorded an allowance for doubtful accounts for those receivables management has determined to not be collectible.
    

7


The percentages of revenues from individual customers totaling greater than 10% of total consolidated Company revenues were as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Distributor A
15.7
%
 
15.1
%
 
15.5
%
 
15.3
%
Distributor B
11.3
%
 
13.2
%
 
12.7
%
 
12.4
%
Distributor C
12.0
%
 
*

 
11.9
%
 
*

*    Less than 10%
 
 
 
 
 
 
 
The percentage of receivables from individual customers totaling greater than 10% of total consolidated Company accounts receivable were as follows:
 
September 30,
 
December 31,
 
2014
 
2013
Distributor C
15.1
%
 
10.4
%
Distributor A
11.4
%
 
11.6
%
Distributor D
*

 
11.2
%
*    Less than 10%
 
 
 

NOTE 2—FAIR VALUE DISCLOSURE
Assets and liabilities recorded at fair value in the condensed consolidated financial statements are categorized based upon the level of judgment associated with the inputs used to measure their fair value. The Company categorizes its financial instruments into a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. There were no transfers between levels during the nine months ended September 30, 2014. Hierarchical levels that are directly related to the amount of subjectivity associated with the inputs to the valuation of these assets or liabilities are as follows:
Level 1
 
Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities.
Level 2
 
Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.
Level 3
 
Unobservable inputs are used when little or no market data is available.
The Company’s assets that were measured at fair value by level within the fair value hierarchy were as follows (in thousands):
 
September 30, 2014
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
Money market funds
$
36,857

 
$
36,857

 
$

 
$

Corporate debt securities
72,103

 

 
72,103

 

Total assets measured and recorded at fair value
$
108,960

 
$
36,857

 
$
72,103

 
$


8


 
December 31, 2013
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
Money market funds
$
47,773

 
$
47,773

 
$

 
$

Corporate debt securities
60,878

 

 
60,878

 

Total assets measured and recorded at fair value
$
108,651

 
$
47,773

 
$
60,878

 
$


NOTE 3—INVESTMENTS
Investments consisted of the following (in thousands):

September 30, 2014

Amortized Cost

Unrealized Gains

Unrealized Losses

Fair Value
Corporate debt securities
$
72,151

 
$
1

 
$
(49
)
 
$
72,103

 
December 31, 2013
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
Corporate debt securities
$
60,882

 
$
9

 
$
(13
)
 
$
60,878

All of the Company's investments have a contractual maturity of less than 12 months from September 30, 2014. The gross realized gains and gross realized losses related to the Company’s investments were not material for the three and nine months ended September 30, 2014.
Investments in an unrealized loss position consisted of the following (in thousands):
 
September 30, 2014
 
December 31, 2013

Less Than 12 Months

Fair Value

Unrealized Loss
 
Fair Value
 
Unrealized Loss
Corporate debt securities
$
55,228

 
$
(49
)
 
$
18,204

 
$
(13
)
The Company does not intend to sell any of these investments, and it is not more likely than not, that the Company would be required to sell these investments before recovery of their amortized cost basis, which may be at maturity.

NOTE 4—BUSINESS COMBINATIONS
On July 18, 2013, the Company acquired all of the outstanding equity interests of YFind Technologies Private Limited (“YFind”), a privately-held software company providing indoor positioning and real-time location-based analytics. The Company acquired YFind to obtain its technology and expertise in location-based services. The purchase consideration was $6.1 million, all of which was paid in cash. 
Former YFind employees who became the employees of the Company were granted 219,782 restricted stock units (“RSUs”) and 51,900 stock options under the Company's Amended & Restated 2012 Equity Incentive Plan (the “2012 Plan”). The equity awards vest between three and four years from when the employee was hired. The fair value of the equity awards of $3.6 million will be recognized as post-acquisition compensation expense over the requisite service period. The Company is also obligated to pay retention bonuses of up to $0.4 million to certain former YFind employees who became employees of the Company, over two years from the date of hire. Both the equity awards and the retention bonuses are subject to certain continued employment restrictions. For the nine months ended September 30, 2014, the Company recorded compensation costs of $0.9 million in research and development expenses associated with the equity awards and the retention bonuses.

9


The purchase allocation for YFind is summarized as follows (in thousands):

Fair Value
Cash and cash equivalents
$
257

Other tangible assets
8

In-process research and development
6,000

Goodwill
914

Non-current deferred tax liabilities
(1,020
)
Other liabilities assumed
(21
)
Total purchase consideration
$
6,138

Pro forma results of operations for the YFind acquisition have not been presented because they are not material to the condensed consolidated statements of operations.

NOTE 5—GOODWILL AND INTANGIBLE ASSETS
Intangible assets consisted of the following (in thousands, except years):

Gross Carrying
Amount

Accumulated
Amortization

Net
Carrying
Amount

Weighted
Average
Remaining
Life
September 30, 2014







Purchased technology
$
12,600

 
$
(4,544
)
 
$
8,056

 
3.1 years
 
 
 
 
 
 
 
 
December 31, 2013
 
 
 
 
 
 
 
Purchased technology
$
6,600

 
$
(2,929
)
 
$
3,671

 
2.8 years
In-process research and development
6,000

 

 
6,000

 
 
Total
$
12,600

 
$
(2,929
)
 
$
9,671

 
 
On July 18, 2013, the Company recorded the fair value of the in-process research and development of $6.0 million related to the acquisition of YFind. The in-process research and development, which was completed on May 1, 2014, was transferred to purchased technology and is being amortized over its estimated useful life of four years.
The following table presents the estimated future amortization expense of intangible assets as of September 30, 2014 (in thousands):
Year ending December 31,
Amount
2014 (remaining three months)
$
705

2015
2,820

2016
2,531

2017
1,500

2018
500

Total amortization
$
8,056

The Company had goodwill of $9.9 million as of September 30, 2014 and December 31, 2013. No impairment has been recognized related to the goodwill balance.

10


NOTE 6—DEFERRED REVENUE
Deferred revenue consisted of the following (in thousands):
 
September 30,
 
December 31,
 
2014
 
2013
Product
$
15,799

 
$
21,732

Service
26,156

 
18,505

Total deferred revenue
$
41,955

 
$
40,237

Reported as:
 
 
 
Current
$
31,949

 
$
33,139

Non-current
10,006

 
7,098

Total deferred revenue
$
41,955

 
$
40,237

Deferred product revenue relates to arrangements where not all revenue recognition criteria have been met. Deferred service revenue represents support contracts billed in advance and revenue is recognized ratably over the support period, typically one to five years.

NOTE 7—COMMITMENTS AND CONTINGENCIES
Operating Leases—The Company’s primary facilities are located in Sunnyvale, California, Shenzhen, China, Singapore, Taipei, Taiwan, Bangalore, India and Woodburn Green, United Kingdom and are leased under non-cancelable operating lease arrangements.
Future minimum lease payments under non-cancelable operating leases were as follows (in thousands):
Years ending December 31,
Amount
2014 (remaining three months)
$
959

2015
3,897

2016
3,052

2017
2,641

2018
2,590

Thereafter
10,033

Operating lease obligations
$
23,172

Litigation— The Company is involved in legal proceedings, claims, and litigation arising in the ordinary course of business. Management is not currently aware of any matters that it expects will have a material adverse effect on the consolidated financial position, results of operations, or cash flows of the Company.
For the nine months ended September 30, 2014, the Company settled several patent litigation claims for a net gain of $0.8 million, which is included in general and administrative expense in the condensed consolidated statements of operations. The Company did not have any settlement gains or losses for the three months ended September 30, 2014, and three and nine months ended September 30, 2013.
Purchase Commitments— As of September 30, 2014, the Company had current purchase commitments of $16.1 million for inventory and specific contractual services.
Indemnification Agreements— The Company indemnifies its directors for certain events or occurrences, subject to certain limits, while the director is or was serving at the Company’s request in such capacity. The term of the indemnification period is for the director’s term of service. The Company may terminate the indemnification agreements with its directors upon the termination of their services as directors of the Company, but termination will not affect claims for indemnification related to events occurring prior to the effective date of termination. The maximum amount of potential future indemnification is unlimited; however, the Company has a director insurance liability policy that limits its exposure. The Company believes the fair value of these indemnification agreements is minimal. The Company has also entered into customary indemnification agreements with each of its officers.

11


The Company indemnifies its channel partners against certain claims alleging that the Company’s products (excluding custom products and/or custom support) infringe a patent, copyright, trade secret, or trademark, provided that a channel partner promptly notifies the Company in writing of the claim and such channel partner cooperates with the Company and grants the Company the authority to control the defense and any related settlement.
The Company has not recorded any liabilities for these agreements as of September 30, 2014 and December 31, 2013.
Reimbursement of Penalties— As of September 30, 2014 and December 31, 2013, the Company held $5.0 million in escrow to secure an indemnification agreement. If triggered, the Company will indemnify a channel partner for reimbursement of penalties assessed under the Information Technology Act of India (“IT Act”). The IT Act specifies penalties for network service providers in the event of illegal or unauthorized use of computers, computer systems and data stored therein. In the event that Ruckus equipment is the cause of a network service provider breach, the Company is required to indemnify the channel partner, without limitation to the amount, for penalties reimbursed by the channel partner to the network service provider under the IT Act. The indemnification period is six years beginning from April 2013. To date no claims have been made under the IT Act, for which the Company would be potentially liable.
Warranties— The Company offers a limited lifetime hardware warranty on its indoor WLAN products and a limited warranty for all other hardware products for a period of up to one year. The Company estimates the costs that may be incurred under its warranties and records a liability for products sold as a charge to cost of revenue. Estimates of future warranty costs are largely based on historical experience of product failure rates and material usage incurred in correcting product failures. The Company periodically assesses the adequacy of its recorded warranty liability and adjusts the amounts as necessary.
The warranty liability is included as a component of accrued liabilities in the accompanying condensed consolidated balance sheets. Changes in the warranty liability were as follows (in thousands): 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Balance at beginning of period
$
847

 
$
751

 
$
1,038

 
$
725

Changes in existing warranty
39

 
10

 
(75
)
 
(14
)
Warranty expense
196

 
215

 
750

 
506

Obligations fulfilled
(179
)
 
(172
)
 
(810
)
 
(413
)
Balance at end of period
$
903

 
$
804

 
$
903

 
$
804


NOTE 8—EQUITY AWARD PLAN     
Stock Option and Restricted Stock Unit Activity
The following table summarizes the outstanding stock option activity and a summary of information related to stock options (in thousands, except per share amounts and years):
 
Common Stock Options Outstanding
 
Number of
Shares
 
Weighted
Average
Exercise Price Per Share
 
Weighted
Average
Remaining
Contractual Life (Years)
 
Aggregate
Intrinsic
Value
Balance, December 31, 2013
19,609
 
$
4.51

 
7.3
 
$
195,142

Options granted
362
 
11.61

 

 


Options exercised
(2,866)
 
2.02

 

 


Options forfeited
(449)
 
10.65

 

 


Balance, September 30, 2014
16,656
 
$
4.92

 
6.7
 
$
146,668

Options exercisable as of September 30, 2014
11,032
 
$
3.45

 
6.2
 
$
111,567

Options vested and expected to vest as of September 30, 2014
16,465
 
$
4.86

 
6.7
 
$
145,873


12


The weighted average grant date fair value of stock options was approximately $7.41 and $8.33 per share for the three months ended September 30, 2014 and 2013, respectively, and $6.88 and $11.22 for the nine months ended September 30, 2014 and 2013, respectively.
The total intrinsic value of options exercised was approximately $15.0 million and $24.9 million for the three months ended September 30, 2014 and 2013, respectively, and $31.7 million and $50.5 million for the nine months ended September 30, 2014 and 2013, respectively.
The following table summarizes the outstanding activity of RSUs and a summary of information related to RSUs (in thousands, except per share amounts and years):
 
Restricted Stock Units Outstanding
 
Number of Shares
 
Weighted
Average
Grant Date Fair Value
Per Share
 
Weighted
Average
Remaining
Contractual Life (Years)
 
Aggregate
Intrinsic
Value
Balance, December 31, 2013
1,011

 
$
17.11

 
1.6
 
$
14,356

RSUs granted
782

 
11.49

 
 
 
 
RSUs vested
(264
)
 
17.81

 
 
 
 
RSUs forfeited
(106
)
 
15.12

 
 
 
 
Balance, September 30, 2014
1,423

 
$
14.04

 
1.4
 
$
19,006

    
The following table summarizes the stock activity and the total number of shares available for grant under the 2012 Plan as of September 30, 2014 (in thousands):
 
Number of
Shares
Balance, December 31, 2013
8,547

Additional shares reserved for issuance
4,035

RSUs granted
(782
)
RSUs forfeited
106

Options granted
(362
)
Options forfeited
449

Balance, September 30, 2014
11,993

Fair Value Disclosures
The Company measures compensation expense for all stock-based payment awards, including stock options and RSUs granted to employees and purchases under the Company's Employee Stock Purchase Plan (“ESPP”), based on the estimated fair values on the date of the grant. The fair value of each stock option granted is estimated using the Black-Scholes option pricing model. The fair value of each RSU granted represents the closing price of the Company's common stock on the date of grant. The fair value of purchases under the Company's ESPP is calculated based on the closing price of the Company's stock on the date of grant and the value of put and call options estimated using the Black-Scholes option pricing model. Stock-based compensation is recognized on a straight-line basis over the requisite service period, net of estimated forfeitures. The forfeiture rate is based on an analysis of the Company’s actual historical forfeitures.
The Company accounts for stock options issued to non-employees based on the fair value of the awards determined using the Black-Scholes option pricing model. The fair value of stock options granted to non-employees is re-measured as the stock options vest, and the resulting change in fair value, if any, is recognized in the Company’s condensed consolidated statement of operations during the period the related services are rendered.

13


Employee Stock Options
The following table summarizes the weighted average assumptions relating to the Company's stock options:

Three Months Ended September 30,
 
Nine Months Ended September 30,

2014

2013
 
2014
 
2013
Volatility
62.2
%

68.4
%
 
63.7
%
 
69.6
%
Expected term (years)
6.1


6.1

 
6.1

 
6.1

Risk-free interest rate
2.0
%

1.7
%
 
1.9
%
 
1.3
%
Dividend yield



 

 

Employee Stock Purchase Plan
There were no stock purchase rights granted under the ESPP during the three months ended September 30, 2014 and September 30, 2013. The following table summarizes the assumptions relating to the Company's ESPP:
 
Nine Months Ended September 30,
 
2014
 
2013
Volatility
45.8
%
 
57.6
%
Expected term (years)
0.5

 
0.5

Risk-free interest rate
0.1
%
 
0.1
%
Dividend yield

 

Stock-based Compensation Expense
The following table summarizes the stock-based compensation expense recorded for stock awards issued to employees and non-employees (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Cost of revenue
$
266

 
$
193

 
$
764

 
$
575

Research and development
2,124

 
1,994

 
6,346

 
4,772

Sales and marketing
1,799

 
1,223

 
5,124

 
3,410

General and administrative
1,994

 
1,476

 
6,635

 
4,472

Total stock-based compensation
$
6,183

 
$
4,886

 
$
18,869

 
$
13,229

At September 30, 2014, the total unrecognized stock-based compensation expense related to employees and non-employees under the Company's stock plans was $41.4 million, net of estimated forfeitures. The unamortized expense will be recognized over a weighted-average period of 1.8 years.
For the three and nine months ended September 30, 2013, the Company recognized $0.4 million in stock-based compensation related to the cash settlement of equity awards held by former YFind employees.

14


NOTE 9—EARNINGS PER SHARE
Basic net income per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed by dividing net income by the weighted-average number of common shares outstanding, including potential dilutive common shares assuming the dilutive effect of outstanding stock awards using the treasury stock method. Under the treasury stock method, the amount the employee must pay for exercising stock awards, the amount of compensation cost for future service that the Company has not yet recognized, and the amount of tax benefits that would be recorded in additional paid-in capital when the award becomes deductible, are collectively assumed to be used to repurchase shares.
The following table presents the calculation of basic and diluted net income per share (in thousands, except per share data):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Numerator:
 
 
 
 
 
 
 
Net income
$
3,554

 
$
57

 
$
5,266

 
$
1,073

Denominator:
 
 
 
 
 
 
 
Weighted-average shares used in computing basic net income per share
83,388

 
77,735

 
82,334

 
75,771

Weighted-average effect of potentially dilutive shares:
 
 
 
 
 
 
 
Employee stock options
10,491

 
15,017

 
10,882

 
17,479

RSUs and ESPP
263

 
27

 
190

 
142

Diluted
94,142

 
92,779

 
93,406

 
93,392

Net income per share:
 
 
 
 
 
 
 
Basic
$
0.04

 
$
0.00

 
$
0.06

 
$
0.01

Diluted
$
0.04

 
$
0.00

 
$
0.06

 
$
0.01

The following table summarizes the weighted average outstanding stock awards that were excluded from the diluted per share calculation because to include them would have been anti-dilutive for the period (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Stock options
2,401

 
979

 
2,356

 
817

RSUs and ESPP
418

 
462

 
714

 
248

Total
2,819

 
1,441

 
3,070

 
1,065



15


NOTE 10—INCOME TAXES
    
The income tax expense of $2.4 million for the three months ended September 30, 2014 was primarily due to certain non-deductible stock-based compensation expenses, which caused the effective tax rate to exceed the statutory rate for the period. The income tax benefit of $0.6 million for the three months ended September 30, 2013 primarily relates to certain stock-based compensation deductions.
The income tax expense of $5.7 million for the nine months ended September 30, 2014 was primarily due to certain non-deductible stock-based compensation expenses, which caused the effective tax rate to exceed the statutory rate for the period. The income tax benefit of $0.9 million for the nine months ended September 30, 2013 primarily relates to certain stock-based compensation deductions and the extension of the R&D credit by Congress in January 2013. The extension of the credit provided a discrete benefit of $0.6 million. These deductions were offset by minor amounts of state and foreign taxes.
The Company evaluates the realization of its deferred tax assets based on the expiration period of the asset, projections of future taxable income in the relevant tax jurisdiction, the effect of tax planning strategies, and other factors. Both positive and negative evidence is weighed using significant judgment. Based on an evaluation of these factors, the Company believes that the realization of its deferred tax assets is more likely than not and, therefore, a valuation allowance against its deferred tax assets is not required. In future periods, positive and negative evidence can change due to revised projections of future taxable income in the relevant jurisdictions and other factors listed above. If future circumstances require a valuation allowance to be recorded, there would be an increase in tax expense in the consolidated statements of operations without any change in net cash provided by operating activities in the consolidated statements of cash flows.

NOTE 11—SEGMENT INFORMATION
The Company operates in one industry segment selling gateways, controllers and access points along with related software and services.
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is its chief executive officer. The Company’s chief executive officer reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. The Company has one business activity, and there are no segment managers who are held accountable for operations, operating results and plans for products or components below the consolidated unit level. Accordingly, the Company reports as a single operating segment. The Company and its chief executive officer evaluate performance based primarily on revenue in the geographic locations in which the Company operates. Revenue is attributed by geographic location based on the bill-to location of the Company’s customers.
The following presents total revenue by geographic region (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Americas:
 
 
 
 
 
 
 
United States
$
41,165

 
$
31,254

 
$
119,307

 
$
85,233

Other Americas
1,312

 
4,283

 
5,598

 
9,681

Total Americas
42,477

 
35,537

 
124,905

 
94,914

EMEA:
 
 
 
 
 
 
 
United Kingdom
7,327

 
7,102

 
19,932

 
20,887

Other EMEA
14,197

 
11,523

 
43,063

 
29,956

Total EMEA
21,524

 
18,625

 
62,995

 
50,843

APAC:
 
 
 
 
 
 
 
Total APAC
21,000

 
14,766

 
53,153

 
44,286

Total revenue
$
85,001

 
$
68,928

 
$
241,053

 
$
190,043

As of September 30, 2014, the Company had property and equipment, net, of $8.7 million, $0.6 million and $4.0 million located in the Americas, EMEA, and APAC respectively.

16


ITEM 2.        MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and in our other Securities and Exchange Commission, or SEC, filings, including our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the SEC on March 3, 2014. The following discussion and analysis contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts contained in this discussion and analysis and elsewhere in this Quarterly Report, including statements regarding our future financial condition, business strategy and plans and objectives of management for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “believe,” “will,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “expect,” “predict,” “could,” “potentially” and similar expressions that convey uncertainty of future events or outcomes are intended to identify forward-looking statements.
These forward-looking statements are subject to a number of risks, uncertainties and assumptions described under the section titled “Risk Factors” and elsewhere in this Quarterly Report and our other SEC filings, regarding, among other things:
our ability to predict our revenue, operating results and gross margin accurately;
our ability to maintain an adequate rate of revenue growth and remain profitable;
the length and unpredictability of our sales cycles with service provider end-customers;
any potential loss of or reductions in orders from our larger customers;
the effects of increased competition in our market;
our ability to continue to enhance and broaden our product offering;
our ability to maintain, protect and enhance our brand;
our ability to effectively manage our growth;
our ability to maintain proper and effective internal controls;
the quality of our products and services;
our ability to continue to build and enhance relationships with channel partners;
the attraction and retention of qualified employees and key personnel;
our ability to sell our products and effectively expand internationally;
our ability to protect our intellectual property;
claims that we infringe intellectual property rights of others; and
other risk factors included under the section titled “Risk Factors.”
Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties, and assumptions, the forward-looking events and circumstances discussed in this report may not occur, and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

17


Overview
Ruckus is a leading provider of carrier-class Wi-Fi solutions. Our products have been sold to over 44,000 end-customers worldwide, including approximately 190 service providers. Our solutions, which we call Smart Wi-Fi, are used by service providers and enterprises to solve network capacity and coverage challenges associated with the rapidly increasing traffic and number of users and client devices on wireless networks. Our Smart Wi-Fi solutions offer carrier-class features and functionality such as enhanced reliability, consistent performance, extended range and massive scalability. Our products include gateways, WLAN controllers and high performance access points. These products incorporate our patented and proprietary technologies, such as Smart-Radio, Smart QoS, Smart Scale and Smart Mesh, to enable high performance, reliable, adaptive and high capacity connectivity in a wide range of challenging operating conditions faced by service providers and enterprises.
Our service provider end-customers include mobile network operators, fixed line operators, cable companies and emerging "over the top" providers. These customers use our Smart Wi-Fi solutions in multiple ways to grow their businesses, including augmenting 3G/4G capacity, mobile data traffic offload to unlicensed spectrum, Wi-Fi access to increase their network footprint, backhaul assets to provide mobility services to existing customers and providing managed Wi-Fi services to enterprise customers.
Our enterprise end-customers span a wide range of industries, including hospitality, education, warehousing and logistics, corporate enterprise, retail, state and local governments, healthcare and public venues, such as stadiums, convention centers, airports, and major outdoor public areas.
We target both service providers and enterprises that require carrier-class Wi-Fi solutions through our global force of sales personnel and systems engineers. They work with value-added resellers and distributors, which we collectively refer to as channel partners, to reach and service our end-customers. Our channel partners provide lead generation, pre-sales support, product fulfillment and, in certain circumstances, post-sales customer service and support. In some instances, service providers may also act as a channel partner for sales of our solutions to enterprises. Our sales personnel and systems engineers typically engage directly with selected large service providers and large enterprises whether or not product fulfillment involves our channel partners. In contrast, the majority of our enterprise sales are originated and completed by our channel partners with little or no direct engagement with us.
Service providers typically require long sales cycles, which generally range between one and three years, but can be longer. The sale to a large service provider usually begins with an evaluation, followed by one or more network trials, followed by vendor selection and finally deployment and testing. A large service provider will frequently issue a request for proposals to shortlist competitive suppliers prior to the network trials. Completion of several of these steps is substantially outside of our control, which causes our revenue patterns from large service providers to vary widely from period to period. After initial deployment, subsequent purchases of our products depend on the time frame of the service provider.
We perform some warehousing and delivery of products sold within the United States from our headquarters in Sunnyvale, California. We also outsource the warehousing and delivery of our products to a third-party logistics provider for worldwide fulfillment. We perform quality assurance for our products at our facilities around the world.
We believe the market for our Smart Wi-Fi solutions is growing rapidly and our intention is to continue to invest for long-term growth. We expect to continue to invest heavily in research and development to expand the capabilities of our solutions with respect to services providers and enterprises. We also plan to continue to make significant investments in our field sales and marketing activities, both by increasing our service provider focused direct sales force and by expanding our network of channel partners.

18


Components of Our Results of Operations and Financial Condition
Revenue
We generate revenue from sales of our products and services. Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is reasonably assured.
Our total revenue is comprised of the following:
Product Revenue. The majority of our product revenue is generated from sales of our access points, controllers and gateways as well as corresponding controller and gateway licenses. We generally recognize product revenue on sales to distributors’ customers and at the time of shipment for all other customers, provided that all other revenue recognition criteria have been met.
Service Revenue. Service revenue is generated primarily from post-contract support, or PCS, and includes software updates on an “if and when available” basis, expedited replacement for defective gateways, controllers or access points, telephone and internet access to technical support personnel and hardware support. PCS is typically sold in one, three or five year terms and we recognize service revenue ratably over the contractual service period.
Cost of Revenue
Our total cost of revenue is comprised of the following:
Cost of Product Revenue. Cost of product revenue primarily includes manufacturing costs of our products payable to third-party contract manufacturers. Our cost of product revenue also includes shipping costs, third-party logistics costs, provisions for excess and obsolete inventory, warranty, amortization of intangible assets, personnel costs, including stock-based compensation, certain allocated costs for facilities and other expenses associated with logistics and quality control.
Cost of Service Revenue. Cost of service revenue primarily includes personnel costs, including stock-based compensation, costs associated with fulfilling support obligations and certain allocated costs for facilities and other expenses associated with our global support organization.
Gross Margin
Gross margin, or gross profit as a percentage of revenue, has been and will continue to be affected by a variety of factors, including the average selling price of our products, manufacturing costs, the mix of products sold, the mix of revenue by region, the mix of revenue between products and services, as well as the size of orders from customers. Our products currently have higher gross margins than our services, arising from the expansion of our service operations to manage growth. We expect our gross margins to fluctuate over time depending on the factors described above.
Operating Expenses
Research and Development. Research and development expenses consist primarily of personnel costs, including stock-based compensation, for employees and contractors engaged in research, design and development activities, as well as costs for prototype-related expenses, product certification, travel, depreciation, recruiting and certain facilities and benefits costs allocated based on headcount. We believe that continued investment in research and development of our products is important to attaining our strategic objectives. We expect research and development expenses to increase in absolute dollars as we continue to invest in our future products and services, although our research and development expenses may fluctuate as a percentage of total revenue.
Sales and Marketing. Sales and marketing expenses consist primarily of personnel costs, commission costs and stock-based compensation for employees and contractors engaged in sales and marketing activities. Commission costs are calculated on sale and expensed in the same period. Sales and marketing expenses also include the costs of trade shows, marketing programs, promotional materials, demonstration equipment, travel, depreciation, recruiting and certain facilities and benefits costs allocated based on headcount. We expect sales and marketing expenses to continue to increase in absolute dollars as we increase the size of our sales and marketing organizations in support of our investment in our growth opportunities, although our sales and marketing expenses may fluctuate as a percentage of total revenue.
General and Administrative. General and administrative expenses consist primarily of personnel costs and stock-based compensation for our executive, finance, legal, human resources and other administrative employees. In addition, general and administrative expenses include outside consulting, legal, audit and accounting services, depreciation and facilities and other supporting overhead costs not allocated to other departments. We expect that our general and administrative expenses will fluctuate on an absolute and percentage of sales basis in the near term as we continue to incur expenses associated with being a publicly traded company and incur legal fees associated with patent litigation matters.
Interest Income
Interest income consists of interest from our cash, cash equivalents and short-term investments and accretion of discount or amortization of premium on short-term investments.

19


Other Expense, net
Other expense, net consists primarily of losses from fluctuations in foreign currency exchange rates.
Income Tax Expense (Benefit)
Income tax expense (benefit) consists primarily of federal and state income taxes in the United States and income taxes in foreign jurisdictions in which we conduct business. We are required to consider all available evidence, both positive and negative, such as historical levels of income and future forecasts of taxable income amongst other items, in determining whether a full or partial release of our valuation allowance is required. We are also required to schedule future taxable income in accordance with accounting standards that address income taxes to assess the appropriateness of a valuation allowance, which further requires the exercise of significant management judgment. As a result, there can be no assurance that an increase in our valuation allowance may not be required in the future. At September 30, 2014, no valuation allowance has been provided against the Company's deferred tax assets.
Results of Operations
The following table sets forth our results of operations for the periods presented as a percentage of total revenue for those periods. The period-to-period comparison of financial results is not necessarily indicative of future results.
Consolidated Statements of Operations
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Revenue:
 
 
 
 
 
 
 
Product
92.7
 %
 
93.5
 %
 
93.0
 %
 
93.4
 %
Service
7.3

 
6.5

 
7.0

 
6.6

Total revenue
100.0

 
100.0

 
100.0

 
100.0

Cost of revenue:
 
 
 
 
 
 
 
Product
27.3

 
30.7

 
27.7

 
29.8

Service
4.0

 
3.7

 
3.8

 
3.8

Total cost of revenue
31.3

 
34.4

 
31.5

 
33.6

Gross profit
68.7

 
65.6

 
68.5

 
66.4

Operating expenses:
 
 
 
 
 
 
 
Research and development
23.1

 
23.6

 
23.5

 
23.7

Sales and marketing
29.1

 
30.6

 
30.1


30.3

General and administrative
9.4


12.2

 
10.3


12.2

Total operating expenses
61.6

 
66.4

 
63.9

 
66.2

Operating income (loss)
7.1

 
(0.8
)
 
4.6

 
0.2

Interest income
0.1

 
0.1

 
0.1

 

Other expense, net
(0.2
)
 
(0.1
)
 
(0.1
)
 
(0.2
)
Income (loss) before income taxes
7.0

 
(0.8
)
 
4.6

 

Income tax expense (benefit)
2.8

 
(0.9
)
 
2.4

 
(0.1
)
Net income
4.2
 %
 
0.1
 %
 
2.2
 %
 
0.1
 %

20


Revenues
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
Change in dollars
 
Change in percent
 
2014
 
2013
 
Change in dollars
 
Change in percent
 
(dollars in thousands)
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Product
$
78,810

 
$
64,449

 
$
14,361

 
22.3%
 
$
224,237

 
$
177,424

 
$
46,813

 
26.4%
Service
6,191

 
4,479

 
1,712

 
38.2%
 
16,816

 
12,619

 
4,197

 
33.3%
Total revenue
$
85,001

 
$
68,928

 
$
16,073

 
23.3%

$
241,053

 
$
190,043

 
$
51,010

 
26.8%

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
Change in dollars
 
Change in percent
 
2014
 
2013
 
Change in dollars
 
Change in percent
 
(dollars in thousands)
Revenue by geographic region:
 
 
 
 
 
 
 
 
 
 
 
 
Americas
$
42,477

 
$
35,537

 
$
6,940

 
19.5%
 
$
124,905

 
$
94,914

 
$
29,991

 
31.6%
EMEA
21,524

 
18,625

 
2,899

 
15.6%
 
62,995

 
50,843

 
12,152

 
23.9%
APAC
21,000

 
14,766

 
6,234

 
42.2%
 
53,153

 
44,286

 
8,867

 
20.0%
Total revenue
$
85,001

 
$
68,928

 
$
16,073

 
23.3%
 
$
241,053

 
$
190,043

 
$
51,010

 
26.8%
Product revenue increased by $14.4 million, or 22.3%, and $46.8 million, or 26.4% for the three and nine months ended September 30, 2014, respectively, compared to the three and nine months ended September 30, 2013. The growth was primarily driven by the expansion of our customer base, combined with incremental purchases from our existing customers, with total end-customers exceeding 44,000 at September 30, 2014.
The increase in demand for our products is driven by the continued introduction of Wi-Fi enabled smart devices, data-rich mobile internet applications and the integration of Wi-Fi technology into non-computing devices (known as the Internet of Things) that require robust Wi-Fi capacity and reliability. These technology trends are fueling new infrastructure investment across almost every segment of the market.
Service revenue increased by $1.7 million, or 38.2%, and $4.2 million, or 33.3% for the three and nine months ended September 30, 2014, respectively, compared to the three and nine months ended September 30, 2013. The increase was primarily related to the increase in PCS sales in connection with the increased sales of our products and PCS renewals from our existing customers. Service revenue is recognized over the contractual service period.
Revenue from Americas, EMEA and APAC increased during the three and nine months ended September 30, 2014 primarily due to the increased number of channel partners in each region focused on selling our products and the growth of our sales teams in new and existing industries and territories.
For the three and nine months ended September 30, 2013, we recognized $2.6 million and $5.2 million, respectively, of non-recurring product revenue in APAC following the expiration of future product rights related to a service provider.
Cost of Revenues and Gross Margin
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
Change in dollars
 
Change in percent
 
2014
 
2013
 
Change in dollars
 
Change in percent
 
(dollars in thousands)
Cost of revenue
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Product
$
23,193

 
$
21,165

 
$
2,028

 
9.6%
 
$
66,898

 
$
56,660

 
$
10,238

 
18.1%
Service
3,379

 
2,512

 
867

 
34.5%
 
9,070

 
7,246

 
1,824

 
25.2%
Total cost of revenue
$
26,572

 
$
23,677

 
$
2,895

 
12.2%
 
$
75,968

 
$
63,906

 
$
12,062

 
18.9%


21


 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
Change in dollars
 
Change in percent
 
Change in margin
 
2014
 
2013
 
Change in dollars
 
Change in percent
 
Change in margin
 
(dollars in thousands)
 
 
Gross profit
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Product
$
55,617

 
$
43,284

 
$
12,333

 
28.5%
 
 
 
$
157,339

 
$
120,764

 
$
36,575

 
30.3%
 
 
Service
2,812

 
1,967

 
845

 
43.0%
 
 
 
7,746

 
5,373

 
2,373

 
44.2%
 
 
Total gross profit
$
58,429

 
$
45,251

 
$
13,178

 
29.1%
 
 
 
$
165,085

 
$
126,137

 
$
38,948

 
30.9%
 
 
Product gross margin
70.6%
 
67.2%
 
 
 
 
 
3.4
 
70.2%
 
68.1%
 
 
 
 
 
2.1
Service gross margin
45.4%
 
43.9%
 
 
 
 
 
1.5
 
46.1%
 
42.6%
 
 
 
 
 
3.5
Total gross margin
68.7%
 
65.6%
 
 
 
 
 
3.1
 
68.5%
 
66.4%
 
 
 
 
 
2.1
Total gross margin for the three and nine months ended September 30, 2014 compared to the three and nine months ended September 30, 2013 increased 3.1 and 2.1 percentage points, respectively.
For the three months ended September 30, 2014, product gross margin increased by 3.4 percentage points, compared to the three months ended September 30, 2013. The increase was primarily due to economies of scale from manufacturing and operations, which contributed a 3.7 percentage point increase to product gross margin. Furthermore, the decrease in inventory write downs due to product end of life contributed a 0.6 percentage point increase in product gross margin. For the three months ended September 30, 2013, we benefited from a non-recurring 1.4 percentage point increase in gross margin related to $2.6 million of product revenue recognized following the expiration of future product rights with no related cost of product.
For the three months ended September 30, 2014, service gross margin increased by 1.5 percentage points, compared to the three months ended September 30, 2013. The increase was primarily the result of a 38.2% growth in service revenue offset, in part, by an increase in service costs of 34.5%, arising from the expansion of our service operations to manage growth.
For the nine months ended September 30, 2014, product gross margin increased by 2.1 percentage points, compared to the nine months ended September 30, 2013. The increase was primarily due to economies of scale from manufacturing and operations, which contributed a 3.6 percentage point increase to product gross margin, offset primarily by a 0.9 percentage point decrease due to increased inventory write downs from product end of life. For the nine months ended September 30, 2013, we benefited from a non-recurring 1.0 percentage point increase in gross margin related to $5.2 million of product revenue recognized following the expiration of future product rights with no related cost of product.
For the nine months ended September 30, 2014, service gross margin increased by 3.5 percentage points, compared to the nine months ended September 30, 2013. The increase was primarily the result of a 33.3% growth in service revenue offset, in part, by an increase in service costs of 25.2%, arising from the expansion of our service operations to manage growth.
Research and Development
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
Change in dollars
 
Change in percent
 
2014
 
2013
 
Change in dollars
 
Change in percent
 
(dollars in thousands)
Research and development
$
19,614

 
$
16,268

 
$
3,346

 
20.6%
 
$
56,707

 
$
44,980

 
$
11,727

 
26.1%
% of revenue
23.1
%
 
23.6
%
 
 
 
 
 
23.5
%
 
23.7
%
 
 
 
 
The $3.3 million increase in research and development expenses for the three months ended September 30, 2014 compared to the three months ended September 30, 2013 was primarily attributable to an increase in personnel and related expenses of $1.4 million, which included increased salary expense of $0.9 million. In addition, we had higher product certification costs for new products of $1.1 million and increased consulting and contractor expense of $0.6 million primarily related to outsourced development work.
The $11.7 million increase in research and development expenses for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013 was primarily attributable to an increase in personnel and related costs of $6.7 million, which included increases in salary expense of $2.6 million, bonuses of $2.2 million and stock-based compensation of $1.6 million. We incurred higher consulting and contractor costs of $2.1 million, primarily related to outsourced development work. We also had higher product design, prototype and certification costs of $2.0 million, increased depreciation expense of $1.2 million and increased allocated overhead of $0.5 million due to the growth in headcount. These increases were offset by a decrease of $0.5 million in consumed supplies and materials.

22


Sales and Marketing
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
Change in dollars
 
Change in percent
 
2014
 
2013
 
Change in dollars
 
Change in percent
 
(dollars in thousands)
 
 
Sales and marketing
$
24,720

 
$
21,106

 
$
3,614

 
17.1%
 
$
72,402

 
$
57,522

 
$
14,880

 
25.9%
% of revenue
29.1
%
 
30.6
%
 
 
 
 
 
30.1
%
 
30.3
%
 
 
 
 
The $3.6 million increase in sales and marketing expenses for the three months ended September 30, 2014 compared to the three months ended September 30, 2013 was primarily attributable to an increase in personnel and related expenses as we increased our sales organization as part of our strategy to expand our reach to new service providers and channel partners. Personnel and related expenses increased $3.4 million, which included increases in salary expense of $1.9 million, bonuses and commissions of $0.7 million and stock-based compensation of $0.6 million.
The increase of $14.9 million in sales and marketing expenses for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013 was primarily attributable to an increase in personnel and related costs as we increased our sales organization as part of our strategy to expand our reach to new service providers and channel partners. Personnel and related costs increased $12.5 million, which included increases in salary expense of $5.6 million, bonus and commission expenses of $3.8 million, stock-based compensation of $1.7 million and payroll taxes of $1.4 million. Sales and marketing program expenses increased by $0.6 million, primarily due to public relations, channel marketing and trade shows. In additions, travel expenses increased $0.9 million, sales conferences increased $0.6 million and allocated overhead increased $0.8 million due to growth in headcount.
General and Administrative
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
Change in dollars
 
Change in percent
 
2014
 
2013
 
Change in dollars
 
Change in percent
 
(dollars in thousands)
General and administrative
$
8,017

 
$
8,410

 
$
(393
)
 
(4.7)%
 
$
24,812

 
$
23,291

 
$
1,521

 
6.5%
% of revenue
9.4
%
 
12.2
%
 
 
 
 
 
10.3
%
 
12.2
%
 
 
 
 
The $0.4 million decrease in general and administrative expenses for the three months ended September 30, 2014 compared to the three months ended September 30, 2013 was primarily attributable to a decrease of $1.9 million in legal fees associated with patent litigation, offset by an increase in personnel and related expenses of $1.3 million, which included increases in salary expense of $0.5 million and stock-based compensation of $0.5 million.
The $1.5 million increase in general and administrative expenses for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013 was primarily attributable to an increase in personnel and related costs of $4.6 million, which included increases in salary expense of $1.2 million, bonus and commission expense of $0.8 million and stock-based compensation of $2.2 million. These increases were offset by a decrease of $2.1 million in legal fees, primarily due to decreased litigation expense and net settlement gains of $0.8 million related to patent litigation matters.
Interest Income
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
Change in dollars
 
Change in percent
 
2014
 
2013
 
Change in dollars
 
Change in percent
 
(dollars in thousands)
Interest Income
$
41

 
$
58

 
$
(17
)
 
(29.3
)%
 
$
133

 
$
140

 
$
(7
)
 
(5.0
)%
Interest income consists of interest earned from our cash and cash equivalents and our short-term investments.
Other Expense, net
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
Change in dollars
 
Change in percent
 
2014
 
2013
 
Change in dollars
 
Change in percent
 
(dollars in thousands)
Other expense, net
$
200

 
$
102

 
$
98

 
96.1
%
 
$
310

 
$
329

 
$
(19
)
 
(5.8
)%

Other expense, net consists primarily of losses from fluctuations in foreign currency exchange rates.

23



Income Tax Expense (Benefit)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
Change in dollars
 
Change in percent
 
2014
 
2013
 
Change in dollars
 
Change in percent
 
(dollars in thousands)
Income tax expense (benefit)
$
2,365

 
$
(634
)
 
$
2,999

 

 
$
5,721

 
$
(918
)
 
$
6,639

 

The income tax expense of $2.4 million for the three months ended September 30, 2014 was primarily due to certain non-deductible stock-based compensation expenses, which caused the effective tax rate to exceed the statutory rate for the period. The income tax benefit of $0.6 million for the three months ended September 30, 2013 primarily relates to certain stock-based compensation deductions.
The income tax expense of $5.7 million for the nine months ended September 30, 2014 was primarily due to certain non-deductible stock-based compensation expenses, which caused the effective tax rate to exceed the statutory rate for the period. The income tax benefit of $0.9 million for the nine months ended September 30, 2013 primarily relates to certain stock-based compensation deductions and the extension of the R&D credit by Congress in January 2013. The extension of the credit provided a discrete benefit of $0.6 million. These deductions were offset by minor amounts of state and foreign taxes.

Liquidity and Capital Resources
 
September 30,
 
December 31,
 
2014
 
2013
 
(in thousands)
Cash and cash equivalents
$
116,836

 
$
91,282

Short-term investments
72,103

 
60,878

Cash and short-term investments
$
188,939

 
$
152,160


 
Nine Months Ended September 30,
 
2014
 
2013
 
(in thousands)
Net cash provided by operating activities
$
31,503

 
$
19,406

Net cash used in investing activities
(18,873
)
 
(87,783
)
Net cash provided by financing activities
12,924

 
5,644

Net increase (decrease) in cash and cash equivalents
$
25,554

 
$
(62,733
)
We had cash, cash equivalents and short-term investments of $188.9 million at September 30, 2014. Our cash equivalents and short-term investments are comprised primarily of money market funds and corporate debt securities. As of September 30, 2014, $2.4 million of cash and cash equivalents were held outside of the United States and is not presently available to fund domestic operations and obligations. If we were to repatriate cash held outside the United States, it could be subject to U.S. income taxes, less any previously paid foreign income taxes.
We plan to continue to invest in long-term growth and we anticipate that these investments will continue to increase in absolute dollars. We believe that our existing cash and cash equivalents balance together with our investments and cash provided by operations will be sufficient to meet our working capital requirements for at least the next 12 months. Our future capital requirements will depend on many factors including our growth rate, the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced products and services offerings, the costs to ensure access to adequate manufacturing capacity, and the continuing market acceptance of our products. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, operating results, and financial condition would be adversely affected.

24


Operating Activities
We generated $31.5 million of cash from operating activities during the nine months ended September 30, 2014 resulting from our net income of $5.3 million, adjusted for non-cash net charges of $27.0 million and offset by changes in our net operating assets and liabilities of $0.8 million. The non-cash net charges consisted mainly of stock-based compensation of $18.9 million and depreciation and amortization of $6.9 million. Changes in our operating assets and liabilities were primarily due to the increase in our accounts receivable, net of $8.7 million and inventory of $1.4 million due to timing of shipments, offset by increased accrued compensation of $2.8 million primarily due to increased headcount and higher attainment of commission and bonus targets, higher accounts payable of $4.7 million due to timing of payments and deferred revenue of $1.7 million related to support renewals, offset in part by inventory sold through the channel.
We generated $19.4 million of cash from operating activities during the nine months ended September 30, 2013 resulting from our net income of $1.1 million, non-cash net charges of $17.4 million and slight changes in our net operating assets and liabilities of $0.9 million. The non-cash net charges consisted primarily of stock-based compensation of $12.8 million, depreciation and amortization of $4.7 million, partially offset by the change in deferred income taxes of $1.5 million, due to the retroactive benefit related to the extension of the Federal research credit.
Investing Activities
Our primary investing activities consist of purchases, maturities, and sales of short-term investments, purchases of property and equipment and payments for intangible assets and acquisitions. Purchases of property and equipment may vary from period to period due to the timing of the expansion of our operations.
Cash used in investing activities during the nine months ended September 30, 2014 was $18.9 million, as a result of $86.1 million related to purchase of investments, $6.8 million related to purchase of property and equipment, offset by $74.0 million in proceeds from the maturity of investments.
Cash used in investing activities during the nine months ended September 30, 2013 was $87.8 million, of which $69.8 million related to purchase of investments, $5.9 million related to our acquisition of YFind, net of cash acquired, $5.9 million related to purchase of property and equipment, $5.0 million related to an increase in restricted cash and $1.0 million related to a previous acquisition.
Financing Activities
Our primary financing activities consist of proceeds from sales of shares through employee equity award plans.
Cash generated from financing activities during the nine months ended September 30, 2014 was $12.9 million, of which $5.8 million related to the exercise of stock options, $2.0 million related to proceeds from the employee stock purchase plan and $5.1 million related to excess income tax benefit from the exercise of stock options.
Cash generated in financing activities during the nine months ended September 30, 2013 was $5.6 million, of which $5.0 million related to proceeds from exercise of stock options and $1.5 million related to proceeds from the employee stock purchase plan, partially offset by $0.8 million related to the payment of offering costs related to our IPO.


25


Contractual Obligations & Commitments
We lease our headquarters in Sunnyvale, California and office space in other locations worldwide under non-cancelable operating leases that expire at various dates through 2022. The following table summarizes our contractual obligations at September 30, 2014, including leases (in thousands):
 
Payment Due by Period
 
Total
 
Less than
1 Year
 
1-3 Years
 
3-5 Years
 
More than 5
Years
Operating leases
$
23,172

 
$
4,046

 
$
5,869

 
$
5,157

 
$
8,100

Purchase commitments (1)
16,074

 
16,074

 

 

 

Total
$
39,246

 
$
20,120

 
$
5,869

 
$
5,157

 
$
8,100

(1)
Consists of minimum purchase commitments with our contract manufacturers for inventory and specific contracted services.
The table above excludes liabilities for uncertain tax positions and related interest and penalties. We have not provided a detailed estimate of the payment timing of uncertain tax positions due to the uncertainty of when the related tax settlements will become due.
Off-Balance Sheet Arrangements
Through September 30, 2014, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.
We believe the critical accounting policies and estimates discussed under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2013, reflect our more significant judgments and estimates used in the preparation of the condensed consolidated financial statements. There have been no significant changes to our critical accounting policies and estimates as filed in such report.


26


ITEM 3.        QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity
We had cash, cash equivalents and short-term investments of $188.9 million and $152.2 million as of September 30, 2014 and December 31, 2013, respectively. These amounts were invested primarily in money market funds and highly liquid investment grade fixed income securities. The cash, cash equivalents and short-term investments are held for working capital purposes. Our investment policy and strategy is focused on the preservation of capital and supporting our liquidity requirements. We do not invest for trading or speculative purposes. At September 30, 2014, the weighted-average duration of our investment portfolio was less than one year. The fair value of our cash and cash equivalents would not be significantly affected by either an increase or decrease in interest rates mainly due to the short-term nature of these instruments.
Based on a sensitivity analysis, we determined that a hypothetical 100 basis point increase in interest rates would have resulted in a decrease in the fair values of our investments of approximately $0.3 million as of September 30, 2014. Such losses would only be realized if we sold the investments prior to maturity.
Foreign Currency Risk
Most of our sales are denominated in U.S. dollars, and therefore, our revenues are not currently subject to significant foreign currency risk. Our operating expenses are denominated in the currencies of the countries in which our operations are located, and may be subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Chinese Yuan, British Pound, Taiwan Dollar and Indian Rupee. Fluctuation in foreign currency exchange rates may cause us to recognize transaction gains and losses in our statement of operations. To date, foreign currency transaction gains and losses have not been material to our financial statements, and we have not engaged in any foreign currency hedging transactions.
ITEM 4.         CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2014. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2014, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


27


PART II. OTHER INFORMATION
ITEM 1.        LEGAL PROCEEDINGS
The information set forth under the “Litigation” subheading in Note 7 - Commitments and Contingencies of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q is incorporated herein by reference.
ITEM 1A.    RISK FACTORS
In evaluating Ruckus and our business, you should carefully consider the risks and uncertainties described below, together with all of the other information in this report, including our condensed consolidated financial statements and related notes. The risks and uncertainties described below are not the only ones we face. If any of the following risks occur, our business, financial condition, operating results, and prospects could be materially harmed. In that event, the price of our common stock could decline, and you could lose part or all of your investment.

The risks factors set forth below are unchanged substantively at September 30, 2014 from those set forth in our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the Securities and Exchange Commission on March 3, 2014.
Risks Related to Our Business and Industry
If the market for our products does not develop as we expect, demand for our products may not grow as we expect.
We develop and provide Wi-Fi products for service providers and enterprises. The success of our business depends on the continued growth and reliance on Wi-Fi in these markets. The recent growth of the market for Wi-Fi networks is being driven by the increased use of Wi-Fi-enabled mobile devices and the use of Wi-Fi as a preferred connectivity option to support video, voice and other higher-bandwidth uses.
A number of barriers may prevent service providers or their subscribers from adopting Wi-Fi technology to address the capacity gap in wireless networks. For example, Wi-Fi operates over an unlicensed radio spectrum, and if the Wi-Fi spectrum becomes crowded, Wi-Fi solutions will be a less attractive option for service providers. In addition, in order for Wi-Fi solutions to adequately address the potential future capacity gap between capacity and demand, mobile devices should automatically switch from a cellular data network to the service provider’s Wi-Fi network, when available and appropriate. Generally, mobile devices do not switch to unauthenticated Wi-Fi networks without input from the device user, and often require the user to log in when a new Wi-Fi network is accessed, which may tend to limit a subscriber’s use of Wi-Fi. These and other factors could limit or slow the adoption of Wi-Fi technologies by service providers as a means to address this potential future capacity gap.
There is no guarantee that service providers and enterprises will continue to utilize Wi-Fi technology, that use of Wi-Fi-enabled mobile devices will continue to increase or that Wi-Fi will continue to be the preferred connectivity option for the uses described above. There is also no guarantee that service providers and enterprises will understand the benefits we believe that our Smart Wi-Fi solutions provide. If another technology were found to be superior to Wi-Fi by service providers or enterprises, it would have a material adverse effect on our business, operating results and financial condition. As a result, demand for our products may not continue to develop as we anticipate, or at all.
Our operating results may fluctuate significantly, which makes our future operating results difficult to predict and could cause our operating results to fall below expectations or our guidance.
Our quarterly and annual operating results have fluctuated in the past and may fluctuate significantly in the future, which makes it difficult for us to predict our future operating results. The timing and size of sales of our products are highly variable and difficult to predict and can result in significant fluctuations in our revenue from period to period. This is particularly true of our sales to service providers, whose purchases are generally larger than those of our enterprise customers, causing greater variation in our results based on when service providers take delivery of our products.
In addition, our budgeted expense levels depend in part on our expectations of future revenue. Because any substantial adjustment to expenses to account for lower levels of revenue is difficult and takes time, we may not be able to reduce our costs sufficiently to compensate for an unexpected shortfall in revenue, and even a small shortfall in revenue could disproportionately and adversely affect our operating margin and operating results for a given quarter.
Our operating results may also fluctuate due to a variety of other factors, many of which are outside of our control, including changing economic environments in the U.S., Europe, China and other regions, and any of which may cause our stock price to fluctuate. In addition to other risks listed in this “Risk Factors” section, factors that may affect our operating results include:
fluctuations in demand for our products and services, including seasonal variations in certain enterprise sectors such as hospitality and education, where end-customers place orders most heavily in the second and third quarters; 
the inherent complexity, length and associated unpredictability of our sales cycles for our products and services, particularly with respect to sales to service providers;

28


changes in customers’ budgets for technology purchases and delays in their purchasing cycles;
technical challenges in service providers’ overall networks, unrelated to our products, which could delay adoption and installation of our products;
changing market conditions, including current and potential service provider consolidation;
any significant changes in the competitive dynamics of our markets, including new entrants, or further consolidation;
variation in sales channels, product costs or mix of products sold;
our contract manufacturers and component suppliers’ ability to meet our product demand forecasts at acceptable prices, or at all;
the timing of product releases or upgrades by us or by our competitors;
our ability to develop, introduce and ship in a timely manner new products and product enhancements and anticipate future market demands that meet our customers’ requirements;
our ability to successfully expand the suite of products we sell to existing customers;
the potential need to record incremental inventory reserves for products that may become obsolete due to our new product introductions;
our ability to control costs, including our operating expenses and the costs of the components we purchase;
any decision to increase or decrease operating expenses in response to changes in the marketplace or perceived marketplace opportunities;
the timing of litigation matters or disputes and any resulting settlements or judgments;
growth in our headcount and other related costs incurred in our customer support organization;
volatility in our stock price, which may lead to higher stock compensation expenses;
our ability to derive benefits from our investments in sales, marketing, engineering or other activities; and
general economic or political conditions in our domestic and international markets, in particular the restricted credit environment impacting the credit of our customers.
The cumulative effects of these factors could result in large fluctuations and unpredictability in our quarterly and annual operating results. As a result, comparing our operating results on a period-to-period basis may not be meaningful. You should not rely on our past results as an indication of our future performance. This variability and unpredictability could also result in our failing to meet the expectations of industry or financial analysts or investors for any period. If our revenue or operating results fall below the expectations of analysts or investors or below any forecasts we may provide to the market, or if the forecasts we provide to the market are below the expectations of analysts or investors, the price of our common stock could decline substantially. Such a stock price decline could occur even when we have met any previously publicly stated revenue and/or earnings forecasts we may provide.
The growth rate in recent periods of our revenue, net income and margin may not be indicative of our future performance.
You should not consider the growth rate in our revenue, net income or margin in recent periods as indicative of our future performance. We do not expect to achieve similar revenue, net income or margin growth rates in future periods. You should not rely on our revenue, net income or margin for any prior quarterly or annual periods as any indication of our future revenue, net income or margin, or their rate of growth. If we are unable to maintain consistent revenue, net income or margin, or growth of any of these financial measures, our stock price could be volatile, and it may be difficult to maintain profitability.

29


Our sales cycles can be long and unpredictable, particularly to service providers, and our sales efforts require considerable time and expense. As a result, our sales and revenue are difficult to predict and may vary substantially from period to period, which may cause our operating results to fluctuate significantly.
The timing of our revenues is difficult to predict. Our sales efforts involve educating our potential end-customers and channel partners about the applications and benefits of our products, including the technical capabilities of our products. Service providers typically require long sales cycles, which generally range between one and three years, but can be longer. The sale to a large service provider usually begins with an evaluation, followed by one or more network trials, followed by vendor selection and contract negotiation and finally followed by installation, testing and deployment. Sales cycles for enterprises are typically less than 90 days. We spend substantial time and resources on our sales efforts without any assurance that our efforts will produce any sales. In addition, purchases of our products are frequently subject to budget constraints, multiple approvals, and unplanned administrative, processing and other delays. Moreover, the evolving nature of the market may lead prospective end-customers to postpone their purchasing decisions pending resolution of Wi-Fi or other standards or adoption of technology by others. Even if an end-customer makes a decision to purchase our products, there may be circumstances or terms relating to the purchase that delay our ability to recognize revenue from that purchase, which makes our revenue difficult to forecast. As a result, it is difficult to predict whether a sale will be completed, the particular fiscal period in which a sale will be completed or the fiscal period in which revenue from a sale will be recognized. Our operating results may therefore vary significantly from quarter to quarter.
With respect to service providers, we have only a short history of making sales, and there remains uncertainty as to whether a significant service provider market for our products will develop. Sales to service providers have been characterized by large and sporadic purchases, in addition to long sales cycles. Sales activity to service providers depends upon the stage of completion of expanding network infrastructures, the availability of funding, and the extent to which service providers are affected by regulatory, economic and business conditions in their country of operations. The nature of this sales activity to service providers can result in further fluctuations in our operating results from period to period. Orders from service providers could decline for many reasons unrelated to the competitiveness of our products and services within their respective markets, such as advances in competing technologies. Our service provider end-customers typically have long implementation cycles, require a broader range of services, and often require acceptance terms that can lead to a delay in revenue recognition. Some of our current or prospective service provider end-customers have canceled or delayed and may in the future cancel or delay spending on the development or roll-out of capital and technology projects with us due to continuing economic uncertainty and, consequently, our financial position, results of operations or cash flows may be adversely affected. Weakness in orders from service providers, including as a result of any slowdown in capital expenditures by service providers, which may be more prevalent during a global economic downturn or periods of economic uncertainty, could have a material adverse effect on our business, financial position, results of operations, cash flows and stock price.
Our large end-customers, particularly service providers, have substantial negotiating leverage, which may require that we agree to terms and conditions that could result in lower revenues and gross margins from such end-customers. The loss of a single large end-customer could adversely affect our business.
Many of our end-customers are service providers or larger enterprises that have substantial purchasing power and leverage in negotiating contractual arrangements with us. These end-customers may require us to develop additional product features, may require penalties for non-performance of certain obligations, such as delivery, outages or response time, and may have multi-vendor strategies. The leverage held by these large end-customers could result in lower revenues and gross margins. The loss of a single large end-customer could materially harm our business and operating results.
We compete in highly competitive markets, and competitive pressures from existing and new companies may harm our business, revenues, growth rates and market share. In addition, many of our current or potential competitors have longer operating histories, greater brand recognition, larger customer bases and significantly greater resources than we do, and we may lack sufficient financial or other resources to maintain or improve our competitive position.
The markets in which we compete are intensely competitive, and we expect competition to increase in the future from established competitors and new market entrants. The markets are influenced by, among others, the following competitive factors:
brand awareness and reputation;
price and total cost of ownership;
strength and scale of sales and marketing efforts, professional services and customer support;
product features, reliability and performance;
incumbency of current provider, either for Wi-Fi products or other products;
scalability of products;
ability to integrate with other technology infrastructures; and
breadth of product offerings.

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Our competitors include Cisco Systems, Ericsson, Hewlett-Packard, Motorola and Aruba Networks. We expect competition to continue to intensify in the future as other companies introduce new products into our markets. This competition could result in increased pricing pressure, reduced profit margins, increased sales and marketing expenses and failure to increase, or the loss of, market share, any of which would likely seriously harm our business, operating results or financial condition. If we do not keep pace with product and technology advances, there could be a material and adverse effect on our competitive position, revenues and prospects for growth.
A number of our current or potential competitors have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical, sales, marketing and other resources than we do. Our competitors may be able to anticipate, influence or adapt more quickly to new or emerging technologies and changes in customer requirements, devote greater resources to the promotion and sale of their products and services, initiate or withstand substantial price competition, take advantage of acquisitions or other opportunities more readily and develop and expand their product and service offerings more quickly than we can. In addition, certain competitors may be able to leverage their relationships with customers based on other products or incorporate functionality into existing products to gain business in a manner that discourages customers from purchasing our products, including through selling at zero or negative margins, product bundling or closed technology platforms. Potential end-customers may prefer to purchase all of their equipment from a single provider, or may prefer to purchase wireless networking products from an existing supplier rather than a new supplier, regardless of product performance or features.
We expect increased competition from our current competitors, as well as other established and emerging companies, to the extent our markets continue to develop and expand. Conditions in our markets could change rapidly and significantly as a result of technological advancements or other factors. Some of our competitors have made acquisitions or entered into partnerships or other strategic relationships to offer a more comprehensive solution than they individually had offered. We expect this trend to continue as companies attempt to strengthen or maintain their market positions in an evolving industry and as companies enter into partnerships or are acquired. The companies resulting from these possible consolidations may create more compelling product offerings and be able to offer greater pricing flexibility, making it more difficult for us to compete effectively, including on the basis of price, sales and marketing programs, technology or product functionality. Continued industry consolidation may adversely impact customers’ perceptions of the viability of smaller and even medium-sized technology companies such as us and, consequently, customers’ willingness to purchase from such companies. These pressures could materially adversely affect our business, operating results and financial condition.
We compete in rapidly evolving markets and depend upon the development of new products and enhancements to our existing products. If we fail to predict and respond to emerging technological trends and our customers’ changing needs, we may not be able to remain competitive.
The Wi-Fi and wireless networking market is generally characterized by rapidly changing technology, changing end-customer needs, evolving industry standards and frequent introductions of new products and services. To succeed, we must effectively anticipate, and adapt in a timely manner to, end-customer requirements and continue to develop or acquire new products and features that meet market demands, technology trends and regulatory requirements. Likewise, if our competitors introduce new products and services that compete with ours, we may be required to reposition our product and service offerings or introduce new products and services in response to such competitive pressure. If we fail to develop new products or product enhancements, or our end-customers or potential end-customers do not perceive our products to have compelling technical advantages, our business could be adversely affected, particularly if our competitors are able to introduce solutions with such increased functionality. Developing our products is expensive, complex and involves uncertainties. Each phase in the development of our products presents serious risks of failure, rework or delay, any one of which could impact the timing and cost-effective development of such product and could jeopardize end-customer acceptance of the product. We have experienced in the past and may in the future experience design, manufacturing, marketing and other difficulties that could delay or prevent the development, introduction or marketing of new products and enhancements. In addition, the introduction of new or enhanced products requires that we carefully manage the transition from older products to minimize disruption in customer ordering practices and ensure that new products can be timely delivered to meet our customers’ demand. As a result, we may not be successful in modifying our current products or introducing new products in a timely or appropriately responsive manner, or at all. If we fail to address these changes successfully, our business and operating results could be materially harmed.
We base our inventory purchasing decisions on our forecasts of customers’ demand, and if our forecasts are inaccurate, our operating results could be materially harmed.
We place orders with our manufacturers based on our forecasts of our customers’ demand. Our forecasts are based on multiple assumptions, each of which may cause our estimates to be inaccurate, affecting our ability to provide products to our customers. When demand for our products increases significantly, we may not be able to meet demand on a timely basis, and we may need to expend a significant amount of time working with our customers to allocate limited supply and maintain positive customer relations, or we may incur additional costs in order to rush the manufacture and delivery of additional products. If we underestimate customers’ demand, we may forego revenue opportunities, lose market share and damage our customer relationships. Conversely, if we overestimate customer demand, we may purchase more inventory than we are able to sell at any given time or at all. In addition, we grant our distributors stock rotation rights, which require us to accept stock back from a distributor’s inventory, including obsolete inventory. As a result of our failure to estimate demand for our products, and our distributor’s stock rotation rights, we could have excess or obsolete inventory, resulting in a decline in the value of our inventory, which would increase our costs of revenues and reduce our liquidity. Our failure to accurately manage inventory relative to demand would adversely affect our operating results.

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If we are unable to manage our growth and expand our operations successfully, our business and operating results will be harmed and our reputation may be damaged.
We have expanded our operations significantly since inception and anticipate that further significant expansion will be required to achieve our business objectives. The growth and expansion of our business and product offerings places a continuous and significant strain on our management, operational and financial resources. Any such future growth would also add complexity to and require effective coordination throughout our organization.
To manage any future growth effectively, we must continue to improve and expand our information technology and financial infrastructure, our operating and administrative systems and controls, and our ability to manage headcount, capital and processes in an efficient manner. We may not be able to successfully implement improvements to these systems and processes in a timely or efficient manner, which could result in additional operating inefficiencies and could cause our costs to increase more than planned. If we do increase our operating expenses in anticipation of the growth of our business and this growth does not meet our expectations, our operating results may be negatively impacted. If we are unable to manage future expansion, our ability to provide high quality products and services could be harmed, which could damage our reputation and brand and may have a material adverse effect on our business, operating results and financial condition.
If material weaknesses occur, we may not be able to report our financial results accurately, prevent fraud or file our periodic reports as a public company in a timely manner.
In connection with the audit of our consolidated financial statements for the years ended December 31, 2011 and 2010, our independent registered public accountants identified a material weakness in our internal control over financial reporting. The material weakness resulted in the need for adjustments to our financial statements during the audit. A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
The material weakness related to a failure to properly design our financial closing and reporting process, which resulted from insufficient accounting resources throughout the years being audited to analyze, record, review and monitor compliance with generally accepted accounting principles for transactions on a timely basis. The resulting errors primarily related to improper estimation of best estimated selling price and vendor specific objective evidence as required properly to recognize revenue and to the capitalization of overhead in inventory.
During 2012, we remediated the previously identified material weakness. As of September 30, 2014, we have identified no material weaknesses. However, we cannot be certain that material weaknesses will not be discovered in the future. If material weaknesses occur in the future, we may be unable to report our financial results accurately on a timely basis or help prevent fraud, which could cause our reported financial results to be materially misstated and result in the loss of investor confidence or delisting and cause the market price of our common stock to decline.
We have a limited operating history, which makes it difficult to evaluate our prospects and future financial results and may increase the risk that we will not be successful.
We were incorporated in August 2002, began commercial shipments of our products and systems in 2005 and only achieved significant levels of revenue in 2010. As a result of our limited operating history, it is very difficult to forecast our future operating results. Our prospects should be considered and evaluated in light of the risks and uncertainties frequently encountered by companies with limited operating histories. These risks and difficulties include challenges in accurate financial planning as a result of limited historical data and the uncertainties resulting from having had a relatively limited time period in which to implement and evaluate our business strategies as compared to older companies with longer operating histories.
Some of the components and technologies used in our products are purchased from a single source or a limited number of sources. The loss of any of these suppliers may cause us to incur additional transition costs, result in delays in the manufacturing and delivery of our products, or cause us to carry excess or obsolete inventory and could cause us to redesign our products.
Although supplies of our components are generally available from a variety of sources, we currently depend on a single source or limited number of sources for several components for our products. We have also entered into license agreements with some of our suppliers for technologies that are used in our products, and the termination of these licenses, which can generally be done on relatively short notice, could have a material adverse effect on our business. For example, we purchase standard Wi-Fi chipsets only from Qualcomm Atheros and our products incorporate certain technology that we license from Qualcomm Atheros. If that license agreement were terminated, we would be required to redesign some of our products in order to incorporate technology from alternative sources, and any such termination of the license agreement and redesign of certain of our products could require additional licenses and materially and adversely affect our business and operating results.

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Because there are no other sources identical to several of our components and technologies, if we lost any of these suppliers or licenses, we could be required to transition to a new supplier or licensor, which could increase our costs, result in delays in the manufacturing and delivery of our products or cause us to carry excess or obsolete inventory. Additionally, poor quality in any of the sole-sourced components in our products could result in lost sales or lost sales opportunities. If the quality of the components does not meet our or our customers’ requirements, if we are unable to obtain components from our existing suppliers on commercially reasonable terms, or if any of our sole source providers cease to remain in business or continue to manufacture such components, we could be required to redesign our products in order to incorporate components or technologies from alternative sources. The resulting stoppage or delay in selling our products and the expense of redesigning our products could result in lost sales opportunities and damage to customer relationships, which would adversely affect our reputation, business and operating results.
In addition, for certain components for which there are multiple sources, we are subject to potential price increases and limited availability due to market demand for such components. In the past, unexpected demand for communication products caused worldwide shortages of certain electronic parts. If such shortages occur in the future and we are unable to pass component price increases along to our customers or maintain stable or competitive pricing, our gross margins and operating results could be negatively impacted.
Because we rely on third parties to manufacture our products, our ability to supply products to our customers may be disrupted.
We outsource the manufacturing of our products to third-party manufacturers. Our reliance on these third-party manufacturers reduces our control over the manufacturing process and exposes us to risks, including reduced control over quality assurance, product costs, and product supply and timing. Any manufacturing disruption by these third-party manufacturers could severely impair our ability to fulfill orders. Our reliance on outsourced manufacturers also yields the potential for infringement or misappropriation of our intellectual property. If we are unable to manage our relationships with these third-party manufacturers effectively, or if these third-party manufacturers suffer delays or disruptions for any reason, experience increased manufacturing lead-times, capacity constraints or quality control problems in their manufacturing operations, or fail to meet our future requirements for timely delivery, our ability to ship products to our customers would be severely impaired, and our business and operating results would be seriously harmed.
These manufacturers typically fulfill our supply requirements on the basis of individual orders. We do not have long term contracts with our third-party manufacturers that guarantee capacity, the continuation of particular pricing terms or the extension of credit limits. Accordingly, our third-party manufacturers are not obligated to continue to fulfill our supply requirements, which could result in supply shortages, and the prices we are charged for manufacturing services could be increased on short notice. In addition, as a result of fluctuating global financial market conditions, natural disasters or other causes, it is possible that any of our manufacturers could experience interruptions in production, cease operations or alter our current arrangements. If our manufacturers are unable or unwilling to continue manufacturing our products in required volumes, we will be required to identify one or more acceptable alternative manufacturers. It is time-consuming and costly and could be impractical to begin to use new manufacturers, and changes in our third-party manufacturers may cause significant interruptions in supply if the new manufacturers have difficulty manufacturing products to our specification. As a result, our ability to meet our scheduled product deliveries to our customers could be adversely affected, which could cause the loss of sales to existing or potential customers, delayed revenue or an increase in our costs. Any production interruptions for any reason, such as a natural disaster, epidemic, capacity shortages or quality problems, at one of our manufacturers would negatively affect sales of our product lines manufactured by that manufacturer and adversely affect our business and operating results.
New regulations related to “conflict minerals” may force us to incur additional expenses, may result in damage to our business reputation and may adversely impact our ability to conduct our business.
Pursuant to the Dodd-Frank Act, we adhere to certain reporting and other requirements regarding the use of certain minerals and derivative metals (referred to as “conflict minerals,” regardless of their actual country of origin) in our products. Some of these metals are commonly used in electronic equipment and devices, including our products. These requirements require that we investigate, disclose and report whether or not any such metals in our products originated from the Democratic Republic of Congo or adjoining countries. We have an extremely complex supply chain, with numerous suppliers, many of whom may not be obligated to investigate their own supply chains, for the components and parts used in each of our products. As a result, we may incur significant costs to comply with the diligence and disclosure requirements, including costs related to determining the source of any of the relevant metals used in our products and other potential changes to products or sources of supply as a consequence of such verification activities. In addition, because our supply chain is so complex, we may not be able to sufficiently verify the origin of all relevant metals used in our products through the due diligence procedures that we implement, which may harm our business reputation. We may incur reputational challenges if we determine that any of our products contain minerals or derivative metals that are not conflict free or if we are unable to sufficiently verify the source for all conflict minerals used in our products through the procedures we may implement. Furthermore, key components and parts that can be shown to be “conflict free” may not be available to us in sufficient quantity, or at all, or may only be available at significantly higher cost to us. If we are not able to meet customer requirements, customers may choose to disqualify us as a supplier. Any of these outcomes could adversely affect our business, financial condition or operating results.
We rely significantly on channel partners to sell and support our products, and the failure of this channel to be effective could materially reduce our revenue.
The majority of our sales are through channel partners. We believe that establishing and maintaining successful relationships with these channel partners is, and will continue to be, important to our financial success. Recruiting and retaining qualified channel partners and training them in our technology and product offerings require significant time and resources. To develop and expand our channel, we must continue to scale and improve our processes and procedures that support our channel partners, including investment in systems and training.

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Existing and future channel partners will only work with us if we are able to provide them with competitive products on terms that are commercially reasonable to them. If we fail to maintain the quality of our products or to update and enhance them, existing and future channel partners may elect to work instead with one or more of our competitors. In addition, the terms of our arrangements with our channel partners must be commercially reasonable for both parties. If we are unable to reach agreements that are beneficial to both parties, then our channel partner relationships will not succeed.
We have no minimum purchase commitments with any of our channel partners, and our contracts with channel partners do not prohibit them from offering products or services that compete with ours, including products they currently offer or may develop in the future and incorporate into their own systems. Some of our competitors may have stronger relationships with our channel partners than we do and we have limited control, if any, as to whether those partners use our products, rather than our competitors’ products, or whether they devote resources to market and support our competitors’ products, rather than our offerings.
The reduction in or loss of sales by these channel partners could materially reduce our revenue. If we fail to maintain relationships with our channel partners, fail to develop new relationships with other channel partners in new markets, fail to manage, train or incentivize existing channel partners effectively, fail to provide channel partners with competitive products on terms acceptable to them, or if these channel partners are not successful in their sales efforts, our revenue may decrease and our operating results could suffer.
Our ability to sell our products is highly dependent on the quality of our support and services offerings, and our failure to offer high quality support and services would have a material adverse effect on our sales and results of operations.
Once our products are deployed, our channel partners and end-customers depend on our support organization to resolve any issues relating to our products. A high level of support is important for the successful marketing and sale of our products. In many cases, our channel partners provide support directly to our end-customers. We do not have complete control over the level or quality of support provided by our channel partners. These channel partners may also provide support for other third-party products, which may potentially distract resources from support for our products. If we and our channel partners do not effectively assist our end-customers in deploying our products, succeed in helping our end-customers quickly resolve post-deployment issues or provide effective ongoing support, it would adversely affect our ability to sell our products to existing end-customers and could harm our reputation with potential end-customers. In some cases, we guarantee a certain level of performance to our channel partners and end-customers, which could prove to be resource-intensive and expensive for us to fulfill if unforeseen technical problems were to arise.
Many of our service provider and large enterprise customers have more complex networks and require higher levels of support than our smaller end-customers. We have recently expanded our support organization for service provider and large enterprise end-customers, and continue to develop this organization. If we fail to build this organization quickly enough, or it fails to meet the requirements of our service provider or large enterprise end-customers, it may be more difficult to execute on our strategy to increase our sales to large end-customers. In addition, given the extent of our international operations, our support organization faces challenges, including those associated with delivering support, training and documentation in languages other than English. As a result of all of these factors, our failure to maintain high quality support and services would have a material adverse effect on our business, operating results and financial condition.
The loss of key personnel or an inability to attract, retain and motivate qualified personnel may impair our ability to expand our business.
Our success is substantially dependent upon the continued service and performance of our senior management team and key technical, marketing and production personnel, including Selina Lo, who is our President and Chief Executive Officer, William Kish, who is one of our co-founders and our Chief Technology Officer, and Victor Shtrom, who is our other co-founder and Chief Wireless Architect. Our employees, including our senior management team, are at-will employees, and therefore may terminate employment with us at any time with no advance notice. The replacement of any members of our senior management team or other key personnel likely would involve significant time and costs and may significantly delay or prevent the achievement of our business objectives.
Our future success also depends, in part, on our ability to continue to attract, integrate and retain highly skilled personnel. Competition for highly skilled personnel is frequently intense, especially in the San Francisco Bay Area, where we have a substantial presence and need for highly skilled personnel. Volatility or lack of performance in our stock price may also affect our ability to attract and retain our key employees. Many of our employees have become, or will soon become, vested in a substantial amount of stock or stock options. Our employees may be more likely to leave us if the shares they own or the shares underlying their vested options have significantly appreciated in value relative to the original purchase prices of the shares or the exercise prices of the options, or if the exercise prices of the options that they hold are significantly above the market price of our common stock. Further, our employees’ ability to exercise those options and sell their stock in a public market is likely to result in a higher than normal turnover rate. Any failure to successfully attract, integrate or retain qualified personnel to fulfill our current or future needs may negatively impact our growth. Also, to the extent we hire personnel from our competitors, we may be subject to allegations that these new hires have been improperly solicited, or that they have divulged proprietary or other confidential information, or that their former employers own their inventions or other work product.

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Our products incorporate complex technology and may contain defects or errors. We may become subject to warranty claims, product returns, product liability and product recalls as a result, any of which could cause harm to our reputation and adversely affect our business.
Our products incorporate complex technology and must operate with cellular networks and a significant number and range of mobile devices using Wi-Fi, while supporting new and complex applications in a variety of environments that utilize different Wi-Fi communication industry standards. Our products have contained, and may contain in the future, undetected defects or errors. Some errors in our products have been and may in the future only be discovered after a product has been installed and used by end-customers. These issues are most prevalent when new products are introduced into the market. Defects or errors have delayed and may in the future delay the introduction of our new products. Since our products contain components that we purchase from third parties, we also expect our products to contain latent defects and errors from time to time related to those third-party components.
Additionally, defects and errors may cause our products to be vulnerable to security attacks, cause them to fail to help secure networks or temporarily interrupt end-customers’ networking traffic. Because the techniques used by computer hackers to access or sabotage networks are becoming increasingly sophisticated, change frequently and generally are not recognized until launched against a target, our products and third-party security products may be unable to anticipate these techniques and provide a solution in time to protect our end-customers’ networks. In addition, defects or errors in the mechanism by which we provide software updates for our products could result in an inability to update end-customers’ hardware products and thereby leave our end-customers vulnerable to attacks.
Real or perceived defects or errors in our products could result in claims by channel partners and end-customers for losses that they sustain, including potentially losses resulting from security breaches of our end-customers’ networks and/or downtime of those networks. If channel partners or end-customers make these types of claims, we may be required, or may choose, for customer relations or other reasons, to expend additional resources in order to help correct the problem, including warranty and repair costs, process management costs and costs associated with remanufacturing our inventory. Liability provisions in our standard terms and conditions of sale may not be enforceable under some circumstances or may not fully or effectively protect us from claims and related liabilities and costs. In addition, regardless of the party at fault, errors of these kinds divert the attention of our engineering personnel from our product development efforts, damage our reputation and the reputation of our products, cause significant customer relations problems and can result in product liability claims. We maintain insurance to protect against certain types of claims associated with the use of our products, but our insurance coverage may not adequately cover any such claims. In addition, even claims that ultimately are unsuccessful could result in expenditures of funds in connection with litigation and divert management’s time and other resources. We also may incur costs and expenses relating to a recall of one or more of our products. The process of identifying recalled products that have been widely distributed may be lengthy and require significant resources, and we may incur significant replacement costs, contract damage claims from our customers and significant harm to our reputation. The occurrence of these problems could result in the delay or loss of market acceptance of our products and could adversely impact our business, operating results and financial condition.
If our products do not interoperate with cellular networks and mobile devices, future sales of our products could be negatively affected.
Our products are designed to interoperate with cellular networks and mobile devices using Wi-Fi technology. These networks and devices have varied and complex specifications. As a result, we must attempt to ensure that our products interoperate effectively with these existing and planned networks and devices. To meet these requirements, we must continue to undertake development and testing efforts that require significant capital and employee resources. We may not accomplish these development efforts quickly or cost-effectively, or at all. If our products do not interoperate effectively, orders for our products could be delayed or cancelled, which would harm our revenue, gross margins and our reputation, potentially resulting in the loss of existing and potential end-customers. The failure of our products to interoperate effectively with cellular networks or mobile devices may result in significant warranty, support and repair costs, divert the attention of our engineering personnel from our product development efforts and cause significant customer relations problems. In addition, our end-customers may require our products to comply with new and rapidly evolving security or other certifications and standards. If our products are late in achieving or fail to achieve compliance with these certifications and standards, or our competitors achieve compliance with these certifications and standards, such end-customers may not purchase our products, which would harm our business, operating results and financial condition.
Although certain technical problems experienced by users may not be caused by our products, our business and reputation may be harmed if users perceive our solution as the cause of a slow or unreliable network connection, or a high profile network failure.
Our products have been deployed in many different locations and user environments and are capable of providing connectivity to many different types of Wi-Fi-enabled devices operating a variety of applications. The ability of our products to operate effectively can be negatively impacted by many different elements unrelated to our products. For example, a user’s experience may suffer from an incorrect setting in a Wi-Fi device. Although certain technical problems experienced by users may not be caused by our products, users often may perceive the underlying cause to be a result of poor performance of the wireless network. This perception, even if incorrect, could harm our business and reputation. Similarly, a high profile network failure may be caused by improper operation of the network or failure of a network component that we did not supply, but other service providers may perceive that our products were implicated, which, even if incorrect, could harm our business, operating results and financial condition.

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Our corporate culture has contributed to our success, and if we cannot maintain this culture, especially as we grow, we could lose the innovation, creativity, and teamwork fostered by our culture, and our business may be harmed.
We believe that a critical contributor to our success has been our corporate culture, which we believe fosters innovation, teamwork, passion for customers, and focus on execution, as well as facilitating critical knowledge transfer and knowledge sharing. As we grow and change, we may find it difficult to maintain these important aspects of our corporate culture, which could limit our ability to innovate and operate effectively. Any failure to preserve our culture could also negatively affect our ability to retain and recruit personnel, continue to perform at current levels or execute on our business strategy.
Our business, operating results and growth rates may be adversely affected by current or future unfavorable economic and market conditions.
Our business depends on the overall demand for wireless network technology and on the economic health and general willingness of our current and prospective end-customers to make those capital commitments necessary to purchase our products. If the conditions in the U.S. and global economies are uncertain or volatile, or if they deteriorate, our business, operating results and financial condition may be materially adversely affected. Economic weakness, end-customer financial difficulties, limited availability of credit and constrained capital spending have resulted, and may in the future result, in challenging and delayed sales cycles, slower adoption of new technologies and increased price competition, and could negatively impact our ability to forecast future periods, which could result in an inability to satisfy demand for our products and a loss of market share.
In particular, we cannot be assured of the level of spending on wireless network technology, the deterioration of which would have a material adverse effect on our results of operations and growth rates. The purchase of our products or willingness to replace existing infrastructure is discretionary and highly dependent on a perception of continued rapid growth in consumer usage of mobile devices and in many cases involves a significant commitment of capital and other resources. Therefore, weak economic conditions or a reduction in capital spending would likely adversely impact our business, operating results and financial condition. A reduction in spending on wireless network technology could occur or persist even if economic conditions improve.
In addition, if interest rates rise or foreign exchange rates weaken for our international customers, overall demand for our products and services could decline and related capital spending may be reduced. Furthermore, any increase in worldwide commodity prices may result in higher component prices for us and increased shipping costs, both of which may negatively impact our financial results.
Our reported financial results may be adversely affected by changes in accounting principles applicable to us.
Generally accepted accounting principles in the United States, or U.S. GAAP, are subject to interpretation by the Financial Accounting Standards Board, or FASB, the SEC and other various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before the announcement of any such change. Any difficulties in the implementation of these pronouncements could cause us to fail to meet our financial reporting obligations, which could result in regulatory discipline.
If our assumptions or judgments relating to our critical accounting policies change or prove to be incorrect, our operating results could fall below expectations of financial analysts and investors, resulting in a decline in our stock price.
The preparation of financial statements in conformity with U.S. GAAP requires our management to make estimates, assumptions and judgments that affect the amounts reported in the financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets, liabilities, equity, revenue and expenses that are not readily apparent from other sources. Our operating results may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our operating results to fall below the expectations of financial analysts and investors, resulting in a decline in our stock price. Significant assumptions and estimates used in preparing our financial statements include those related to revenue recognition, inventory, valuation of goodwill, intangible assets, income taxes, stock-based compensation and warranties.
Our exposure to the credit risks of our customers may make it difficult to collect accounts receivable and could adversely affect our operating results and financial condition.
In the course of our sales to customers, we may encounter difficulty collecting accounts receivable and could be exposed to risks associated with uncollectible accounts receivable. Economic conditions or other factors may impact some of our customers' ability to pay their accounts payables, including customers who are unable to collect or experience delays in payment from their own customers. We derive a significant portion of our revenue through distributors and in many cases sales in one or more countries or regions are via a single distributor, which can result in a concentrated credit risk if such country or region has experienced active sales. While we monitor these situations carefully and take appropriate measures to collect accounts receivable balances, we have written down accounts receivable and written off doubtful accounts in prior periods and may be unable to avoid accounts receivable write-downs or write-offs of doubtful accounts in the future. Such write-downs or write-offs could negatively affect our operating results.

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U.S. and global political, credit and financial market conditions may negatively impact or impair the value of our current portfolio of cash, cash equivalents and investments.
Our cash, cash equivalents and investments are held in a variety of interest bearing instruments, including money market funds, corporate debt securities. As a result of the uncertain domestic and global political, credit and financial market conditions, investments in these types of financial instruments pose risks arising from liquidity and credit concerns. Given that future deterioration in the U.S. and global credit and financial markets is a possibility, no assurance can be made that losses or significant deterioration in the fair value of our cash, cash equivalents or investments will not occur. These factors could impact the liquidity or valuation of our current portfolio of cash, cash equivalents and investments. If any such losses or significant deteriorations occur, it may negatively impact or impair our current portfolio of cash, cash equivalents and investments, which may affect our ability to fund future obligations. Further, if there is a U.S. and global political, credit and financial market crisis, it may be difficult for us to liquidate our investments prior to their maturity without incurring a loss, which would have a material adverse effect on our business, operating results and financial condition.
Our business is subject to the risks of earthquakes, fire, floods and other natural catastrophic events, and to interruption by manmade problems such as network security breaches, computer software or system errors or viruses, or terrorism.
Our corporate headquarters are located in the San Francisco Bay Area, and many of our contract manufacturers are located in eastern Asia, both regions known for seismic activity. A significant natural disaster, such as an earthquake, a fire or a flood, occurring near our headquarters, or near the facilities of our contract manufacturers, could have a material adverse impact on our business, operating results and financial condition. Despite the implementation of network security measures, our networks also may be vulnerable to computer viruses, break-ins and similar disruptions from unauthorized tampering with our products. In addition, natural disasters, acts of terrorism or war could cause disruptions in our or our customers’ businesses, our suppliers’ or manufacturers’ operations or the economy as a whole. We also rely on information technology systems to operate our business and to communicate among our workforce and with third parties. For example, we use business management and communication software products provided by third parties, such as Microsoft Online, SAP and salesforce.com, and security flaws or outages in such products would adversely affect our operations. Any disruption to these systems, whether caused by a natural disaster or by manmade problems, such as power disruptions, could adversely affect our business. To the extent that any such disruptions result in delays or cancellations of customer orders or impede our suppliers’ and/or our manufacturers’ ability to timely deliver our products and product components, or the deployment of our products, our business, operating results and financial condition would be adversely affected.
New regulations or standards or changes in existing regulations or standards in the United States or internationally related to our products may result in unanticipated costs or liabilities, which could have a material adverse effect on our business, results of operations and future sales, and could place additional burdens on the operations of our business.
Our products are subject to governmental regulations in a variety of jurisdictions. In order to achieve and maintain market acceptance, our products must continue to comply with these regulations as well as a significant number of industry standards. In the United States, our products must comply with various regulations defined by the Federal Communications Commission, or FCC, Underwriters Laboratories and others. We must also comply with similar international regulations. For example, our wireless communication products operate through the transmission of radio signals, and radio emissions are subject to regulation in the United States and in other countries in which we do business. In the United States, various federal agencies including the Center for Devices and Radiological Health of the Food and Drug Administration, the FCC, the Occupational Safety and Health Administration and various state agencies have promulgated regulations that concern the use of radio/electromagnetic emissions standards. Member countries of the European Union have enacted similar standards concerning electrical safety and electromagnetic compatibility and emissions, and chemical substances and use standards.
As these regulations and standards evolve, and if new regulations or standards are implemented, we will be required to modify our products or develop and support new versions of our products, and our compliance with these regulations and standards may become more burdensome. The failure of our products to comply, or delays in compliance, with the various existing and evolving industry regulations and standards could prevent or delay introduction of our products, which could harm our business. End-customer uncertainty regarding future policies may also affect demand for communications products, including our products. Moreover, channel partners or end-customers may require us, or we may otherwise deem it necessary or advisable, to alter our products to address actual or anticipated changes in the regulatory environment. Our inability to alter our products to address these requirements and any regulatory changes may have a material adverse effect on our business, operating results and financial condition.
We are evaluating and may adopt a corporate structure more closely aligned with the international nature of our business activities, which will require us to incur expenses but could fail to achieve the intended benefits.
We are considering reorganizing our corporate structure and intercompany relationships to more closely align with the international nature of our business activities. This proposed corporate structure may result in a reduction in our overall effective tax rate through changes in how we use our intellectual property, international procurement, and sales operations. This proposed corporate structure may also allow us to achieve financial and operational efficiencies. These efforts will require us to incur expenses in the near term for which we may not realize related benefits. If the intended structure is not accepted by the applicable taxing authorities or changes in domestic and international tax laws negatively impact the proposed structure, including proposed legislation to reform U.S. taxation of international business activities, or we do not operate our business consistent with the proposed structure and applicable tax provisions, we may fail to achieve the financial and operational efficiencies that we anticipate as a result of the proposed structure and our future financial condition and results of operations may be negatively impacted.

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Risks Related to Our International Operations
Our international operations expose us to additional business risks and failure to manage these risks may adversely affect our international revenue.
We derive a significant portion of our revenues from customers outside the United States. For the nine months ended September 30, 2014 and years ended December 31, 2013 and 2012, 51%, 55% and 57% of our revenue, respectively, was attributable to our international customers. As of September 30, 2014, approximately 54% of our full-time employees were located abroad. We expect that our international activities will be dynamic over the foreseeable future as we continue to pursue opportunities in international markets, which will require significant management attention and financial resources. Therefore, we are subject to risks associated with having worldwide operations.
As we expand the marketing, selling, and supporting of our products and services internationally, we must hire and train experienced personnel to staff and manage our foreign operations. To the extent that we experience difficulties in recruiting, training, managing, and retaining an international staff, and specifically staff related to sales management and sales personnel, we may experience difficulties in sales productivity in foreign markets. In addition, business practices in the international markets that we serve may differ from those in the United States and may require us to include non-standard terms in customer contracts, such as extended payment or warranty terms. To the extent that we may enter into contracts with our international customers in the future that include non-standard terms related to payment, warranties or performance obligations, our operating results may be adversely impacted. International operations are subject to other inherent risks and our future results could be adversely affected by a number of factors, including:
tariffs and trade barriers, export regulations and other regulatory or contractual limitations on our ability to sell or develop our products in certain foreign markets;
requirements or preferences for domestic products, which could reduce demand for our products;
differing technical standards, existing or future regulatory and certification requirements and required product features and functionality;
management communication and integration problems related to entering new markets with different languages, cultures and political systems;
difficulties in enforcing contracts and collecting accounts receivable, and longer payment cycles, especially in emerging markets;
heightened risks of unfair or corrupt business practices in certain geographies and of improper or fraudulent sales arrangements that may impact financial results and result in restatements of, and irregularities in, financial statements;
improper or illegal activities of third party agents or consultants purporting to act on our behalf;
difficulties and costs of staffing and managing foreign operations;
the uncertainty of protection for intellectual property rights in some countries;
potentially adverse tax consequences, including regulatory requirements regarding our ability to repatriate profits to the United States;
added legal compliance obligations and complexity;
the increased cost of terminating employees in some countries; and
political and economic instability and terrorism.
To the extent we continue to expand our business globally, our success will depend, in large part, on our ability to anticipate and manage effectively these and other risks associated with our international operations. Our failure to manage any of these risks successfully could harm our international operations and reduce our international sales, adversely affecting our business, operating results and financial condition.
We may not successfully sell our products in certain geographic markets or develop and manage new sales channels in accordance with our business plan.
We expect to continue to sell our products in certain geographic markets where we do not have significant current business and to a broader customer base. To succeed in certain of these markets, we believe we will need to develop and manage new sales channels and distribution arrangements. We may not be successful in developing and managing such channels, in further penetrating certain geographic regions, or reaching a broader customer base. Failure to develop or manage additional sales channels effectively would limit our ability to succeed in these markets and could adversely affect our ability to grow our customer base and revenue.

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We are exposed to fluctuations in currency exchange rates, which could negatively affect our financial condition and operating results.
To date, substantially all of our international sales have been denominated in U.S. dollars; however, most of our expenses associated with our international operations are denominated in local currencies. As a result, a decline in the value of the U.S. dollar relative to the value of these local currencies could have a material adverse effect on the gross margins and profitability of our international operations. Conversely, an increase in the value of the U.S. dollar relative to the value of these local currencies results in our products being more expensive to potential customers and could have an adverse impact on our pricing or our ability to sell our products internationally. To date, we have not used risk management techniques to hedge the risks associated with these fluctuations. Even if we were to implement hedging strategies, not every exposure can be hedged and, where hedges are put in place based on expected foreign currency exchange exposure, they are based on forecasts that may vary or that may later prove to have been inaccurate. As a result, fluctuations in foreign currency exchange rates or our failure to successfully hedge against these fluctuations could have a material adverse effect on our operating results and financial condition.
Failure to comply with the U.S. Foreign Corrupt Practices Act and similar laws associated with our activities outside the United States could subject us to penalties and other adverse consequences.
A significant portion of our revenues is and will be from jurisdictions outside of the United States. As a result, we are subject to the U.S. Foreign Corrupt Practices Act, or the FCPA, which generally prohibits U.S. companies and their intermediaries from making corrupt payments to foreign officials for the purpose of directing, obtaining or keeping business, and requires companies to maintain reasonable books and records and a system of internal accounting controls. The FCPA applies to companies and individuals alike, including company directors, officers, employees and agents. Under the FCPA, U.S. companies may be held liable for the corrupt actions taken by employees, strategic or local partners or other representatives. In addition, the government may seek to rely on a theory of successor liability and hold us responsible for FCPA violations committed by companies or associated with assets which we acquire.
In many foreign countries where we operate, particularly in countries with developing economies, it may be a local custom for businesses to engage in practices that are prohibited by the FCPA or other similar laws and regulations. In contrast, we have implemented a company policy requiring our employees and consultants to comply with the FCPA and similar laws. We have conducted mandatory formal FCPA compliance training for all of our full time employees. Nevertheless, there can be no assurance that our employees, partners and agents, as well as those companies to which we outsource certain of our business operations, will not take actions in violation of the FCPA or our policies for which we may be ultimately held responsible. As a result of our rapid growth, our infrastructure to identify FCPA matters and monitor compliance is developing. If we or our intermediaries fail to comply with the requirements of the FCPA or similar legislation, governmental authorities in the U.S. and elsewhere could seek to impose civil and/or criminal fines and penalties which could have a material adverse effect on our business, operating results and financial conditions. We may also face collateral consequences such as debarment and the loss of our export privileges.
We are subject to governmental export and import controls that could impair our ability to compete in international markets due to licensing requirements and subject us to liability if we are not in compliance with applicable laws.
Our products and solutions are subject to export control and import laws and regulations, including the U.S. Export Administration Regulations, U.S. Customs regulations and various economic and trade sanctions regulations administered by the U.S. Treasury Department’s Office of Foreign Assets Controls. Exports of our products and solutions must be made in compliance with these laws and regulations. If we fail to comply with these laws and regulations, we and certain of our employees could be subject to substantial civil or criminal penalties, including the possible loss of export or import privileges, fines, which may be imposed on us and responsible employees or managers, and, in extreme cases, the incarceration of responsible employees or managers. In addition, if our channel partners, agents or consultants fail to obtain appropriate import, export or re-export licenses or authorizations, we may also be adversely affected through reputational harm and penalties. Obtaining the necessary authorizations, including any required license, for a particular sale may be time-consuming, is not guaranteed and may result in the delay or loss of sales opportunities. Changes in our products or solutions or changes in applicable export or import laws and regulations may also create delays in the introduction and sale of our products and solutions in international markets, prevent our end-customers with international operations from deploying our products and solutions or, in some cases, prevent the export or import of our products and solutions to certain countries, governments or persons altogether. Any change in export or import laws and regulations, shift in the enforcement or scope of existing laws and regulations, or change in the countries, governments, persons or technologies targeted by such laws and regulations, could also result in decreased use of our products and solutions, or in our decreased ability to export or sell our products and solutions to existing or potential end-customers with international operations. Any decreased use of our products and solutions or limitation on our ability to export or sell our products and solutions would likely adversely affect our business, financial condition and results of operations.

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Furthermore, we incorporate encryption technology into certain of our products and solutions. Various countries regulate the import of certain encryption technology, including through import permitting and licensing requirements, and have enacted laws that could limit our ability to distribute our products and solutions or could limit our customers’ ability to implement our products and solutions in those countries. Encryption products and solutions and the underlying technology may also be subject to export control restrictions. Governmental regulation of encryption technology and regulation of imports or exports of encryption products, or our failure to obtain required import or export approval for our products and solutions, when applicable, could harm our international sales and adversely affect our revenues. Compliance with applicable regulatory laws and regulations regarding the export of our products and solutions, including with respect to new releases of our solutions, may create delays in the introduction of our products and solutions in international markets, prevent our end-customers with international operations from deploying our products and solutions throughout their globally-distributed systems or, in some cases, prevent the export of our products and solutions to some countries altogether. U.S. export control laws and economic sanctions programs also prohibit the shipment of certain products and services to countries, governments and persons that are subject to U.S. economic embargoes and trade sanctions. Even though we take precautions to prevent our products and solutions from being shipped or provided to U.S. sanctions targets, our products and solutions could be shipped to those targets or provided by third-parties despite such precautions. Any such shipment could have negative consequences, including government investigations, penalties and reputational harm. Furthermore, any new embargo or sanctions program, or any change in the countries, governments, persons or activities targeted by such programs, could result in decreased use of our products and solutions, or in our decreased ability to export or sell our products and solutions to existing or potential end-customers, which would likely adversely affect our business and our financial condition.
Risks Related to Our Intellectual Property
Claims by others that we infringe their intellectual property rights could harm our business.
Our industry is characterized by vigorous protection and pursuit of intellectual property rights, which has resulted in protracted and expensive litigation for many companies. We are subject to claims and litigation by third parties that we infringe their intellectual property rights and we expect claims and litigation with respect to infringement to occur in the future. As our business expands and the number of products and competitors in our market increases and overlaps occur, we expect that infringement claims may increase in number and significance. Any claims or proceedings against us, whether meritorious or not, could be time-consuming, result in costly litigation, require significant amounts of management time or result in the diversion of significant operational resources, any of which could materially and adversely affect our business and operating results.
Intellectual property lawsuits are subject to inherent uncertainties due to the complexity of the technical issues involved, and we cannot be certain that we will be successful in defending ourselves against intellectual property claims. In addition, we currently have a limited portfolio of issued patents compared to our larger competitors, and therefore may not be able to effectively utilize our intellectual property portfolio to assert defenses or counterclaims in response to patent infringement claims or litigation brought against us by third parties. Further, we are subject to claims and litigation brought by patent assertion companies and other non-practicing entities who have no relevant products or revenues and against whom our patents provide no deterrence. Such claims distract resources and require us to incur significant litigation expenses to defend or to pay significant sums in settlement to avoid the costs of litigation even when such claims are not meritorious. Furthermore, many potential litigants have the capability to dedicate substantially greater resources to enforce their intellectual property rights and to defend claims that may be brought against them. In addition to incurring litigation and settlement costs, a successful claimant could secure a judgment that requires us to pay substantial damages or prevents us from distributing certain products or performing certain services. We might also be required to seek a license and pay royalties for the use of such intellectual property, which may not be available on commercially acceptable terms or at all. Alternatively, we may be required to develop non-infringing technology, which could require significant effort and expense and may ultimately not be successful.
If we are unable to protect our intellectual property rights, our competitive position could be harmed or we could be required to incur significant expenses to enforce our rights.
Our ability to compete effectively is dependent in part upon our ability to protect our proprietary technology. We protect our proprietary information and technology through licensing agreements, third-party nondisclosure agreements and other contractual provisions, as well as through patent, trademark, copyright and trade secret laws in the United States and similar laws in other countries. There can be no assurance that these protections will be available in all cases or will be adequate to prevent our competitors from copying, reverse engineering or otherwise obtaining and using our technology, proprietary rights or products. The laws of some foreign countries, including countries in which our products are sold or manufactured, are in many cases not as protective of intellectual property rights as those in the United States, and mechanisms for enforcement of intellectual property rights may be inadequate. In addition, third parties may seek to challenge, invalidate or circumvent our patents, trademarks, copyrights and trade secrets, or applications for any of the foregoing. There can be no assurance that our competitors will not independently develop technologies that are substantially equivalent or superior to our technology or design around our proprietary rights. We have focused patent, trademark, copyright and trade secret protection primarily in the United States, China, Taiwan and Europe. As a result, we may not have sufficient protection of our intellectual property in all countries where infringement may occur. In each case, our ability to compete could be significantly impaired.
    

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To prevent substantial unauthorized use of our intellectual property rights, it may be necessary to prosecute actions for infringement and/or misappropriation of our proprietary rights against third parties, including previous employees that misappropriate our proprietary information upon departure from our company. Any such action could result in significant costs and diversion of our resources and management’s attention, and there can be no assurance that we will be successful in such action. Furthermore, many of our current and potential competitors have the ability to dedicate substantially greater resources to enforce their intellectual property rights than we do. Accordingly, despite our efforts, we may not be able to prevent third parties from infringing upon or misappropriating our intellectual property.
We are generally obligated to indemnify our channel partners and end-customers for certain expenses and liabilities resulting from intellectual property infringement claims regarding our products, which could force us to incur substantial costs.
We have agreed, and expect to continue to agree, to indemnify our channel partners and end-customers for certain intellectual property infringement claims regarding our products. As a result, in the case of infringement claims against these channel partners and end-customers, we could be required to indemnify them for losses resulting from such claims or to refund amounts they have paid to us. Some of our channel partners and end-customers have sought, and we expect that certain of our channel partners and end-customers in the future may seek, indemnification from us in connection with infringement claims brought against them. In addition, some of our channel partners and end-customers have tendered to us the defense of claims brought against them for infringement. We evaluate each such request on a case-by-case basis and we may not succeed in refuting all such claims. If a channel partner or end-customer elects to invest resources in enforcing a claim for indemnification against us, we could incur significant costs disputing it. If we do not succeed in disputing it, we could face substantial liability.
We rely on the availability of third-party licenses. If these licenses are available to us only on less favorable terms or not at all in the future, our business and operating results would be harmed.
We have incorporated third-party licensed technology into our products. For example, our products incorporate certain technology that we license from Qualcomm Atheros. It may be necessary in the future to renew licenses relating to various aspects of these products or to seek additional licenses for existing or new products. There can be no assurance that the necessary licenses will be available on acceptable terms or at all. The inability to obtain certain licenses or other rights, or to obtain those licenses or rights on favorable terms, or the need to engage in litigation regarding these matters, could result in delays in product releases until such time, if ever, as equivalent technology could be identified, licensed or developed and integrated into our products and might have a material adverse effect on our business, operating results and financial condition. Moreover, the inclusion in our products of intellectual property licensed from third parties on a nonexclusive basis could limit our ability to protect our proprietary rights in our products.
Our use of open source software could impose limitations on our ability to commercialize our products.
Our products contain software modules licensed for use from third-party authors under open source licenses, such as Linux and Cassandra. Use and distribution of open source software may entail greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or other contractual protections regarding infringement claims or the quality of the code. Some open source licenses contain requirements that we make available source code for modifications or derivative works we create based upon the type of open source software we use. If we combine our proprietary software with open source software in a certain manner, we could, under certain of the open source licenses, be required to release the source code of our proprietary software to the public. This could allow our competitors to create similar products with lower development effort and time, and ultimately could result in a loss of product sales for us.
Although we monitor our use of open source software, the terms of many open source licenses have not been interpreted by U.S. courts, and there is a risk that such licenses could be construed in a manner that could impose unanticipated conditions or restrictions on our ability to commercialize our products. In such event, we could be required to seek licenses from third parties in order to continue offering our products, to re-engineer our products or to discontinue the sale of our products in the event re-engineering cannot be accomplished on a timely basis, any of which could materially and adversely affect our business and operating results.

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Risks Related to Ownership of Our Common Stock
The price of our common stock has been and will likely continue to be volatile.
The trading price of our common stock has fluctuated, and is likely to continue to fluctuate, substantially. The trading price of our common stock depends on a number of factors, including those described in this “Risk Factors” section, many of which are beyond our control and may not be related to our operating performance.
Since shares of our common stock were sold at our initial public offering in November 2012 at a price of $15.00 per share, our stock price has ranged as low as $8.65 and as high as $26.50 through September 30, 2014. Factors that may have and could cause fluctuations in the trading price of our common stock include the following:
price and volume fluctuations in the overall stock market from time to time;
volatility in the market prices and trading volumes of high technology stocks;
changes in operating performance and stock market valuations of other technology companies generally, or those in our industry in particular;
sales of shares of our common stock by us or our stockholders, including our officers, directors and other holders of a significant percentage of our shares;
failure of financial analysts to maintain coverage of us, changes in financial estimates by any analysts who follow our company, or our failure to meet these estimates or the expectations of investors;
the financial projections we may provide to the public, any changes in those projections or our failure to meet those projections;
announcements by us or our competitors of new products or new or terminated significant contracts, commercial relationships or capital commitments;
the public’s reaction to our press releases, other public announcements and filings with the SEC;
rumors and market speculation involving us or other companies in our industry;
actual or anticipated changes in our results of operations or fluctuations in our operating results;
actual or anticipated developments in our business or our competitors’ businesses or the competitive landscape generally;
litigation involving us, our industry or both or investigations by regulators into our operations or those of our competitors;
developments or disputes concerning our intellectual property or other proprietary rights;
announced or completed acquisitions of businesses or technologies by us or our competitors;
new laws or regulations or new interpretations of existing laws or regulations applicable to our business;
changes in accounting standards, policies, guidelines, interpretations or principles;
any major change in our management;
general economic conditions and slow or negative growth of our markets; and
other events or factors, including those resulting from war, incidents of terrorism or responses to these events.

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In addition, the stock market in general, and the market for technology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry factors may seriously affect the market price of our common stock, regardless of our actual operating performance. In addition, in the past, following periods of volatility in the overall market and the market prices of particular companies’ securities, securities class action litigations have often been instituted against these companies. Litigation of this type, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.
Insiders continue to have substantial influence over us, which could limit a stockholder's ability to affect the outcome of key transactions, including a change of control.
As of September 30, 2014, our directors, executive officers and each of our stockholders who own greater than 5% of our outstanding common stock and their affiliates, in the aggregate, beneficially owned approximately 12.5% of the outstanding shares of our common stock. As a result, these stockholders, if acting together, will be able to influence matters requiring approval by our stockholders, including the election of directors and the approval of mergers, acquisitions or other extraordinary transactions. This concentration of ownership may have the effect of delaying, preventing or deterring a change of control of our company, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company and might ultimately affect the market price of our common stock.
We do not intend to pay dividends for the foreseeable future.
We have never declared or paid any cash dividends on our common stock and do not intend to pay any cash dividends in the foreseeable future. We anticipate that we will retain all of our future earnings for use in the development of our business and for general corporate purposes. Any determination to pay dividends in the future will be at the discretion of our board of directors. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investments.
The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified members of our board of directors.
We are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Dodd-Frank Act, the listing requirements of the New York Stock Exchange and other applicable securities rules and regulations. Compliance with these rules and regulations has increased and will continue to increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly, and increase demand on our systems and resources, particularly now that we are no longer an “emerging growth company.” The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. In order to maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight may be required. As a result, management’s attention may be diverted from other business concerns, which could harm our business and operating results. Although we have hired additional employees to comply with these requirements, we may need to hire more employees in the future, which will increase our costs and expenses.

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In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us and our business may be harmed.
As a public company that is subject to these rules and regulations, we may find that it is more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors and qualified executive officers.
We may acquire other businesses which could require significant management attention, disrupt our business, dilute stockholder value and adversely affect our operating results.
As part of our business strategy, we may continue to make investments in complementary companies, products or technologies. We may not be able to find suitable acquisition candidates, and we may not be able to complete such acquisitions on favorable terms, if at all. If we do complete significant acquisitions, we may not ultimately strengthen our competitive position or achieve our goals, and any acquisitions we complete could be viewed negatively by our end-customers, investors and financial analysts. In addition, if we are unsuccessful at integrating such acquisitions, or the technologies associated with such acquisitions, into our company, the revenue and operating results of the combined company could be adversely affected. Any integration process may require significant time and resources, and we may not be able to manage the process successfully. We may not successfully evaluate or utilize the acquired technology or personnel, or accurately forecast the financial impact of an acquisition transaction, including accounting charges. We may have to pay cash, incur debt or issue equity securities to pay for any such acquisition, each of which could adversely affect our financial condition or the value of our common stock. The sale of equity or issuance of debt to finance any such acquisitions could result in dilution to our stockholders. The incurrence of indebtedness would result in increased fixed obligations and could also include covenants or other restrictions that would impede our ability to manage our operations.
Our future capital needs are uncertain, and we may need to raise additional funds in the future. If we require additional funds in the future, those funds may not be available on acceptable terms, or at all.
We believe that our existing cash, cash equivalents and investments will be sufficient to meet our anticipated cash requirements for at least the next 12 months. We may, however, need to raise substantial additional capital to:
fund our operations;
continue our research and development;
develop and commercialize new products;
acquire companies, in-licensed products or intellectual property; or
expand sales and marketing activities.
Our future funding requirements will depend on many factors, including:
market acceptance of our products and services;
the cost of our research and development activities;
the cost of defending, in litigation or otherwise, claims that we infringe third-party patents or violate other intellectual property rights;
the cost and timing of establishing additional sales, marketing and distribution capabilities;
the cost and timing of establishing additional technical support capabilities;
the effect of competing technological and market developments; and
the market for different types of funding and overall economic conditions.
We may require additional funds in the future, and we may not be able to obtain those funds on acceptable terms, or at all. If we raise additional funds by issuing equity securities, our stockholders may experience dilution. Debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. Any debt or additional equity financing that we raise may contain terms that are not favorable to us or our stockholders.

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If we do not have, or are not able to obtain, sufficient funds, we may have to delay development or commercialization of our products or license to third parties the rights to commercialize products or technologies that we would otherwise seek to commercialize. If we raise additional funds through collaboration and licensing arrangements with third parties, it may be necessary to relinquish some rights to our technologies or our products, or to grant licenses on terms that are not favorable to us. If we are unable to raise adequate funds, we may have to liquidate some or all of our assets, or delay, reduce the scope of or eliminate some or all of our development programs. We also may have to reduce marketing, customer support or other resources devoted to our products or cease operations. Any of these actions could harm our operating results.
If we are unable to implement and maintain effective internal control over financial reporting in the future, investor confidence in our company may be adversely effected and, as a result, the value of our common stock may decline.
If we are unable to maintain adequate internal controls for financial reporting in the future, or if our auditors are unable to attest to management’s report on the effectiveness of our internal controls or determine we have a material weakness in our internal controls, as required by Section 404 of the Sarbanes-Oxley Act, we could lose investor confidence in the accuracy and completeness of our financial reports, which would cause the price of our common stock to decline.
If financial or industry analysts do not publish research or reports about our business, or if they issue an adverse or misleading opinion regarding our common stock, our stock price and trading volume could decline.
The trading market for our common stock may be influenced by the research and reports that industry or financial analysts publish about us or our business. We do not control these analysts or the content and opinions included in their reports. We may not attract sufficient research coverage or maintain coverage of analysts that currently publish reports regarding our business. Additionally, the analysts who publish information about our common stock have had relatively little experience with our company, which could affect their ability to accurately forecast our results and make it more likely that we fail to meet their estimates. In the event we obtain industry or financial analyst coverage, if any of the analysts who cover us issue an adverse or misleading opinion regarding our stock price, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.
Certain provisions in our charter documents and under Delaware law could limit attempts by our stockholders to replace or remove members of our board of directors or current management and may adversely affect the market price of our common stock.
Our restated certificate of incorporation and our restated bylaws may have the effect of delaying or preventing a change of control or changes in our board or directors or management. These provisions include the following:
our board of directors has the right to elect directors to fill a vacancy created by the expansion of the board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors;
our stockholders may not act by written consent or call special stockholders’ meetings; as a result, a holder, or holders, controlling a majority of our capital stock would not be able to take certain actions other than at annual stockholders’ meetings or special stockholders’ meetings called by the board of directors, the chairman of the board, the chief executive officer or the president;
our certificate of incorporation prohibits cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates;
stockholders must provide advance notice and additional disclosures in order to nominate individuals for election to the board of directors or to propose matters that can be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of our company; and
our board of directors may issue, without stockholder approval, shares of undesignated preferred stock; the ability to issue undesignated preferred stock makes it possible for our board of directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to acquire us.
As a Delaware corporation, we are also subject to certain Delaware anti-takeover provisions. Under Delaware law, a corporation may not engage in a business combination with any holder of 15% or more of its capital stock unless the holder has held the stock for three years or, among other things, the board of directors has approved the transaction. Our board of directors could rely on Delaware law to prevent or delay an acquisition of us.
Certain of our executive officers or directors may be entitled to accelerated vesting of their stock options pursuant to the terms of their employment arrangements or option grants upon a change of control of the Company. In addition to the arrangements currently in place with some of our executive officers, we may enter into similar arrangements in the future with other officers. Such arrangements could delay or discourage a potential acquisition of the Company.

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ITEM 2.        UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3.         DEFAULT UPON SENIOR SECURITIES

Not applicable.
ITEM 4.        MINE SAFETY DISCLOSURE
Not applicable.

ITEM 5.        OTHER INFORMATION
None.

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PART IV

ITEM 6.        EXHIBITS

The documents listed in the Exhibit Index of this Quarterly Report on Form 10-Q are incorporated by reference or are filed with this Quarterly Report on Form 10-Q, in each case as indicated therein (numbered in accordance with Item 601 of Regulation S-K).

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
 
RUCKUS WIRELESS, INC.
 
 
 
 
 
 
Date: November 3, 2014
 
 
By:
 
/s/ Selina Y. Lo
 
 
 
 
 
Selina Y. Lo
 
 
 
 
 
President and Chief Executive Officer


 
 
 
 
 
 
 
 
 
 
Date: November 3, 2014
 
 
By:
 
/s/ Seamus Hennessy
 
 
 
 
 
Seamus Hennessy
 
 
 
 
 
Chief Financial Officer



 



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EXHIBIT INDEX
Exhibit
Number
 
Description of Document
3.1
(1)
Amended and Restated Certificate of Incorporation of the Company.
3.2
(2)
Bylaws of the Registrant.
4.1
(2)
Sixth Amended and Restated Investor Rights Agreement, dated February 3, 2012, between the Company and the investors named therein.
10.1
(3)
Offer Letter to Daniel A. Rabinovitsj, dated August 20, 2014.
31.1
 
Certification of the Chief Executive Officer of the Company pursuant to rule 13a-14 under the Securities Exchange Act of 1934.
31.2
 
Certification of the Chief Financial Officer of the Company pursuant to rule 13a-14 under the Securities Exchange Act of 1934.
32.1
(4)
Certification of the Chief Executive Officer and Chief Financial Officer of the Company pursuant to18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
(5)
XBRL Instance Document.
101.SCH
(5)
XBRL Taxonomy Extension Schema Document.
101.CAL
(5)
XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF
(5)
XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB
(5)
XBRL Taxonomy Extension Labels Linkbase Document.
101.PRE
(4)
XBRL Taxonomy Extension Presentation Linkbase Document.
(1)
Previously filed as the same numbered exhibit to the Company's Current Report on Form 8-K, filed with the Securities and Exchange Commission on November 20, 2012, and incorporated herein by reference.
(2)
Previously filed as an exhibit to the Company's Registration Statement on Form S-1, as amended (File No. 333-184309), filed with the Securities and Exchange Commission on October 5, 2012, and incorporated herein by reference.
(3)
Previously filed as the same numbered exhibit to the Company's Current Report on Form 8-K, filed with the Securities and Exchange Commission on September 23, 2014, and incorporated herein by reference.
(4)
In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release Nos. 33-8238 and 34-47986, Final Rule; Management's Reports on Internal Control over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, the Certification furnished in Exhibit 32.1 hereto is deemed to accompany this Form 10-Q and will not be filed for purposes of Section 18 of the Exchange Act. Such certification will not be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.
(5)
XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Exchange Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under this section.






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