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EX-2.1 - MERGER AGREEMENT - INFOBLOX INCexhibit21-mergeragreement.htm
EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13A-14(A)/15D-14(A) - INFOBLOX INCexhibit311-ceocertificatio.htm
EX-32.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 - INFOBLOX INCexhibit322-cfocertificatio.htm
EX-32.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 - INFOBLOX INCexhibit321-ceocertificatio.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13A-14(A)/15D-14(A) - INFOBLOX INCexhibit312-cfocertificatio.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
[ x ]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2016
OR
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission File Number: 001-35507
INFOBLOX INC.
(Exact name of registrant as specified in its charter)
Delaware
 
20-0062867
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 

3111 Coronado Drive
Santa Clara, California 95054
(Address of principal executive offices)
(408) 986-4000
(Registrant’s telephone number, including area code)
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  [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.
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  [ ]   No  [ x ]
Shares outstanding of the registrant’s common stock:
Class
 
Outstanding at February 29, 2016
Common Stock, $0.0001 par value per share
 
57,849,856



INFOBLOX INC.
INDEX
 
 
 
 
PART I – FINANCIAL INFORMATION
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.


2




PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
INFOBLOX INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
 
 
January 31, 2016
 
July 31, 2015
 
 
(Unaudited)
 
 
ASSETS
 
 
 
 
CURRENT ASSETS:
 
 
 
 
Cash and cash equivalents
 
$
132,804

 
$
103,124

Short-term investments
 
194,427

 
227,712

Accounts receivable, net
 
53,883

 
45,881

Inventory
 
6,709

 
8,588

Prepaid expenses and other current assets
 
11,860

 
10,459

Total current assets
 
399,683

 
395,764

Property and equipment, net
 
23,212

 
23,225

Restricted cash
 
3,518

 
3,515

Intangible assets, net
 
1,279

 
1,923

Goodwill
 
33,293

 
33,293

Other assets
 
1,279

 
1,547

TOTAL ASSETS
 
$
462,264

 
$
459,267

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
CURRENT LIABILITIES:
 
 
 
 
Accounts payable and accrued liabilities
 
$
19,199

 
$
19,136

Accrued compensation
 
19,091

 
22,931

Deferred revenue, net
 
108,216

 
95,130

Total current liabilities
 
146,506

 
137,197

Deferred revenue, net
 
50,924

 
41,717

Other liabilities
 
4,687

 
5,201

TOTAL LIABILITIES
 
202,117

 
184,115

Commitments and contingencies (Note 5)
 

 

STOCKHOLDERS’ EQUITY:
 
 
 
 
Convertible preferred stock, $0.0001 par value per share—5,000 shares authorized; no shares issued or outstanding
 

 

Common stock, $0.0001 par value per share—100,000 shares authorized; 58,517 shares and 58,836 shares issued and outstanding as of January 31, 2016 and July 31, 2015
 
6

 
6

Additional paid-in capital
 
446,195

 
438,725

Accumulated other comprehensive loss
 
(218
)
 
(37
)
Accumulated deficit
 
(185,836
)
 
(163,542
)
TOTAL STOCKHOLDERS’ EQUITY
 
260,147

 
275,152

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
 
$
462,264

 
$
459,267



See accompanying Notes to Condensed Consolidated Financial Statements.

3


INFOBLOX INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
 
Three Months Ended January 31,
 
 Six Months ended January 31,
 
2016
 
2015
 
2016
 
2015
Net revenue:
 
 
 
 
 
 
 
Products and licenses
$
51,516

 
$
37,917

 
$
102,373

 
$
69,425

Services
44,483

 
36,387

 
87,648

 
71,598

Total net revenue
95,999

 
74,304

 
190,021

 
141,023

Cost of revenue:
 
 
 
 
 
 
 
Products and licenses
9,856

 
8,787

 
20,206

 
16,254

Services
9,065

 
7,491

 
17,817

 
14,958

Total cost of revenue
18,921

 
16,278

 
38,023

 
31,212

Gross profit
77,078

 
58,026

 
151,998

 
109,811

Operating expenses:
 
 
 
 
 
 
 
Research and development
17,461

 
15,504

 
35,294

 
30,074

Sales and marketing
45,996

 
39,788

 
93,282

 
78,243

General and administrative
11,149

 
9,355

 
21,606

 
17,315

Total operating expenses
74,606

 
64,647

 
150,182

 
125,632

Income (loss) from operations
2,472

 
(6,621
)
 
1,816

 
(15,821
)
Other income (expense), net
167

 
(590
)
 
262

 
(780
)
Income (loss) before provision for (benefit from) income taxes
2,639

 
(7,211
)
 
2,078

 
(16,601
)
Provision for (benefit from) income taxes
(1,139
)
 
(200
)
 
(189
)
 
620

Net income (loss)
$
3,778

 
$
(7,011
)
 
$
2,267

 
$
(17,221
)
 
 
 
 
 
 
 
 
Net income (loss) per share - basic and diluted
$
0.06

 
$
(0.13
)
 
$
0.04

 
$
(0.31
)
 
 
 
 
 
 
 
 
Weighted-average shares used in computing basic net income (loss) per share
58,926

 
56,087

 
59,099

 
55,729

Weighted-average shares used in computing diluted net income (loss) per share

60,138

 
56,087

 
60,795

 
55,729

See accompanying Notes to Condensed Consolidated Financial Statements.


4


INFOBLOX INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
 
Three Months Ended January 31,
 
 Six Months ended January 31,
 
2016
 
2015
 
2016
 
2015
Net income (loss)
$
3,778

 
$
(7,011
)
 
$
2,267

 
$
(17,221
)
Other comprehensive loss
 
 
 
 
 
 
 
Unrealized holding gain (loss) on short-term investments, net
(142
)
 
105

 
(181
)
 
96

Comprehensive income (loss)
$
3,636

 
$
(6,906
)
 
$
2,086

 
$
(17,125
)

See accompanying Notes to Condensed Consolidated Financial Statements.


5


INFOBLOX INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
 
Six Months Ended January 31,
 
 
2016
 
2015
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
Net income (loss)
 
$
2,267

 
$
(17,221
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
 
Stock-based compensation
 
25,793

 
24,339

Depreciation and amortization
 
4,982

 
4,437

Increase (decrease) in excess tax benefits from employee stock plans
 
387

 
(241
)
Other
 
556

 
1,552

Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable, net
 
(8,002
)
 
(2,473
)
Inventory
 
1,778

 
(1,267
)
Prepaid expenses, other current assets and other assets
 
(930
)
 
(907
)
Accounts payable and accrued liabilities
 
358

 
553

Accrued compensation
 
(3,840
)
 
3,247

Deferred revenue, net
 
22,293

 
15,239

Other liabilities
 
(514
)
 
(430
)
Net cash provided by operating activities
 
45,128

 
26,828

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
Purchases of short-term investments
 
(29,905
)
 
(56,316
)
Proceeds from maturities of short-term investments
 
62,700

 
40,880

Purchases of property and equipment
 
(5,144
)
 
(3,299
)
Proceeds from sales of short-term investments
 

 
1,001

Net cash provided by (used in) investing activities
 
27,651

 
(17,734
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
Common stock repurchases
 
(50,019
)
 

Proceeds from issuance of common stock under employee stock plans
 
7,555

 
7,633

Increase (decrease) in excess tax benefits from employee stock plans
 
(387
)
 
241

Net cash provided by (used in) financing activities
 
(42,851
)
 
7,874

Effect of foreign exchange rate changes on cash and cash equivalents
 
(248
)
 
(1,269
)
NET INCREASE IN CASH AND CASH EQUIVALENTS
 
29,680

 
15,699

CASH AND CASH EQUIVALENTS—Beginning of period
 
103,124

 
78,535

CASH AND CASH EQUIVALENTS—End of period
 
$
132,804

 
$
94,234

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
 
Purchases of property and equipment not yet paid
 
$
522

 
$
378

Cash paid for income taxes, net
 
$
439

 
$
138

See accompanying Notes to Condensed Consolidated Financial Statements.

6

INFOBLOX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)




NOTE 1. DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business
Infoblox Inc. (together with our subsidiaries, “we,” “us” or “our”) was originally incorporated in the State of Illinois in February 1999 and was reincorporated in the State of Delaware in May 2003. We are headquartered in Santa Clara, California and have subsidiaries and representative offices located throughout the world. We provide a broad family of enterprise and service provider-class solutions to automate management of the critical network infrastructure services needed for secure, scalable and fault-tolerant connections between applications, devices and users.
Basis of Presentation
The condensed consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries. Intercompany transactions and balances have been eliminated. The accompanying condensed consolidated balance sheet as of January 31, 2016 and the condensed consolidated statements of operations and the condensed consolidated statements of comprehensive income (loss) for the three and six months ended January 31, 2016 and 2015 and the condensed consolidated statements of cash flows for the six months ended January 31, 2016 and 2015 are unaudited. The condensed consolidated balance sheet as of July 31, 2015 was derived from the audited consolidated balance sheet as of July 31, 2015. These unaudited condensed consolidated financial statements and accompanying notes should be read together with the audited consolidated financial statements in Item 8 of our Annual Report on Form 10-K for the fiscal year ended July 31, 2015.
The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP, pursuant to the rules and regulations of the Securities Exchange Commission, or SEC. They do not include all of the financial information and footnotes required by GAAP for complete financial statements. We believe the unaudited condensed consolidated financial statements have been prepared on the same basis as the audited financial statements and include all adjustments necessary for their fair presentation. All adjustments are of a normal recurring nature. The results for the three and six months ended January 31, 2016 are not necessarily indicative of the results to be expected for any subsequent quarter or for the year ending July 31, 2016.
Significant Accounting Policies
We describe our significant accounting policies in Note 1 to the consolidated financial statements in Item 8 of our Annual Report on Form 10-K for the fiscal year ended July 31, 2015. Except for the accounting policy related to our market stock units, or MSUs, described below, and the election to allocate the cost related to the repurchase of common stock between additional paid-in-capital and accumulated deficit (see Note 6), there have been no significant changes in our accounting policies during the three and six months ended January 31, 2016, as compared to the significant accounting policies described in our Annual Report on Form 10-K for the year ended July 31, 2015.

During the first quarter of fiscal 2016, we granted MSUs to certain of our executive officers as part of our executive compensation program. We measure and recognize compensation cost for all stock-based awards based on the awards' fair value. We use the Monte-Carlo simulation model to estimate the fair value of MSUs. As the MSUs contain a performance metric with a market condition (our stock performance relative to a market index), we recognize compensation cost for MSUs using the graded vesting approach, net of estimated forfeitures and do not adjust the expense for subsequent changes in the expected outcome of the market-based vesting conditions.
Use of Estimates
The preparation of the accompanying condensed consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Those management estimates and assumptions affect revenue recognition, allowances for doubtful accounts and sales returns, valuation of our cash equivalents and available-for-sale investments, valuation of inventory, determination of fair value of stock-based awards, valuation of goodwill and intangible assets acquired, impairment of goodwill and other intangible assets, amortization of intangible assets, contingencies and litigation and accounting for income taxes, including the valuation reserve on deferred tax assets and uncertain tax positions. We evaluate our estimates and assumptions on an ongoing basis using historical experience and other factors and adjust those estimates and assumptions when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ from these estimates and assumptions, and those differences could be material to the condensed consolidated financial statements.

7

INFOBLOX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)




Concentrations of Risk
Financial instruments that potentially subject us to concentrations of credit risk consist of cash, cash equivalents, short-term investments, restricted cash and accounts receivable. Our cash, cash equivalents, short-term investments and restricted cash are invested in high-credit quality financial instruments with banks and financial institutions. Such deposits may be in excess of insured limits provided on such deposits.
We mitigate credit risk in respect to accounts receivable by performing ongoing credit evaluations of our customers and maintaining a reserve for potential credit losses. In addition, we generally require our customers to prepay for maintenance and support services to mitigate the risk of uncollectible accounts receivable.
Significant customers are those which represent more than 10% of our total net revenue or total gross accounts receivable balance at each respective balance sheet date. Exclusive Networks, Ltd., a distributor, accounted for 14.2% and 13.3% of our total net revenue for the three and six months ended January 31, 2016 and 10.9% and 11.5% for the three and six months ended January 31, 2015. Exclusive Networks Ltd. and Barclays Services Corporation, an end-user customer, accounted for 13.9% and 10.7% of our total gross accounts receivable as of January 31, 2016. Exclusive Networks Ltd. accounted for 14.0% of our total gross accounts receivable as of July 31, 2015. We believe it is unlikely that the loss of any of our channel partners would have a long term material adverse effect on our total net revenue as we believe end-users would likely purchase our products from a different channel partner. However, a loss of any one of these channel partners could have a material adverse impact during the transition period.

Recently Issued Accounting Pronouncements
    
In November 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-17 “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes,” to simplify the presentation of deferred income taxes. Under this new standard, both deferred tax liabilities and assets are required to be classified as noncurrent in a classified balance sheet. ASU 2015-17 is effective for fiscal years, and the interim periods within those years, beginning after December 15, 2016. Early adoption is permitted, and we are in the process of evaluating the timing of the adoption. Should we not early adopt, this standard will be effective for us in fiscal year 2018. The adoption of this standard is not expected to have a significant impact on our condensed consolidated financial statements.

In July 2015, the FASB issued ASU 2015-11—Inventory—Simplifying the Measurement of Inventory (Topic 330). ASU 2015-11 changes the measurement principle for inventory from the lower of cost or market to lower of cost and net realizable value. It applies to entities that measure inventory using a method other than last-in, first-out or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost. Early adoption is permitted, and we are in the process of evaluating the timing of the adoption. Should we not early adopt, this standard will be effective for us in fiscal year 2018. The adoption of this standard is not expected to have a significant impact on our condensed consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-05, Intangibles-Goodwill and Other-Internal-Use Software: Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement, which provides guidance on determining whether a cloud computing arrangement contains a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. We adopted this standard during the three months ended October 31, 2015 and our adoption did not have a significant impact on our condensed consolidated financial statements.

    

8

INFOBLOX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in Accounting Standards Codification (ASC) 605, Revenue Recognition. This ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The guidance requires the use of either of two methods: (i) retrospective to each prior reporting period presented with the option to elect certain practical expedients as defined within the guidance; or (ii) retrospective with the cumulative effect of initially applying the guidance recognized at the date of initial application and providing certain additional disclosures as defined per the guidance. In July 2015, the FASB decided to delay the effective date of the new revenue standard by one year. As such, ASU 2014-09 will be effective for us in fiscal year 2019, with the option to adopt earlier in fiscal year 2018. We are currently evaluating adoption timing and methods and whether this standard will have a material impact on our condensed consolidated financial statements.    


NOTE 2. NET INCOME (LOSS) PER SHARE
    
We compute basic net income (loss) per share using the weighted average number of common shares outstanding during the period. We compute diluted net income (loss) per share using the weighted average number of common shares and dilutive potential common shares outstanding during the period. Dilutive potential common shares include shares issuable upon the exercise of stock options and upon the vesting of restricted stock units, or RSUs, and each purchase under our employee stock purchase plan, or ESPP, under the treasury stock method.
In loss periods, basic net loss per share and diluted net loss per share are the same since the effect of potential common shares is anti-dilutive and therefore excluded.
The following outstanding weighted-average shares of common stock equivalents were excluded from the computation of diluted net income (loss) per share for the periods presented because including them would have been antidilutive:
 
 
Three Months Ended January 31,
 
 Six Months ended January 31,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
 
(In thousands)
Stock options to purchase common stock
1,743

 
3,412

 
1,632

 
3,221

Restricted stock units
1,488

 
1,946

 
1,355

 
2,229

Employee Stock Purchase Plan
171

 
58

 
164

 
260

 


9

INFOBLOX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)




NOTE 3. CASH EQUIVALENTS, SHORT-TERM INVESTMENTS, RESTRICTED CASH AND FAIR VALUE MEASUREMENTS

Cash Equivalents, Short-term Investments and Restricted Cash

The following table summarizes our cash equivalents, short-term investments and restricted cash as of January 31, 2016:
 
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Estimated Fair Value
 
 
 
 
 
 
 
 
 
 
 
(In thousands)
Cash equivalents:
 
 
 
 
 
 
 
 
Money market funds
 
$
18,004

 
$

 
$

 
$
18,004

Short-term investments:
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
135,602

 

 
(156
)
 
135,446

U.S. government agency securities
 
37,439

 
4

 
(27
)
 
37,416

FDIC-backed certificates of deposit
 
21,600

 
3

 
(38
)
 
21,565

Total short-term investments
 
194,641

 
7

 
(221
)
 
194,427

Restricted cash:
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
3,420

 

 
(4
)
 
3,416

Total cash equivalents, short-term investments and restricted cash
 
$
216,065

 
$
7

 
$
(225
)
 
$
215,847

    
The following table presents the contractual maturities of our short-term investments which are classified as available-for-sale securities as of January 31, 2016:
 
 
Amortized Cost
 
Estimated Fair Value
 
 
 
 
 
 
 
(In thousands)
Due within one year
 
$
123,035

 
$
122,933

Due after one year through two years
 
71,606

 
71,494

Total
 
$
194,641

 
$
194,427


We classify our available-for-sale investments as short-term investments in our condensed consolidated balance sheet based on the availability of the funds for use in operations or strategic investments rather than the actual maturity dates.     
    
    

10

INFOBLOX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)




The following table summarizes our cash equivalents, short-term investments and restricted cash as of July 31, 2015:

 
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Estimated Fair Value
 
 
 
 
 
 
 
 
 
 
 
(In thousands)
Cash equivalents:
 
 
 
 
 
 
 
 
Money market funds
 
$
5,695

 
$

 
$

 
$
5,695

Short-term investments:
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
162,718

 
50

 
(58
)
 
162,710

U.S. government agency securities
 
42,468

 
9

 
(10
)
 
42,467

FDIC-backed certificates of deposit
 
22,560

 
7

 
(32
)
 
22,535

Total short-term investments
 
227,746

 
66

 
(100
)
 
227,712

Restricted cash:
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
3,416

 
1

 
(4
)
 
3,413

Total cash equivalents, short-term investments and restricted cash
 
$
236,857

 
$
67

 
$
(104
)
 
$
236,820

    
Fair Value Measurements
The following table sets forth the fair value of our financial assets by level within the fair value hierarchy:
 
 
 
Fair Value Measurements at January 31, 2016 Using:
 
 
Quoted Prices in Active Markets For Identical Assets
 
Significant Other Observable Remaining Inputs
 
Significant Other Unobservable Remaining Inputs
 
 
 
 
(Level I)
 
(Level II)
 
(Level III)
 
Total
 
 
 
 
 
 
 
 
 
 
 
(In thousands)
Financial Assets
 
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
Money market funds
 
$
18,004

 
$

 
$

 
$
18,004

Short-term investments:
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
135,446

 

 

 
135,446

U.S. government agency securities
 

 
37,416

 

 
37,416

FDIC-backed certificates of deposit
 

 
21,565

 

 
21,565

Total short-term investments
 
135,446

 
58,981

 

 
194,427

 
 
 
 
 
 
 
 
 
Restricted cash:
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
3,416

 

 

 
3,416

Total financial assets
 
$
156,866

 
$
58,981

 
$

 
$
215,847

 
    

11

INFOBLOX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)




 
 
Fair Value Measurements at July 31, 2015 Using:
 
 
Quoted Prices in Active Markets For Identical Assets
 
Significant Other Observable Remaining Inputs
 
Significant Other Unobservable Remaining Inputs
 
 
 
 
(Level I)
 
(Level II)
 
(Level III)
 
Total
 
 
 
 
 
 
 
 
 
 
 
(In thousands)
Financial Assets
 
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
Money market funds
 
$
5,695

 
$

 
$

 
$
5,695

Short-term investments:
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
162,710

 

 

 
162,710

U.S. government agency securities
 

 
42,467

 

 
42,467

FDIC-backed certificates of deposit
 

 
22,535

 

 
22,535

Total short-term investments
 
162,710

 
65,002

 

 
227,712

 
 
 
 
 
 
 
 
 
Restricted cash:
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
3,413

 

 

 
3,413

Total financial assets
 
$
171,818

 
$
65,002

 
$

 
$
236,820



We value our Level I assets, consisting of money market funds and U.S. Treasury securities, using quoted prices in active markets for identical instruments. Financial assets whose fair values we measure on a recurring basis using Level II inputs consist of U.S. government agency securities and Federal Deposit Insurance Corporation, or FDIC-backed certificates of deposit. We measure the fair values of these assets with the help of a pricing service that either provides quoted market prices in active markets for identical or similar securities or uses observable inputs for their pricing without applying significant adjustments because the inputs used in the valuation model, such as interest rates and volatility, can be corroborated by readily observable market data for substantially the full term of the financial assets.
There were no transfers between Level I, Level II and Level III fair value hierarchies during the three and six months ended January 31, 2016.

     

12

INFOBLOX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)




NOTE 4. INVENTORY AND DEFERRED REVENUE

Inventory
Inventory consists of the following:
 
 
January 31, 2016
 
July 31, 2015
 
 
 
 
 
 
 
(In thousands)
Raw materials
 
$
1,825

 
$
2,224

Finished goods
 
4,884

 
6,364

Total inventory
 
$
6,709

 
$
8,588


Deferred Revenue, Net
Deferred revenue, net consists of the following: 
 
 
January 31, 2016
 
July 31, 2015
 
 
 
 
 
 
 
(In thousands)
Deferred revenue:
 
 
Products and licenses
 
$
8,314

 
$
6,255

Services
 
155,130

 
133,834

Total deferred revenue
 
163,444

 
140,089

Deferred cost of revenue:
 
 
 
 
Products and licenses
 
487

 
567

Services
 
3,817

 
2,675

Total deferred cost of revenue
 
4,304

 
3,242

Total deferred revenue, net
 
159,140

 
136,847

Less current portion
 
108,216

 
95,130

Non-current portion
 
$
50,924

 
$
41,717

 

13

INFOBLOX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)




NOTE 5. COMMITMENTS AND CONTINGENCIES
Contract Manufacturer Commitments
The independent contract manufacturer that provides the substantial majority of our manufacturing, repair and supply chain operations procures components and builds our products based on our forecasts. These forecasts are based on estimates of future demand for our products, which are in turn based on historical trends and an analysis from our sales and marketing organizations, adjusted for overall market conditions. In order to reduce manufacturing lead times and plan for adequate component supply, we may issue purchase orders to this independent contract manufacturer which may not be cancelable. In addition, we also have purchase commitments with other third-party contract manufacturers and suppliers. As of January 31, 2016, we had $7.5 million in purchase commitments with our third-party contract manufacturers and suppliers, of which $6.5 million relates to open purchase orders with our primary independent contract manufacturer.

Guarantees
We have entered into agreements with some of our customers that contain indemnification provisions relating to potential situations where claims could be alleged that our products infringe the intellectual property rights of a third party. We have, at our option and expense, the ability to repair any infringement, replace the product with a non-infringing functionally equivalent product, or refund our customers the unamortized value of the product based on its estimated useful life, typically five years. Other guarantees or indemnification arrangements include guarantees of product and service performance and standby letters of credit for lease facilities and corporate credit cards. We have not recorded a liability related to these indemnification and guarantee provisions, and our guarantees and indemnification arrangements have not had any significant impact on our condensed consolidated financial statements to date.

Loss Contingencies and Legal Proceedings
We are subject to the possibility of various loss contingencies arising in the ordinary course of business. An estimated loss contingency is accrued when it is probable that an asset has been impaired or a liability has been incurred and the range of loss can be reasonably estimated. However, the actual loss in any such contingency may be materially different from our estimates, which could result in the need to record additional expenses. If the amount of liability is not probable or the amount cannot be reasonably estimated, no accruals have been made. We regularly evaluate current information available to management to determine whether such accruals should be adjusted and whether new accruals are required in the periods presented.
From time to time, we are subject to various legal proceedings, claims and litigation arising in the ordinary course of business. Other than the litigation matter described below, as to which we are unable to make a materiality determination, we do not believe we are party to any currently pending legal proceedings, the outcome of which would have a material adverse effect on our financial position, results of operations or cash flows. There can be no assurance that existing or future legal proceedings arising in the ordinary course of business or otherwise will not have a material adverse effect on our financial position, results of operations or cash flows.

On June 9, 2015, Stacey Greenfield, who claims to be a stockholder of the Company, filed suit in the United States District Court for the Southern District of New York under Section 16(b) of the Securities Exchange Act of 1934 (“Section 16”) against Cadian Capital Management, LP, and certain persons and entities allegedly affiliated with it (collectively, the “Cadian Defendants”) in an action captioned Greenfield v. Cadian Capital Management, L.P., et al., Case No. 15-civ-04478.  We are named as a nominal defendant.  Plaintiff alleges that the Cadian Defendants engaged in transactions in our securities that resulted in “short-swing” profits within the scope of Section 16, and seeks disgorgement from the Cadian Defendants of those alleged “short-swing” profits on our behalf.  On September 3, 2015, the Cadian Defendants filed a motion to dismiss the complaint. On October 7, 2015, Plaintiff filed an amended complaint (“Amended Complaint”). On December 11, 2015, the Cadian Defendants filed a motion to dismiss the Amended Complaint, which Plaintiff has since opposed. The motion to dismiss has been fully briefed but has not been ruled upon by the Court. The parties have agreed that we (as a nominal defendant) shall not be required to file any responsive pleading until after the Cadian Defendants’ motion to dismiss is decided. 

We believe at this time that liabilities associated with this case, while possible, are not probable, and therefore we have not recorded any accrual for them as of January 31, 2016 and July 31, 2015. Further, any possible range of loss cannot be reasonably estimated at this time.


14

INFOBLOX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)




NOTE 6. STOCKHOLDERS' EQUITY AND EMPLOYEE BENEFIT PLANS
Stock-based Compensation
The following table summarizes stock-based compensation expense for stock option grants, ESPP purchase rights, restricted stock units, or RSUs, and MSUs recorded in our condensed consolidated statements of operations: 
 
Three Months Ended January 31,
 
 Six Months ended January 31,
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Cost of revenue
$
1,221

 
$
1,201

 
$
2,349

 
$
2,404

Research and development
2,908

 
2,633

 
6,125

 
5,241

Sales and marketing
6,343

 
5,847

 
12,561

 
12,195

General and administrative
2,493

 
2,436

 
4,758

 
4,499

 
$
12,965

 
$
12,117

 
$
25,793

 
$
24,339

    
    
The following table summarizes stock-based compensation expense by award type:
 
Three Months Ended January 31,
 
 Six Months ended January 31,
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
 
 
 
 
RSUs
$
9,494

 
$
7,846

 
$
19,315

 
$
15,284

Stock options
1,601

 
2,448

 
3,166

 
5,154

ESPP
1,284

 
1,823

 
2,416

 
3,901

MSUs
586

 

 
896

 

 
$
12,965

 
$
12,117

 
$
25,793

 
$
24,339

    

15

INFOBLOX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



    
The following table summarizes the unrecognized stock-based compensation balance, net of estimated forfeitures, by type of awards as of January 31, 2016:
 
 
 As of January 31, 2016
 
Weighted-Average Amortization Period
 
 
(In thousands)
 
(In years)
RSUs
 
$
71,705

 
2.64
Stock options
 
7,974

 
2.28
ESPP
 
4,106

 
1.05
MSUs
 
3,503

 
1.50
Total unrecognized stock-based compensation balance
 
$
87,288

 
2.49

Determination of Fair Value
The fair value of stock option grants and ESPP purchase rights was estimated at the date of grant and start of the offering period using the following assumptions: 
 
Three Months Ended January 31,
 
 Six Months ended January 31,
 
2016
 
2015
 
2016
 
2015
Stock Options:
 
 
 
 
 
 
 
Expected term (in years)
6.08

 
6.08

 
6.08

 
6.08

Risk-free interest rate
1.70
%
 
1.73
%
 
1.70
%
 
1.80
%
Expected volatility
52
%
 
55
%
 
52
%
 
56
%
Dividend rate
%
 
%
 
%
 
%
Weighted average fair value per share
$
9.24

 
$
9.40

 
$
9.48

 
$
8.66

Employee Stock Purchase Plan:
 
 
 
 
 
 
 
Expected term (in years)
0.50-2.00

 
0.50-2.00

 
0.50 - 2.00

 
0.50 - 2.00

Risk-free interest rate
0.51%-0.96%

 
0.16%-0.71%

 
0.51% - 0.96%

 
0.16% - 0.71%

Expected volatility
64
%
 
71
%
 
64
%
 
71
%
Dividend rate
%
 
%
 
%
 
%
Weighted average fair value per share
$6.19-$9.44

 
$7.02-$10.72

 
$6.19 - $9.44

 
$7.02-$10.72

    

16

INFOBLOX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)




Stock Option Activity
A summary of the stock option activity under our stock plans during the six months ended January 31, 2016 is presented below:
 
 
Number of
Shares
Underlying
Outstanding
Options
 
Weighted-
Average
Exercise Price
 
Weighted-
Average
Remaining
Contractual
Term
 
Aggregate Intrinsic Value
 
 
(In thousands)
 
 
 
(In years)
 
(In thousands)
Outstanding as of July 31, 2015
 
3,357

 
$
15.45

 
6.67
 
$
32,040

Granted
 
74

 
18.76

 
 
 
 
Exercised
 
(425
)
 
7.91

 
 
 
 
Canceled due to forfeitures and expirations
 
(134
)
 
20.62

 
 
 
 
Outstanding as of January 31, 2016
 
2,872

 
16.40

 
6.27
 
9,785

Vested and expected to vest as of January 31, 2016
 
2,787

 
16.27

 
6.20
 
9,747

Vested and exercisable as of January 31, 2016
 
1,965

 
$
14.60

 
5.32
 
$
9,153

 
Restricted Stock Unit Activity
A summary of the RSU activity during the six months ended January 31, 2016 is presented below:
 
 
Number of Units
 
Weighted-Average Grant Date Fair Value Per Share
 
 
(In thousands)
 
 
Outstanding as of July 31, 2015
 
4,406

 
$
21.03

Granted
 
2,014

 
18.13

Vested
 
(1,104
)
 
19.45

Cancellations due to forfeitures
 
(457
)
 
19.93

Outstanding as of January 31, 2016
 
4,859

 
$
20.29



17

INFOBLOX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)




Market Stock Units

In September 2015, the Compensation Committee of our board of directors approved awarding MSUs to certain of our officers. In general, the target shares are eligible to be earned in three annual installments, based on the number of shares eligible to be earned for the applicable performance period multiplied by the Performance Multiplier (as defined below) in effect for the applicable performance period. The performance periods consist of a one-, two- and three-year period within the three-year period covering fiscal 2016, fiscal 2017 and fiscal 2018, with each performance period commencing on the first day of fiscal 2016. In each of the first two performance periods, up to one-third of the target shares are eligible to be earned.  In the third performance period, up to the maximum shares (175% of target shares) less any shares that were earned in a prior performance period are eligible to be earned. The performance goal under the MSUs is our total stockholder return relative to the Russell 2000 Index over the applicable performance period. The Performance Multiplier is based on the positive difference or negative difference, measured in percentage points, between our total stockholder return and the total return for the Russell 2000 Index over the applicable performance period, and ranges from 0% to 175%. Subject to certain exceptions, the MSUs shall vest, if at all, only following the end of each applicable performance period, and the officer must be employed by us at the end of such performance period in order to vest in the award. We use a Monte-Carlo simulation to calculate the fair value of the award on the grant date. Monte-Carlo simulation requires various assumptions including stock price volatility and risk free interest rate as of the valuation date corresponding to the length of time remaining in the performance period and expected dividend yield. In September 2015, we granted a total of 245,000 MSUs with a weighted-average grant date fair value per unit of $20.66. We recognized $0.6 million and $0.9 million stock-based compensation expense, net of estimated forfeitures, related to MSUs during the three and six months ended January 31, 2016. As of January 31, 2016, there was approximately $3.5 million of unrecognized compensation cost, net of estimated forfeitures, related to MSUs. No MSUs vested during the three and six months ended January 31, 2016 as the first performance period would not be completed until the end of fiscal 2016. No MSUs were forfeited or canceled during the three and six months ended January 31, 2016.

Share Repurchase Program

In November 2015, our board of directors authorized a $100 million share repurchase program, with $50 million of that program to be executed as an accelerated share repurchase, or ASR, and the remaining $50 million of that program may be executed from time to time in compliance with applicable securities laws in the open market or in privately-negotiated transactions. The timing and amounts of any repurchases will be based on market conditions and other factors including price, regulatory requirements and capital availability. The authorization for open market purchases does not require the purchase of any minimum number of shares, has no expiration date and may be suspended, modified or discontinued at any time without prior notice. Under this program, shares repurchased are recorded as a reduction to capital in excess of par value and an increase in accumulated deficit in our condensed consolidated balance sheet as of January 31, 2016.

In December 2015, we executed an ASR with Goldman, Sachs & Co., or GS&Co, pursuant to which, on December 8, 2015, we paid GS&Co $50 million and received an initial delivery of 2,192,982 shares, representing 80% of the total ASR amount. Upon final settlement of the ASR, GS&Co may be required to deliver additional shares of common stock to us or we may be required to deliver shares of our common stock, or elect to make a cash payment, to GS&Co, based on the terms and conditions of the ASR.

We have accounted for the ASR program as two separate transactions (i) the 2,192,982 shares of common stock initially delivered to us on December 8, 2015 pursuant to the ASR were accounted for as a share repurchase transaction resulting in a reduction of stockholders’ equity and (ii) the unsettled contract representing 20%, or $10 million, of the total ASR were accounted for as a forward contract indexed to our own common stock. The initial delivery of 2,192,982 shares on December 8, 2015 resulted in an immediate reduction, on the delivery date, of the outstanding shares used to calculate the weighted-average common shares outstanding for basic and diluted earnings per share. We have determined that the forward contract, indexed to our common stock met all of the applicable criteria for equity classification. Therefore, during the three and six months ended January 31, 2016, we recorded $40 million as a share repurchase transaction and recorded $10 million, the implied value of the forward contract, as additional paid-in-capital.

    

18

INFOBLOX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)




In February 2016, the ASR was completed and GS&Co delivered 748,464 additional shares to us, resulting in a total of 2,941,446 shares repurchased at an average per share price of $17.00. We will account for the additional 748,464 shares repurchased as a share repurchase transaction which will reduce outstanding shares and the weighted shares outstanding that will be used to calculate the basic and diluted net income (loss) per share for the three and nine months ending April 30, 2016. In addition, approximately $4.7 million of the cost associated with these additional shares, which was initially recorded as a reduction to additional paid-in-capital, will be reclassified to accumulated deficit during the three and nine months ending April 30, 2016.


NOTE 7. INCOME TAXES
The income tax benefits for the three months ended January 31, 2016 and 2015 were $1.1 million and $0.2 million and the amounts recorded in each period consisted of the federal and state income tax benefits, partially offset by foreign income taxes. For the three months ended January 31, 2016 and 2015, our income tax benefits differed from the statutory amount primarily due to U.S. and foreign taxes currently payable as we realized no benefit for current year losses due to maintaining a full valuation allowance against net U.S. deferred tax assets. For the three months ended January 31, 2016, we also maintained a full valuation allowance against net Canadian deferred tax assets.

The income tax benefit for the six months ended January 31, 2016 was $0.2 million and the provision for income taxes for the six months ended January 31, 2015 was $0.6 million. The income tax benefit for the six months ended January 31, 2016 primarily consisted of U.S. income tax benefits and foreign income tax and the provision for income taxes for the six months ended January 31, 2015 primarily consisted of state and foreign income taxes. The change in the income tax benefit for the six months ended January 31, 2016 compared to the same period in the prior year was primarily due to higher favorable adjustments to U.S. taxes recorded in the first fiscal quarter of 2016 as a result of higher projected fiscal year 2016 taxable income.
    
The realization of tax benefits of deferred tax assets is dependent upon future levels of taxable income, of an appropriate character, in the periods the items are expected to be deductible or taxable. Based on the available objective evidence, management does not believe it is more likely than not that the net U.S. and Canadian deferred tax assets will be realizable. Accordingly, we have provided a full valuation allowance against net U.S. and Canadian deferred tax assets as of January 31, 2016 and July 31, 2015. We intend to maintain the valuation allowance until sufficient positive evidence exists to support a reversal of, or decrease in, the valuation allowance. During the three and six months ended January 31, 2016, there have been no material changes to the total amount of unrecognized tax benefits.

The Protecting Americans from Tax Hikes Act of 2015, or the PATH Act, which made the research tax credit permanent, was passed on December 18, 2015. The PATH Act retroactively extended the federal research tax credit from January 1, 2015. As we have a full valuation allowance against net U.S. deferred tax asset, this provision has no material impact on our financial statements for the three and six months ended January 31, 2016.


19

INFOBLOX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)




NOTE 8. SEGMENT INFORMATION
We operate in one segment. The following table represents net revenue based on the customer’s location, as determined by the customer’s shipping address: 
 
Three Months Ended January 31,
 
 Six Months ended January 31,
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Americas
$
58,671

 
$
46,578

 
$
119,997

 
$
91,428

Europe, Middle East and Africa ("EMEA")
27,232

 
19,228

 
51,224

 
35,125

Asia Pacific ("APAC")
10,096

 
8,498

 
18,800

 
14,470

Total net revenue
$
95,999

 
$
74,304

 
$
190,021

 
$
141,023

Included within the Americas total in the above table is revenue from sales in the United States of $56.1 million and $44.1 million for the three months ended January 31, 2016 and 2015 and $113.9 million and $86.3 million for the six months ended January 31, 2016 and 2015. No other country comprised more than 10% of our net revenue for the three and six months ended January 31, 2016 and 2015.

Our property and equipment, net by location is summarized as follows:
 
 
January 31, 2016
 
July 31, 2015
 
(In thousands)
Americas
$
21,506

 
$
21,807

EMEA
609

 
712

APAC
1,097

 
706

Total property and equipment, net
$
23,212

 
$
23,225

    
Included within the Americas total in the above table is property and equipment, net in the United States of $21.4 million and $21.8 million as of January 31, 2016 and July 31, 2015


20

INFOBLOX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)




NOTE 9. SUBSEQUENT EVENTS

Business Acquisition

On February 6, 2016, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with IID Security, Inc., a Delaware corporation (“IID”), Niners Acquisition Sub, Inc. and Shareholder Representative Services, LLC to acquire IID, a provider of global threat intelligence. On February 8, 2016, we consummated the acquisition of IID pursuant to the Merger Agreement (the “Acquisition”) and IID became our wholly owned subsidiary. Pursuant to the terms of the Merger Agreement, all outstanding shares of IID capital stock and vested options or warrants to purchase IID capital stock were canceled in exchange for an aggregate of $45 million in cash, subject to certain adjustments. A portion of the aggregate consideration is subject to deferred payment arrangements and holdback provisions related to the indemnification obligations of IID security holders. The Merger Agreement contains customary representations, warranties and covenants by us and IID.

Share Repurchase Program

In February 2016, the ASR was completed and GS&Co delivered 748,464 additional shares to us, resulting in a total of 2,941,446 shares repurchased at an average per share price of $17.00. We will account for the additional 748,464 shares repurchased as a share repurchase transaction which will reduce outstanding shares and the weighted shares outstanding that will be used to calculate the basic and diluted net income (loss) per share for the three and nine months ending April 30, 2016. In addition, approximately $4.7 million of the cost associated with these additional shares, which was initially recorded as a reduction to additional paid-in-capital, will be reclassified to accumulated deficit during the three and nine months ending April 30, 2016.
 


21



Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q, including this Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements regarding future events and our future results that are subject to the safe harbors created under the Securities Act of 1933 (the “Securities Act”) and the Securities Exchange Act of 1934 (the “Exchange Act”). All statements other than statements of historical facts are statements that could be deemed forward-looking statements. These statements are based on current expectations, estimates, forecasts, and projections about the industries in which we operate and the beliefs and assumptions of our management. Words such as “expects,” “anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “continues,” “endeavors,” “strives,” “may,” “assumes,” and variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements. Readers are cautioned that these forward-looking statements are subject to risks, uncertainties, and assumptions that are difficult to predict, including those identified below, under “Part II, Item 1A. Risk Factors,” and elsewhere herein. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. We undertake no obligation to revise or update any forward-looking statements for any reason.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and related notes to audited consolidated financial statements included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on September 24, 2015. In this Quarterly Report, unless otherwise specified or the context otherwise requires, “Infoblox,” “we,” “us,” and “our” refer to Infoblox and its consolidated subsidiaries.
Overview
We are a leader in network control, network automation and domain name system (DNS) security though appliance-based solutions that enable and secure dynamic networks and next-generation data centers. Our solutions combine real-time IP address management, automation of key network control, change and configuration management processes and DNS based infrastructure security in purpose-built physical and virtual appliances. Our solutions are based on our proprietary software that is highly scalable and automates vital network functions, such as IP address management, device configuration, compliance, network discovery, policy implementation, security and monitoring. In addition, our solutions use our real-time distributed network database to provide “always-on” access to network control data through a scalable, redundant and reliable architecture.
    
We derive revenue from sales and licensing of our products and sales of our services. We generate product licenses revenue primarily from sales of perpetual licenses of our software installed on our physical appliances and from sales of perpetual licenses of our software that run on third party appliances. We generate services revenue primarily from sales of maintenance and support and, to a lesser extent, from sales of subscription services and training and consulting services. End customers typically purchase maintenance and support in conjunction with purchases of our products, and generally renew their maintenance and support contracts upon expiration. Maintenance and support provide a significant source of recurring revenue for us. Services revenue was 46.3% and 49.0% of our total net revenue for the three months ended January 31, 2016 and 2015 and was 46.1% and 50.8% of our total net revenue for the six months ended January 31, 2016 and 2015.
 
We sell our products and services to enterprises and government entities primarily through our channel partners, including distributors, systems integrators, managed service providers and value-added resellers in the United States and internationally. We also have a direct field sales force that sells our solutions directly to certain end customers, and typically works closely with our channel partners in all phases of initial sales of our products and services.


22


    
Our results of operations have benefited from the increasing complexity of networks, including increasing numbers of connected devices and applications, expanding use of technologies such as virtualization, cloud computing and adoption of IPv6, which we believe is straining legacy network control approaches and driving organizations to replace their legacy platforms with more automated solutions. In addition, we believe the cyber-threat landscape and new attacks on DNS and exfiltration of data via DNS have created significant security opportunities and greater need for our products. Accordingly, we expect that our future business and operating results will be significantly affected by the speed with which organizations transition to network control solutions and seek to secure their DNS-based infrastructure. Our future business and operating results will depend both on our ability to add new end customers continually and to continue to sell additional products and services to our growing base of existing customers directly and through our channel partners.  Since our prior results have benefitted from our success at selling more complex and higher performance configurations of our product solutions, which generally result in higher value per product sold, we expect that our ability to sell more robust product configurations will be an important factor in sustaining our revenue growth rates and our operating results in any quarter. To achieve these growth objectives, we intend to continue to invest for long-term growth by, among other things, expanding our field sales force, our channel and technology partnerships and our programs to market our solutions. In addition, we expect to continue to invest in research and development and selective acquisitions in order to expand the capabilities of our solutions, as well as in our infrastructure to support expanding operations. We expect that our operating results will be impacted by the timing and size of these investments over the next few quarters.

Financial Highlights

We had net revenue of $96.0 million during the three months ended January 31, 2016, an increase of 29.2% year-over-year. Products and licenses net revenue during the three months ended January 31, 2016 was $51.5 million, which was an increase of 35.9% year-over-year. Services revenue during the three months ended January 31, 2016 was $44.5 million, which was an increase of 22.2% year-over-year. We had year-over-year revenue growth across all our regions. Americas, EMEA and APAC increased 26.0%, 41.6% and 18.8%, respectively, year-over-year. Sequentially, Americas revenue decreased 4.3% while EMEA and APAC increased 13.5% and 16.0%, respectively.

During the three months ended January 31, 2016, we generated $25.4 million in cash flows from operating activities and, after giving effect to a $50 million upfront payment pursuant to the ASR, exited the second quarter of fiscal 2016 with approximately $327.2 million in cash, cash equivalents and short term investments and $159.1 million of total deferred net revenue.
    
We continued to invest in our organization to achieve our profitability goals, incurring additional expenses to expand our sales, support, marketing, development, and general and administrative capabilities to grow our business. Personnel-related costs, including stock-based compensation, are the most significant component of our operating expenses. During the three months ended January 31, 2016, total operating expenses increased by 15.4% compared to the same period in the prior year which was primarily driven by the increase in personnel-related costs.
 
Stock-based compensation expense amounted to $13.0 million and $12.1 million in the three months ended January 31, 2016 and 2015. We expect to continue to incur significant stock-based compensation expense and we continue to anticipate further growth in stock-based compensation expense as our employee base grows because we expect stock-based compensation to continue to play an important part in the overall compensation structure for our employees.
 

23


Results of Operations
The following tables provide condensed consolidated statements of operations data in dollars and as a percentage of net revenue for the three and six months ended January 31, 2016 and 2015.
 
 
Three Months Ended January 31,
 
 Six Months ended January 31,
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Net revenue:
 
 
 
 
 
 
 
Products and licenses
$
51,516

 
$
37,917

 
$
102,373

 
$
69,425

Services
44,483

 
36,387

 
87,648

 
71,598

Total net revenue
95,999

 
74,304

 
190,021

 
141,023

Cost of revenue(1):
 
 
 
 
 
 
 
Products and licenses(2)
9,856

 
8,787

 
20,206

 
16,254

Services
9,065

 
7,491

 
17,817

 
14,958

Total cost of revenue
18,921

 
16,278

 
38,023

 
31,212

Gross profit
77,078

 
58,026

 
151,998

 
109,811

Operating expenses:
 
 
 
 
 
 
 
Research and development(1)
17,461

 
15,504

 
35,294

 
30,074

Sales and marketing(1) (2)
45,996

 
39,788

 
93,282

 
78,243

General and administrative(1) (3)
11,149

 
9,355

 
21,606

 
17,315

Total operating expenses
74,606

 
64,647

 
150,182

 
125,632

Income (loss) from operations
2,472

 
(6,621
)
 
1,816

 
(15,821
)
Other income (expense), net
167

 
(590
)
 
262

 
(780
)
Income (loss) before provision for (benefit from) income taxes
2,639

 
(7,211
)
 
2,078

 
(16,601
)
Provision for (benefit from) income taxes
(1,139
)
 
(200
)
 
(189
)
 
620

Net income (loss)
$
3,778

 
$
(7,011
)
 
$
2,267

 
$
(17,221
)
 
 
 
 
 
 
 
 
 
Three Months Ended January 31,
 
 Six Months ended January 31,
 
2016
 
2015
 
2016
 
2015
Net revenue:
 
 
 
 
 
 
 
Products and licenses
53.7
 %
 
51.0
 %
 
53.9
%
 
49.2
 %
Services
46.3

 
49.0

 
46.1

 
50.8

Total net revenue
100.0

 
100.0

 
100.0

 
100.0

Cost of revenue(1):
 
 
 
 
 
 
 
Products and licenses(2)
10.3

 
11.8

 
10.6

 
11.5

Services
9.4

 
10.1

 
9.4

 
10.6

Total cost of revenue
19.7

 
21.9

 
20.0

 
22.1

Gross margin
80.3

 
78.1

 
80.0

 
77.9

Operating expenses:
 
 
 
 
 
 
 
Research and development(1)
18.2

 
20.9

 
18.6

 
21.3

Sales and marketing(1) (2)
47.9

 
53.5

 
49.1

 
55.5

General and administrative(1) (3)
11.6

 
12.6

 
11.3

 
12.3

Total operating expenses
77.7

 
87.0

 
79.0

 
89.1

Operating margin
2.6

 
(8.9
)
 
1.0

 
(11.2
)
Other income (expense), net
0.2

 
(0.8
)
 
0.1

 
(0.6
)
Income (loss) before provision for (benefit from) income taxes
2.8

 
(9.7
)
 
1.1

 
(11.8
)
Provision for (benefit from) income taxes
(1.2
)
 
(0.3
)
 

 
0.4

Net income (loss)
4.0
 %
 
(9.4
)%
 
1.1
%
 
(12.2
)%

24



(1)
Results above include stock-based compensation as follows:
 
Three Months Ended January 31,
 
 Six Months ended January 31,
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Stock-based compensation:
 
 
 
 
 
 
 
Cost of revenue
$
1,221

 
$
1,201

 
$
2,349

 
$
2,404

Research and development
2,908

 
2,633

 
6,125

 
5,241

Sales and marketing
6,343

 
5,847

 
12,561

 
12,195

General and administrative
2,493

 
2,436

 
4,758

 
4,499

Total stock-based compensation
$
12,965

 
$
12,117

 
$
25,793

 
$
24,339



(2)
Results above include intangible asset amortization expense as follows:
 
Three Months Ended January 31,
 
 Six Months ended January 31,
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Intangible asset amortization:
 
 
 
 
 
 
 
Cost of products and licenses revenue
$
290

 
$
290

 
$
580

 
$
580

Sales and marketing
32

 
327

 
64

 
654

Total intangible asset amortization expense
$
322

 
$
617

 
$
644

 
$
1,234


(3)
Results during the three and six months ended January 31, 2016 include acquisition related transaction costs of $0.4 million.


25


Results of Operations for the Three and Six Months Ended January 31, 2016 and 2015
The following table presents our net revenue for the three and six months ended January 31, 2016 and related changes from the same periods in the prior year:
Net Revenue 
 
Three Months Ended January 31,
 
Change in
 
 Six Months Ended January 31,
 
Change in
 
2016
 
2015
 
$
 
%
 
2016
 
2015
 
$
 
%
 
(Dollars in thousands)
Products and licenses
$
51,516

 
$
37,917

 
$
13,599

 
35.9
%
 
$
102,373

 
$
69,425

 
$
32,948

 
47.5
%
Services
44,483

 
36,387

 
8,096

 
22.2
%
 
87,648

 
71,598

 
16,050

 
22.4
%
Total net revenue
$
95,999

 
$
74,304

 
$
21,695

 
29.2
%
 
$
190,021

 
$
141,023

 
$
48,998

 
34.7
%

Three Months Ended January 31, 2016 Compared to Three Months Ended January 31, 2015
Our net revenue increased by $21.7 million, or 29.2%, to $96.0 million during the three months ended January 31, 2016 from $74.3 million during the three months ended January 31, 2015.
Products and licenses revenue increased by $13.6 million, or 35.9%, to $51.5 million during the three months ended January 31, 2016 from $37.9 million during the three months ended January 31, 2015. The change was due primarily to increased unit sales, including sales of products to replace older generations of products and sales of our security solutions. We expect sales to replace older generations of products will decrease during the remainder of fiscal 2016.
Services revenue increased $8.1 million, or 22.2%, to $44.5 million during the three months ended January 31, 2016 from $36.4 million during the three months ended January 31, 2015. The change was primarily attributable to the growth of our established base of customers with maintenance and support contracts, and to a lesser extent, sales of our subscription products, for which revenue is recognized ratably over the relevant service or subscription period. As our end customer base grows, we expect our revenue generated from maintenance and support services to increase.

Six Months Ended January 31, 2016 Compared to Six Months Ended January 31, 2015
Our net revenue increased by $49.0 million, or 34.7%, to $190.0 million during the six months ended January 31, 2016 from $141.0 million during the six months ended January 31, 2015.
Products and licenses revenue increased by $32.9 million, or 47.5%, to $102.4 million during the six months ended January 31, 2016 from $69.4 million during the six months ended January 31, 2015. The change was driven primarily by increased unit sales, including sales of products to replace older generations of products and sales of our security solutions, and, to a lesser extent, increase in sales prices.
    Services revenue increased $16.1 million, or 22.4%, to $87.6 million during the six months ended January 31, 2016 from $71.6 million during the six months ended January 31, 2015. The change was primarily attributable to the growth of our established base of customers with maintenance and support contracts for which revenue is recognized ratably over the service period, and to a lesser extent, an increase in subscription revenue.


26


Gross Profit
 
Three Months Ended January 31,
 
Change in
 
 Six Months Ended January 31,
 
Change in
 
2016
 
2015
 
$
 
%
 
2016
 
2015
 
$
 
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in thousands)
Products and Licenses Gross Profit:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Products and licenses gross profit
$
41,660

 
$
29,130

 
$
12,530

 
43.0
%
 
$
82,167

 
$
53,171

 
$
28,996

 
54.5
%
Products and licenses gross margin
80.9
%
 
76.8
%
 
 
 
4.1

 
80.3
%
 
76.6
%
 
 
 
3.7

Services Gross Profit:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Services gross profit
$
35,418

 
$
28,896

 
$
6,522

 
22.6
%
 
$
69,831

 
$
56,640

 
$
13,191

 
23.3
%
Services gross margin
79.6
%
 
79.4
%
 
 
 
0.2

 
79.7
%
 
79.1
%
 
 
 
0.6

Total Gross Profit:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total gross profit
$
77,078

 
$
58,026

 
$
19,052

 
32.8
%
 
$
151,998

 
$
109,811

 
$
42,187

 
38.4
%
Total gross margin
80.3
%
 
78.1
%
 
 
 
2.2

 
80.0
%
 
77.9
%
 
 
 
2.1


Three Months Ended January 31, 2016 Compared to Three Months Ended January 31, 2015
Total gross margin during the three months ended January 31, 2016 was 2.2 percentage points higher compared to the same period in the prior year primarily due to the increase in products and licenses gross margin. Products and licenses gross margin increased by 4.1 percentage points primarily due to changes in product mix as a result of increased sales of software and lower product discounts. Services gross margin during the three months ended January 31, 2016 was relatively flat compared to the same period in the prior year.

Six Months Ended January 31, 2016 Compared to Six Months Ended January 31, 2015
Total gross margin during the six months ended January 31, 2016 increased by 2.1 percentage points compared to the same period in the prior year primarily due to the increase in products and licenses gross margin. Products and licenses gross margin increased by 3.7 percentage points primarily due to favorable product mix, as shipments of newer, higher margin products represented a greater portion of products sold than in the prior period, and increased sales of software. Services gross margin during the six months ended January 31, 2016 was relatively flat compared to the same period in the prior year.
 


27


Operating Expenses 
 
Three Months Ended January 31,
 
Change in
 
 Six Months Ended January 31,
 
Change in
 
2016
 
2015
 
$
 
%
 
2016
 
2015
 
$
 
%
 
(Dollars in thousands)
Research and development
$
17,461

 
$
15,504

 
$
1,957

 
12.6
%
 
$
35,294

 
$
30,074

 
$
5,220

 
17.4
%
Sales and marketing
45,996

 
39,788

 
6,208

 
15.6
%
 
93,282

 
78,243

 
15,039

 
19.2
%
General and administrative
11,149

 
9,355

 
1,794

 
19.2
%
 
21,606

 
17,315

 
4,291

 
24.8
%
Total operating expenses
$
74,606

 
$
64,647

 
$
9,959

 
15.4
%
 
$
150,182

 
$
125,632

 
$
24,550

 
19.5
%
Three Months Ended January 31, 2016 Compared to Three Months Ended January 31, 2015
Research and Development Expenses
Research and development expenses increased by $2.0 million, or 12.6%, to $17.5 million during the three months ended January 31, 2016 from $15.5 million during the three months ended January 31, 2015. The change was primarily attributable to a $1.4 million increase in personnel costs, which includes a $0.3 million increase in stock-based compensation associated with our equity compensation programs. The change was also attributable to a $0.3 million increase in facility, information technology and other allocated expenses. We intend to continue to invest in our research and development organization and expect research and development expense to grow in the remainder of fiscal 2016, and to also increase as a percentage of revenue.
Sales and Marketing Expenses
Sales and marketing expenses increased by $6.2 million, or 15.6%, to $46.0 million during the three months ended January 31, 2016 from $39.8 million during the three months ended January 31, 2015. The change was primarily related to a $4.5 million increase in personnel costs, which includes a $0.5 million increase in stock-based compensation. The change was also attributable to a $1.0 million increase in facility, information technology and other allocated expenses and a $0.7 million increase related to third-party sales and marketing services and increased participation in marketing events with channel and technology partners. We intend to continue to make investments in our sales resources and infrastructure and expect sales and marketing expense to grow in the remainder of fiscal 2016, and to also increase as a percentage of revenue.
General and Administrative Expenses
General and administrative expenses increased by $1.8 million, or 19.2%, to $11.1 million during the three months ended January 31, 2016 from $9.4 million during the three months ended January 31, 2015. The change was principally attributable to a $0.7 million increase in personnel costs, a $0.6 million increase in professional service fees and $0.4 million in acquisition related transaction costs. We expect general and administrative expense to grow in the remainder of fiscal 2016, and to also increase as a percentage of revenue.

28


Six Months Ended January 31, 2016 Compared to Six Months Ended January 31, 2015
Research and Development Expenses
Research and development expenses increased by $5.2 million, or 17.4%, to $35.3 million during the six months ended January 31, 2016 from $30.1 million during the six months ended January 31, 2015. The change was primarily attributable to a $4.0 million increase in personnel costs, which includes a $0.9 million increase in stock-based compensation associated with our equity compensation programs. The change was also due to a $0.8 million increase in facility, information technology and other allocated expenses.
Sales and Marketing Expenses
Sales and marketing expenses increased by $15.0 million, or 19.2%, to $93.3 million during the six months ended January 31, 2016